Hong Kong Regulators Set to Enhance OTC Derivatives Regulatory Regime

Proposal could also see introduction of platform obligations for specific OTC derivatives

In a bid to enhance the regulatory regime of over-the-counter (OTC) derivatives in Hong Kong, the two regulatory agencies of the independent jurisdiction – the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) – on Wednesday issued a joint consultation paper.

The publication includes a proposal to mandate the use of the Legal Entity Identifier (LEI) – a 20-digit unique alphanumeric id for entities in a financial transaction – for the reporting obligation. The identification with the respective LEI is proposed to align with global standards, as every entity contained in a transaction report has to submit its respective LEI to the Hong Kong trade repository.

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“We propose to mandate the use of LEIs in OTC derivatives trade reporting so that all entities contained in a transaction report to be submitted to the Hong Kong Trade Repository (HKTR) would eventually be identified by their LEIs. The proposal would cover HKTR members, reporting entities (ie, entities that are subject to reporting obligation), transacting parties of trades, and other entities contained in transaction reports such as central counterparties (CCPs) and providers of clearing services,” the consultation paper states.

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This proposal followed the second phase of mandatory reporting of OTC derivatives transactions, which came into effect in July 2017. The phase covered all five major asset classes of OTC derivatives – interest rates, foreign exchange, credit, commodities, and equities.

Moreover, as the second phase of the OTC derivatives clearing regime, the regulators proposed to expand the clearing obligation to specified standardized interest rate swaps denominated in Australian dollars. The first phase of this came into effect on September 2016, which covered specified standardized interest rate swaps.

To determine the appropriate products for the trading obligation in Hong Kong, the consultation paper even sets out specific factors.

“As a first step towards the possible introduction of a platform trading obligation, we propose to formally adopt a trading determination process for identifying which products are appropriate to be subject to a platform trading obligation in Hong Kong,” the paper added. “The process entails taking into account factors that we currently use in our feasibility study of introducing a platform trading obligation. These factors are also broadly similar to criteria used in other jurisdictions.”

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