Bill tackling OTC derivatives advances at LegCo

Second and third reading up soon.

The bill introducing mandatory reporting clearing and trading obligations provides for a regulatory framework for the OTC derivatives market in Hong Kong.

Covered by the bill pending at the Legislative Council are 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 provisions for the regulation of participants in the OTC derivatives market.

The mandatory reporting and clearing obligations will initially cover interest rate swaps and non-deliverable forwards, which are the major types of OTC derivative transactions conducted in Hong Kong. The scope of products will be extended in phases to cover other types of derivative products.

The regulatory framework will be set out in the finalized primary legislation. Details will be set out in specific rules to be drawn up by the Securities and Futures Commission with the consent of the Hong Kong Monetary Authority.

HKMA will regulate the OTC derivative activities of authorized institutions and approved money brokers. On the other hand, SFC will regulate activities of licensed corporations and other prescribed persons. SFC and HKMA will be given additional powers to carry out investigations and enforce disciplinary powers.