Banking (Exposure Limits) Code

BANKING ORDINANCE (CHAPTER 155) CODE OF PRACTICE The Monetary Authority, having consulted with the persons specified in section 97M(2) of the Banking Ordinance (Chapter 155) and amended and approved the amendment of an approved code of practice pursuant to section 97M(4) of that Ordinance, hereby, as required pursuant to section 97M(3) and (4) of that Ordinance- (a) identifiesthe following code (with English and Chinese versions) as being the code concerned: (i) in English — ‘Code of Practice for the Purposes of Providing Guidance in Respect of the Provisions of Rules 20(4)(b), 37(2) and (3) and 41 of the Banking (Exposure Limits) Rules (Chapter 155S)’; and (ii) in Chinese — 「就《銀行業(風險承擔限度)規則》(第 155S 章)第 20(4)(b), 37(2)及(3)及 41 條的條文提供指引的實務守 則」; (b) specifies 1 January 2026 as the date on which the Monetary Authority’s approval of the amendment of the code is to take effect; and (c) specifies the following provisions of the Banking (Exposure Limits) Rules (Chapter 155S) as the relevant provisions for which the amended code is approved: (i) Rule 20(4)(b); (ii) Rule 37(2) and (3); and (iii) Rule 41. Arthur YUEN for Monetary Authority [Date]

Code of Practice for the Purposes of Providing Guidance in Respect of the Provisions of Rules 20(4)(b), 37(2) and (3) and 41 of the Banking (Exposure Limits) Rules (Chapter 155S)

i Table of Contents I. Preliminary......................................................................................................1

1. Citation.................................................................................................1
2. Interpretation........................................................................................1 II. Guidance .........................................................................................................1
3. Guidance on rule 20(4)(b) of the BELR in respect of “a competent and reliable third-party market data provider”.....................................1
4. (Repealed)............................................................................................2
5. (Repealed)............................................................................................2 5A. Guidance on rule 37(2) and (3) of the BELR.......................................2
6. Guidance on rule 41 of the BELR in respect of “economically dependent” ...........................................................................................3
7. (Repealed)............................................................................................9

1 Code of Practice for the Purposes of Providing Guidance in Respect of the Provisions of Rules 20(4)(b), 37(2) and (3) and 41 of the Banking (Exposure Limits) Rules (Chapter 155S) (Approved and issued by the Monetary Authority pursuant to section 97M(1) of the Banking Ordinance (Chapter 155) and subsequently amended by the Monetary Authority pursuant to section 97M(4) of that Ordinance) I. Preliminary

1. Citation This code of practice may be cited as the Banking (Exposure Limits) Code.
2. Interpretation (1) In this code of practice, BELR means the Banking (Exposure Limits) Rules (Chapter 155S). (2) All words and expressions used in this code of practice that are defined in the BELR have the same meaning as in the BELR. (3) Unless the context otherwise requires, a reference to a rule, a Part or a Schedule in this code of practice means a rule in, a Part of, or a Schedule to, the BELR. II. Guidance
3. Guidance on rule 20(4)(b) of the BELR in respect of “a competent and reliable third-party market data provider” (1) Rule 20(4) provides as follows: “For subrule (1)(c), Formula 2 may be used if— (a) the institution has access to information with respect to the underlying exposure of the CIS and the following requirements are satisfied— (i) the frequency of financial reporting of the CIS is not lower than that of the institution; and

2 (ii) the information is sufficient to allow the institution to value its equity exposure arising from the CIS by using that Formula; and (b) the information provided to the institution under paragraph (a) is verified by an independent third party such as the depository, the custodian or the manager of the CIS, or the information is subscribed information provided by a competent and reliable third-party market data provider.” (2) In determining, for the purposes of rule 20(4)(b), whether a third-party market data provider is competent and reliable, an authorized institution should take into account the following in respect of the third￾party market data provider: (a) market position and reputation; (b) financial strength and service capability; (c) track records; (d) contingency service arrangements; and (e) any other factors that the authorized institution considers appropriate or relevant. 4. (Repealed) 5. (Repealed) 5A. Guidance on rule 37(2) and (3) of the BELR (1) Rule 37(2) and (3) provides as follows: “(2) For subrule (1)(b), if any land is used for— (a) conducting an authorized institution’s business; or (b) providing housing or amenities for an authorized institution’s employees, the land is the institution’s self-use land. (3) Without limiting subrule (2), if an office of an authorized

