All liquidity shall be provided in ways consistent with the Linked Exchange Rate System, which is underpinned by the Currency Board arrangements. While the framework is designed to balance the competing demands of clarity and flexibility, it is recognised that no single approach can cover all eventualities, and the HKMA may adapt the framework or establish new facilities as it considers appropriate at the relevant time.
Settlement Facilities
The objective of the two Settlement Facilities (Intraday Repo and Discount Window) is to facilitate smooth operation of the interbank payment system and thus preserve systemic stability. In their normal day-to-day operations, banks may access the facilities to make adjustments to their liquidity positions, defined to be the balances in their clearing accounts with the HKMA. They may use their holdings of Exchange Fund Paper as collateral to obtain intraday or overnight HKD liquidity through the Intraday Repo and the Discount Window respectively. These standing facilities are meant to facilitate banks in meeting their settlement obligations in case of need in order to ensure the smooth functioning of the interbank payment system.
Standby Liquidity Facilities
The objective of the Standby Liquidity Facilities (including term repo and FX swap) is to make term liquidity available to banks to enable them to manage any unexpected liquidity tightness which they may encounter. Liquidity is normally available at a term of up to one month and may be rolled over, subject to re-pricing at maturity. The HKMA determines pricing by reference to market rates.
HKD Liquidity is provided under these facilities against standard collateral (USD or other major currencies (via an FX swap) and/or certain liquid securities denominated in HKD, USD or other major currencies (via a term repo)). See “HKMA Liquidity Facilities Framework for Banks: Operational Note” for further details.
Contingent Term Facility
The Contingent Term Facility makes reference to the guiding principles of the previous Lender of Last Resort arrangements. It may be made available, at the discretion of the HKMA, to a bank facing extraordinary liquidity stress that cannot be overcome through other means (for example, market funding) where (i) access to the Settlement Facilities and/or the Standby Liquidity Facilities is not applicable or otherwise not sufficient; and (ii) the HKMA considers that the liquidity stress situation of the bank could of itself, or through the spreading of contagion or through the undermining of public confidence, threaten or damage systemic stability in Hong Kong. The HKMA will consider each application on a case-by-case basis, taking into account the prevailing circumstances. While the Contingent Term Facility is not subject to a limit on the maximum amount of liquidity that may be made available, it should be adequately collateralised. A wide spectrum of collateral will be considered for the purpose of providing liquidity under the Contingent Term Facility (see “HKMA Liquidity Facilities Framework for Banks: Operational Note” for further details), but the terms of assistance and acceptable collateral will be set by the HKMA on a case-by-case basis having regard to the particular circumstances of the applicant bank.
The Contingent Term Facility provides the necessary flexibility for the HKMA to respond adequately to extraordinary liquidity stress situations and enables the HKMA to plan for the most severe stress scenarios.
Resolution Facility
The Resolution Facility provides for the scenario in which resolution powers under the FIRO are exercised by the Monetary Authority as Resolution Authority. The Resolution Facility may be made available, at the discretion of the HKMA, having regard to systemic stability, for the purpose of ensuring that a bank which has (or whose holding company has) gone into resolution in Hong Kong has sufficient liquidity to meet its obligations, until such time as the bank is able to transition back to market-based funding. Like the Contingent Term Facility, the terms on which liquidity is provided under the Resolution Facility will be set by the HKMA on a case-by-case basis.
The Resolution Facility is distinct from the Contingent Term Facility in two ways. First, the Resolution Facility will be available only where resolution has been initiated under the FIRO. Second, any losses arising from assistance provided under the Resolution Facility may ultimately be recovered pursuant to the levy arrangements which may be imposed under the FIRO.
