Hong Kong sets out OTC derivatives reform plans

Exchange and post-trade services operator Hong Kong Exchanges and Clearing (HKEx) has laid out plans for establishing a clearing facility for over-the-counter (OTC) derivatives, following the lead of
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Exchange and post-trade services operator Hong Kong Exchanges and Clearing (HKEx) has laid out plans for establishing a clearing facility for over-the-counter (OTC) derivatives, following the lead of regulatory initiatives in the US and Europe.

HKEx will make an initial investment of HK$180 million (US$23.15 million) to build a clearing platform by the end of 2012, which it says will support global regulatory initiatives and take advantage of business opportunities arising from clearing OTC contracts.

The facility will initially handle interest rate derivatives and non-deliverable forwards, with other products such as equity derivatives added in the future.

“While this is a relatively low-volume market in Hong Kong at the moment, it has tremendous potential for growth, particularly with the wider use of renminbi in international transactions,” said HKEx chief executive Charles Li. “We aim to be at the forefront of that growth by providing a stable, transparent and efficient platform for the clearing of OTC derivatives.”

The new clearing house will complement the trade repository (TR) for OTC derivatives, which was announced today by the Hong Kong Monetary Authority (HKMA), the government division responsible for maintaining monetary and banking stability. The TR will also be fully operational by the end of 2012.

The TR will be a centralised registry that maintains an electronic database of OTC derivatives transactions. HKMA says it will help to maintain the stability of financial system, increase transparency and promote standardisation.

A link will be developed between the TR and the clearing house.

The HKMA has committed to working with the government and the domestic regulator, the Securities and Futures Commission, to build a regulatory regime for OTC derivatives markets. The industry will be consulted on the relevant supervisory requirements by the third quarter of 2011.

“The HKMA supports HKEx's initiative to develop the central counterparty (CCP) for OTC derivatives and considers it both timely and necessary for Hong Kong to develop a local TR,” said Eddie Yue, deputy chief executive, HKMA. “The local TR and CCP are crucial for enhancing the robustness and transparency of local OTC derivatives markets, bringing Hong Kong’s financial market infrastructure in line with global standards.”

Reforming the OTC derivatives market has been a priority for regulators in the US and Europe in the wake of the global financial crisis. US regulators the Securities and Exchange Commission and derivatives regulator the Commodities and Futures Trading Commission are currently drafting rules covering exchange trading, central clearing and data collection of OTC derivatives transactions under the powers handed to them by the Dodd-Frank Act.

In Europe, central clearing and data standards for OTC derivatives were covered by draft legislation presented by the European Commission (EC) on 15 September, while the EC's consultation on MiFID II, which was launched on 8 December, proposed options for migrating OTC derivatives on trading venues.

The Singapore Exchange recently went live with an OTC clearing solution for interest rate swaps, launched in conjunction with nine investment banks.

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