3 institution is situated in a part of any premises, the Monetary Authority may, for that subrule, give a written consent to allow the institution to treat the whole of the premises as being used for conducting the institution’s business.” (2) An authorized institution may make reference to the HKMA circular issued on 3 October 2019 regarding, inter alia, circumstances under which the whole of any premises in part of which an office of an authorized institution is situated may be treated as being used for conducting the authorized institution’s business.1 6. Guidance on rule 41 of the BELR in respect of “economically dependent” (1) Rule 41 provides as follows: “(1) For this Part, subject to subrules (3), (4) and (5)— (a) for a counterparty of an authorized institution (reference counterparty), another counterparty of the institution is a linked counterparty of the reference counterparty if the other counterparty is an entity specified in subrule (2); and (b) the reference counterparty and all of its linked counterparties are collectively treated as an LC group of the institution. (2) The other counterparty is one that is— (a) an entity that controls the reference counterparty; (b) an entity that is controlled by the entity that controls the reference counterparty; (c) an entity that is controlled by the reference counterparty; (d) an entity that is not an entity specified in paragraph (a), (b) or (c), but is economically dependent on the reference counterparty or an entity specified in paragraph (a), (b) or (c); 1 HKMA circular “BELR Rule 37(3) – Premises in whole treated as being used for conducting banking business” issued on 3 October 2019 (https://brdr.hkma.gov.hk/eng/doc-ldg/docId/20191003-1-EN).

4 (e) an entity that is controlled by an entity specified in paragraph (d); or (f) any other entity that— (i) controls; and (ii) is economically dependent on, an entity specified in paragraph (d). (3) For subrule (1), if the reference counterparty is a counterparty in relation to which the institution’s ASCE ratio does not exceed 5% or is an exempted sovereign entity, the institution, in determining its ASC exposure to the LC group (by reference to the reference counterparty), may treat any of the following entities as not being in the LC group— (a) an entity specified in subrule (2)(d) that is economically dependent on the reference counterparty; (b) an entity specified in subrule (2)(e) that is controlled by an entity specified in paragraph (a); (c) an entity specified in subrule (2)(f) that controls and is economically dependent on an entity specified in paragraph (a). (4) For subrule (1), if a counterparty of an authorized institution (counterparty A) is a linked counterparty of the reference counterparty by virtue of subrule (2)(a), (b) or (c) and the institution’s ASCE ratio in relation to the counterparty A does not exceed 5%, the institution, in determining its ASC exposure to the LC group (by reference to the reference counterparty), may treat any of the following entities as not being in the LC group— (a) an entity specified in subrule (2)(d) that is economically dependent on the counterparty A; (b) an entity specified in subrule (2)(e) that is controlled by an entity specified in paragraph (a);

5 (c) an entity specified in subrule (2)(f) that controls and is economically dependent on the entity specified in paragraph (a). (5) For subrule (1), if 2 or more counterparties of an authorized institution— (a) are controlled by, or economically dependent on, an exempted sovereign entity, a specified sovereign-owned entity or The Financial Secretary Incorporated established under the Financial Secretary Incorporation Ordinance (Cap. 1015); and (b) are otherwise not in an LC group under subrule (1), regardless of whether the exempted sovereign entity, the specified sovereign-owned entity or The Financial Secretary Incorporated is a counterparty of the institution, the counterparties are treated as not being in an LC group of the institution. (6) For this rule, subject to subrule (7), an entity (subordinate entity) is treated as being controlled by another entity (parent entity) if— (a) the parent entity owns more than 50% of the voting rights in the subordinate entity; (b) the parent entity has control of a majority of the voting rights in the subordinate entity under an agreement with other shareholders (or similar holders of voting rights); (c) the parent entity has the right to appoint or remove a majority of the members of the subordinate entity’s board of directors (or a similar governing body); (d) a majority of the members of the subordinate entity’s board of directors (or a similar governing body) have been appointed solely as a result of the parent entity exercising its voting rights; or

