Hong Kong has been one of Asia’s slowest movers in implementing G20 rules on OTC derivatives. However, progress is now being made as a bill introducing mandatory reporting clearing and trading obligations was submitted to Hong Kong’s government, the Legislative Council, on 10 July.
At the house committee held on 12 July, members decided to set up a Bills Committee to study the bill. The second and third reading will take place at a later date.
The bill provides for a regulatory framework for the OTC derivatives market in Hong Kong, including mandatory reporting, clearing and trading obligations; the establishment and regulation of the infrastructure through which the mandatory obligations will be fulfilled, (for example, central counterparties) and provides for the regulation of participants in the OTC derivatives market.
The regulatory framework will be set out in the finalised primary legislation. The details will be set out in specific rules to be drawn up by the Securities and Futures Commission (SFC) with the consent of the Hong Kong Monetary Authority (HKMA).
These two bodies will then carry out the regulatory tasks, with the HKMA regulating the OTC derivative activities of authorized institutions and approved money brokers. The SFC will regulate activities of licensed corporations and other prescribed persons. The SFC and HKMA will be given additional powers to carry out investigations and enforce disciplinary powers.
The HKMA will develop and operate a trade repository whose reporting standards and specifications will be in line with those applied by international standard setting bodies and industry platforms. The HKMA will also work with other jurisdictions to facilitate the sharing of data.
The mandatory reporting and clearing obligations initially cover interest rate swaps and non-deliverable forwards, as not only are they the major types of OTC derivative transactions conducted in Hong Kong but they are capable of standardisation. The scope of products will be extended in phases to cover other types of derivative products.