SFC Updates its OTC Derivatives Regulation

Legal entity identifiers will not become mandatory but their use will expand

The Securities and Futures Commission (SFC), a Hong Kong regulator, announced the conclusion of its consultation on over-the-counter (OTC) derivatives regulation. OTC derivatives regulation has been in place within the East Asian jurisdiction since 2016.

The SFC launched a consultation back in March of 2018 which had a number of purposes. These included proposals to mandate the use of legal entity identifiers (LEIs) – a code which identifies an entity in a transaction – expand firms’ clearing obligations and enforce a trading determination process for introducing a platform trading obligation.

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Following on from the consultation, the SFC has decided not to make LEIs mandatory entirely. Instead, only the entity on the reporting side of a transaction will have to use an LEI. This new regulation will be enforced starting on April 1st of 2019, leaving firms with under a year to ensure they are compliant.

Changes to transaction reporting

With regard to transaction reports, reporting entities must continue to identify their counterparties in transaction reports. Reporting entities must also “establish a process to request LEIs from their clients.” The SFC did not detail a framework for this process or how it could be set up.

The clearing obligation put on firms will also be expanded. In today’s announcement, the SFC noted that firms’ clearing obligation would be expanded to include specifically standardized interest rate swaps denominated in Australian dollars and the list of firms included under the regulation’s definition of Financial Services Provider will also be expanded.

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