HKMA publishes conclusions to consultation - DCM Considerations

Hong Kong Monetary Authority publishes conclusions to consultation on rules on contractual stays on termination rights in financial contracts

On 31 December 2020, the Hong Kong Monetary Authority (the “HKMA”) published the conclusions (the “Consultation Conclusions”) to its January 2020 consultation paper on proposals for making rules relating to contractual stays on termination rights in financial contracts of authorized institutions under the Financial Institutions (Resolution) Ordinance (Cap. 628) (the “FIRO”).

In addition to the Consultation Conclusions, the HKMA also published for consultation the draft rules (the “Draft Rules”) for the banking sector. The consultation on the Draft Rules closes on 31 January 2021.

Please refer to this client note where we have highlighted the key points from the Consultation Conclusions, as well as a few observations on the Draft Rules. In summary, within-scope covered entities will be required to include a contractual stay provision in within-scope financial contracts that are not governed by Hong Kong law and contain termination rights. The contractual stay provision will need to be along the lines that contractual parties agree to be bound by any temporary stay that may be imposed by the HKMA (as the resolution authority) under the FIRO.

DCM market participants in the international bond market should be familiar with contractual stay rule requirements as there are similar regimes in the United States, the United Kingdom and Europe.

To assist DCM market participants in processing the Consultation Conclusions and Draft Rules, we set out below the key DCM considerations for market participants, with a focus on DCM bond documents that may constitute a within-scope financial contract.

Subscription or underwriting agreement

A subscription or underwriting agreement would probably be a within-scope financial contract because it is a contract for the purchase or sale of transferable securities. However, most English law governed subscription or underwriting agreements would not contain an express termination right that can be exercised against the managers, although there would usually be one that could be exercised against the issuer. Therefore, if the issuer is a within-scope covered entity, it is likely that a contractual stay provision should be included in an English law governed subscription or underwriting agreement.

Where only a manager is a within-scope covered entity, then a contractual stay provision may not be necessary. However, this needs to be reconsidered if any default provision is included in a subscription or underwriting agreement. This is because the definition of ‘termination rights’ in the Draft Rules is wide and includes, inter alia, the right of a party to modify the obligations of another party. For example, it is common in English law governed subscription or underwriting agreements to adopt the form of Agreement Among Managers (the “Agreement Among Managers”) set out in the Primary Market Handbook of the International Capital Market Association (ICMA). The Agreement Among Managers (and variations thereto) may contain one or more default provisions where a manager may have the right to modify the obligations of another manager.

Bond terms and conditions and other ancillary documents

Vanilla bond terms and conditions, trust deeds, agency agreements, auditor arrangement letters and other ancillary bond documents would probably not be considered a financial contract as they are not contracts for the purchase or sale of transferable securities or master agreements for such contracts.

The above discussion is based on our general observations and each DCM bond document should be considered on its own facts and merits.


The HKMA intends to introduce the Draft Rules into the Legislative Council for negative vetting within the current legislative year of 2020/21, with a view to bringing the rules into operation shortly after the completion of the vetting process in 2021. Following this process, there will be a transitional period where compliance will be phased in. The earliest phase 1 compliance is scheduled for 24 months from the date of commencement of the rules.