HONG KONG Law and Practice Contributed by: Vincent Sum and Sylvia Leung, Mayer Brown
any equivalent action (including voluntary winding-up). HKEx’s regulatory powers The HKEx is the principal regulator. It is given substantial regulatory authority to enforce adher - ence to its Listing Rules. The HKEx can inves - tigate possible breaches and take disciplinary actions against violators – eg, the issuer, their directors and other relevant individuals can all be held accountable). These actions include pub - lic reprimands, censures, banning of personnel of professional advisers from being involved in listing-related activities, and imposing adminis - trative and financial penalties. 4.9 Banks Securitising Financial Assets While banks in Hong Kong are generally required to comply with HKMA rules and regulations, there are no laws in Hong Kong that apply spe - cifically to securitisations involving banks. The Statutory Stay Rules Notably, the Financial Institutions (Resolution) (Contractual Recognition of Suspension of Ter - mination Rights – Banking Sector) Rules (Cap. 628) (generally referred to as the “Stay Rules”) came into operation on 27 August 2021. The purpose is to prevent contractual counterparties of a bank from terminating or closing out their positions solely as a result of the bank’s entry into resolution (eg, when they fall into financial distress) so as to prevent disorderly early termi - nation of contracts on a mass scale, which could frustrate resolution actions taken by the HKMA resolution authority and thus result in significant systemic risks. The Stay Rules require the insertion of a “sus - pension of termination rights provision” into the “Covered Contracts”, such that the contractual counterparties agree to be bound by any tem -
porary stay that the resolution authority may impose pursuant to Section 90(2) of the Financial Institutions (Resolution) Ordinance (Cap. 628). Implications for securitisations If AIs (either as issuer or investor, or in any other capacity) enter into non-Hong Kong law-gov - erned bond documents after 27 August 2021, such as subscription agreements, underwrit - ing agreements, placement agreements, dealer manager agreements and agency agreements, they will need to examine carefully whether such contracts contain a termination right exercisable by a counterparty; if so, they will need to include the required contractual provision for contract parties to be bound by any temporary stay that the resolution authority (HKMA) may impose. For issuers that are AIs or group companies that are not themselves an AI, the range of bond documentation that may fall within the ambit of the Stay Rules may be much wider, and each securitisation transaction involving banks or their group companies as issuers will therefore need to be considered on a case-by-case basis. Implications for the use of derivatives in securitisations Where derivatives are used in securitisations or by the issuer in its underlying loan contracts and receivables, and where a Covered Entity (Hong Kong AI) is a counterparty, the Stay Rules will also apply, which could have the effect of tem - porarily suspending the rights of acceleration, close-out, set-off or netting obligations of the counterparties in the underlying derivatives contracts. This could adversely impede bond - holders’ rights to close out the positions in a derivative contract under a default situation in a securitisation transaction.
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