Hong Kong Tackles OTC Reforms

Terry Flanagan

HKex to establish CCP for derivatives.

Authorities in Hong Kong have set in motion plans to regulate OTC derivatives markets, adopting a blueprint that mirror that taken in other jurisdictions.

The Honk Kong Monetary Authority is in the process of establishing a trader repository (HKMA-TR) for the collection of data relating to OTC derivatives transactions.
Hong Kong Exchanges and Clearing Limited (HKEx) is in the process of
establishing a new clearing house in Hong Kong that may serve as a CCP for the OTC derivatives market.

The HKMA and Hong Kong’s SFC have formed a working group to develop the legislative framework and detailed requirements for regulating the OTC derivatives market.

Many jurisdictions (including the US, the EU, Japan, Australia and Singapore) have initiated proposals to implement the G20 commitments.

Additionally, and given the global nature of OTC derivatives transactions, a number of working groups and task forces have been set up under the auspices of various international standard setting bodies such as the Financial Stability Board (FSB), the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO).

Because the OTC derivatives market in Hong Kong is relatively small, the focus has been on developing a regime that is on a par with international standards but takes into account local market conditions and characteristics.

However, because key aspects of the OTC derivatives reform are still evolving in the global arena, and certain proposals already put forward are still being debated, the HKMA and SFC have not at this stage finalized details of the proposals for the Hong Kong regime.

The new OTC derivatives regime introduces mandatory reporting, clearing and trading obligations in line with the G20 commitments where appropriate, and also provides for the establishment and regulation of the necessary infrastructure through which any mandatory obligations must be fulfilled, i.e. the TRs, CCPs and trading platforms.

It provides for the regulation of key players in the OTC derivatives market – in particular authorized institutions (AIs), licensed corporations (LCs) and large players whose positions may pose systemic risk.

The new OTC derivatives regime should be set out in the Securities and Futures Ordinance (SFO).  Additionally, to provide for flexibility which is needed in view of the evolving global regulatory developments, the main obligations of the new regulatory regime will be set out in the primary legislation, but that the details – including some of
the key definitions that will delineate the scope of any mandatory reporting, clearing and trading obligations – will be set out in subsidiary legislation.

As an international financial center, Hong Kong endeavors to ensure that its financial markets’ regulation is on a par with international standards.  In the context of the OTC derivatives market, given its global nature and the relatively small size of Hong Kong’s OTC derivatives market, the regime will need to be in alignment with other major markets while also taking into account local market conditions and characteristics.

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