Hong Kong to Launch OTC Clearing

Terry Flanagan

CCP and trade repository are planned to open in 2012.

Hong Kong is on track to launch an OTC derivatives clearing system by mid-2012.

Hong Kong Exchanges and Clearing Ltd. (HKEx) has established two new departments, the OTC Clearing Operations Department and the OTC Clearing Risk Management Department, to be responsible for the OTC clearing business.

HKEx completed the platform selection process and commenced implementation work in November 2011.

“System implementation has started and the risk management and operations models are being finalized,” HKEx said.

HKEx has begun reaching out to individual financial institutions to determine their interest in becoming clearing members.

The new clearinghouse will complement the trade repository that the Honk Kong Monetary Authority (HKMA) plans to establish to serve as a central registry and electronic database for transaction records from Hong Kong’s OTC derivatives market.

The clearinghouse and trade repository will help ensure that Hong Kong remains in step with global regulatory trends.

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).

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

“Regulations for increased transparency will drive OTC derivatives trading to become increasingly electronic, with its processes and technologies converging with those used for listed market trading,” Bob Santella, head of SunGard’s capital markets U.S. trading software and brokerage business, told Markets Media.

The trade repository in Hong Kong, which is to become operational in 2012, will be provided as a new service under the Central Moneymarkets Unit of the HKMA.   A link will be developed between the TR and the CCP for OTC derivatives to be launched by HKEx to allow eligible transactions to be passed to the CCP for central clearing.

At the initial stage, the reporting and clearing requirement will be applied to interest rate swaps and non-deliverable forwards.  Consideration will be given to extending the requirement to other appropriate OTC derivatives asset classes after the initial roll out.

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 HKMA and the Securities and Futures Commission have been developing the framework for the OTC derivatives market in Hong Kong, and have published a consultation paper on key concepts of the proposed 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.

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