HKMA and SFC seek opinions on OTC derivatives rules

The agencies want to collect views on developing a regime at par with international standards but takes into account local market conditions and characteristics.

The Hong Kong Monetary Authority and Securities & Futures Commission have issued a joint consultation paper on the proposed regulatory regime for Hong Kong’s over-the-counter derivatives market.

Monetary Authority Deputy Chief Executive Eddie Yue said, in line with the objectives of the G20 Leaders commitments, the proposed regime aims to improve overall transparency in the OTC derivatives market, reduce participants' interconnectedness, and generally reduce systemic risk in the financial system, according to a government report.

Both parties are mindful that the local OTC derivatives market is relatively small compared with other major markets and the OTC derivatives market is global in nature. The focus has been on developing a regime that is on par with international standards but takes into account local market conditions and characteristics.

As key aspects of the OTC regulatory reform are still under discussion in the global arena, the proposed regime for Hong Kong may change. The joint consultation paper sets out both parties’ current thinking on how the regime might be cast given the present status of the global reform efforts.

The main proposals include the regime to be set out in the Securities & Futures Ordinance and will be jointly overseen and regulated by the Monetary Authority and Securities & Futures Commission.

The OTC derivatives transactions will have to be reported to the trade repository, which the Monetary Authority is setting up.

Standardised OTC derivatives transactions will have to be centrally cleared through a designated central counterparty.

Initially, the OTC derivatives transactions will not be required to be traded on an exchange or electronic trading platform. Further study is needed to assess how best to implement such a requirement in Hong Kong.

Both parties are working towards meeting the G20 implementation deadline of the end of 2012.