6 (e) the parent entity has the power, under a contract or otherwise, to exercise a controlling influence over the management or policies of the subordinate entity. (7) For subrule (6), in so far as a parent entity falls within subrule (6)(a), (b), (c), (d) or (e), by virtue of its fiduciary capacity on behalf of a non-anonymous beneficiary— (a) the subordinate entity is not to be treated as being controlled by the parent entity; and (b) to avoid doubt, the subordinate entity is treated as being controlled by the beneficiary if, by virtue of the beneficiary’s beneficial interest— (i) the beneficiary owns more than 50% of the voting rights in the subordinate entity; (ii) the beneficiary has control of a majority of the voting rights in the subordinate entity under an agreement with other shareholders (or similar holders of voting rights); (iii) the beneficiary has the right to appoint or remove a majority of the members of the subordinate entity’s board of directors (or a similar governing body); (iv) a majority of the members of the subordinate entity’s board of directors (or a similar governing body) have been appointed solely as a result of the beneficiary exercising its voting rights; or (v) the beneficiary has the power, under a contract or otherwise, to exercise a controlling influence over the management or policies of the subordinate entity. (8) For this rule, an entity (Entity A) is economically dependent on another entity (Entity B) if they are connected in a way that if Entity B were to encounter financial problems (in particular funding or repayment difficulties), Entity A would also be

7 likely to encounter financial problems (in particular funding or repayment difficulties). (9) In this rule— specified sovereign-owned entity (指明官方擁有實體) means an entity that is specified in Schedule 2.” (2) When an authorized institution assesses, for the purposes of rules 41(2)(d), 41(2)(f)(ii), 41(3)(a) , 41(3)(c), 41(4)(a) , 41(4)(c), 41(5)(a) and 41(8), whether a counterparty is economically dependent on another entity, the authorized institution may rely on information provided in good faith by the counterparty that is potentially economically dependent on another entity provided that such information is not in conflict with any information otherwise available to or in possession of the authorized institution. An authorized institution is expected to request a counterparty to provide the relevant information which could facilitate the authorized institution’s assessment of the counterparty’s economic dependence during regular credit reviews, at the time of the authorized institution granting new credit facilities to the counterparty, and immediately when the authorized institution is aware of any indications that the counterparty is economically dependent on another counterparty. (3) An authorized institution should calculate, for the purposes of rules 41(3) and 41(4), its ASCE ratio in relation to a reference counterparty or counterparty A by determining its ASC exposure to the reference counterparty or counterparty A in accordance with rule 46. In other words, the calculation should take into account the provisions on exposures disregarded under rule 48, credit risk mitigation under Subdivision 2 of Division 3 of Part 7, specific circumstances (including in relation to credit protection provider) under Subdivision 3 of Division 3 of Part 7 and offsetting and deduction under Subdivision 4 of Division 3 of Part 7. (4) An authorized institution should regard, for the purposes of rule 41(8), that if Entity B were to encounter financial problems (in particular funding or repayment difficulties), Entity A would also be likely to

8 encounter financial problems (in particular funding or repayment difficulties) and hence Entity A is economically dependent on Entity B when any of the following applies: (a) 50% or more of the gross receipts or gross expenditures (on an annual basis) of Entity A are derived from transactions with Entity B; (b) Entity A has fully or partly guaranteed the exposure of Entity B, or is liable in respect of that exposure in any other manner (e.g. by the giving of an indemnity), and the exposure is so significant that Entity A is likely to default if a claim occurs; (c) 50% or more of Entity A’s product/output or services is sold to Entity B, and Entity B cannot easily be replaced by other customers; (d) the expected source of funds to repay the loans of both Entity A and Entity B is the same and neither Entity A nor Entity B has another independent source of income from which the loans may be fully repaid; (e) it is likely that the financial problems of Entity B would cause difficulties for Entity A in terms of full and timely repayment of liabilities; (f) the insolvency or default of Entity A is likely to be associated with the insolvency or default of Entity B; (g) both Entity A and Entity B rely on the same source for 50% or more of their funding and neither Entity A nor Entity B has another independent source of funding. (5) To avoid doubt, when Entity A is economically dependent on Entity B, an authorized institution should include Entity A in the LC group of Entity B. However, if Entity B is not economically dependent on Entity A, an authorized institution should not include Entity B in the LC group of Entity A unless Entity B meets other criteria for inclusion in the LC group of Entity A(6) In relation to subparagraph (4)(d) and (g) above, Entity A and Entity B are regarded as economically dependent on each other; however, it is not necessary to regard Entity

9 A and Entity B as economically dependent on each other merely on the grounds that they are employees of the same employer. (7) In relation to subparagraph (4)(e) and (f) above, it is not necessary to regard Entity A as economically dependent on Entity B merely on the grounds that Entity B is the employer of Entity A. 7. (Repealed) Arthur YUEN for Monetary Authority [Date]

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