Regulatory regime for OTC derivatives markets

The Securities and Futures Commission (SFC) welcomes the announcement by the Hong Kong Monetary Authority (HKMA) and Hong Kong Exchanges and Clearing Limited (HKEx) to respectively establish a trade repository (TR) and a central counterparty (CCP) for over-the-counter (OTC) derivatives transactions in Hong Kong (Note 1). These key financial market infrastructures aim at enhancing the transparency of and reducing overall counterparty risk in the OTC derivatives markets.

To provide the legal framework for the development of these market infrastructures, the SFC will work with the Government, the HKMA, HKEx and relevant stakeholders to build a regulatory regime for OTC derivatives markets. The regulatory regime would cover the reporting of OTC derivatives transactions, particularly those which are relevant to the Hong Kong market, to the TR and the clearing of standardised OTC derivatives transactions through an authorized CCP.

At the initial stage, the reporting and clearing requirement will be applied to interest rate swaps and non-deliverable forwards. Consideration will be given to extending the requirement to other appropriate OTC derivatives asset classes after the initial roll out, having regard to local and overseas market developments including any further guidance from international regulatory bodies.

The SFC plans to consult the market on the regulatory regime by the third quarter of 2011, so that there is sufficient time to prepare for the roll out of the TR and the CCP by end 2012 (Note2).

“Establishing a regulatory regime for OTC derivatives markets is an important move for Hong Kong to keep pace with international initiatives on this front,” said Mr Martin Wheatley, the SFC’s Chief Executive Officer. “As the regulation of OTC derivatives markets internationally is still evolving, the SFC will closely monitor overseas developments with a view to bringing the local regulatory regime appropriately in line with those that are taking shape in other major markets.”

The initiatives represent a major step for Hong Kong to implement the commitment agreed by the G20 leaders to regulate OTC derivatives markets.

The SFC will maintain a close dialogue with HKEx regarding the OTC derivatives CCP to ensure that its operations will be orderly, fair and expeditious, and its risks are managed prudently.

End

Notes:

1. Please refer to the press releases today issued by the HKMA and HKEx for details.
2. The September 2009 G20 communique called for (i) all standardized OTC derivative contracts to be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end 2012 at the latest; and (ii) OTC derivative contracts should be reported to trade repositories.