The Hong Kong Monetary Authority (HKMA) and Securities and Futures Commission (SFC) have set out conclusions on the proposed regulatory regime for OTC derivatives in Hong Kong and issued a further supplementary consultation paper on the final scope of the proposed changes.
The two regulators aim to bring Hong Kong into line with the G-20 nations’ agreement to reduce systemic risks in OTC derivatives markets by improving transparency and monitoring. The consultation, which ran from October to November 2011, proposed imposition of mandatory reporting, clearing and trading obligations, as well as proposals for the regulation of intermediaries and oversight of systemically important players.
“In view of the generally positive feedback from respondents, we are minded to proceed along the lines of our earlier proposals, albeit with some adjustments and refinements to address comments and concerns raised,” said the consultation response document.
The original proposals called for a new regime to be set out in Hong Kong’s Securities and Futures Ordinance, the overarching legislative framework for Hong Kong’s financial markets. The HKMA would have responsibility for maintaining a trade repository, with reporting obligations initially applying to interest rate swaps and non-deliverable forwards before being extended to other instruments. IRSs and NDFs will also be the first instruments that are made eligible for central clearing. The two watchdogs also said further assessment was required before deciding whether swaps should be traded on exchange-like platforms.
One of the main concerns aired by respondents was that the definition of an OTC derivatives transaction put forward by the consultation was too wide. Instead, market participants requested that the regulators exclude all exchange-traded transactions, securities products, embedded derivatives and spot contracts – a request to which the HKMA and SFC agreed in principle.
The new supplementary consultation paper is open for comment until the end of August.