Hong Kong regulators release conclusions on introducing mandatory clearing and reporting for OTC derivatives market

There were concerns about the lack of explicit guidance as to what constitutes an OTC derivative for FX, and clarification was sought as to whether it captured all FX forwards (including FX security conversions), FX NDFs, FX swaps and FX options, in all currencies. The Hong Kong financial regulators also received a request to exclude FX spot transactions from the scope of mandatory reporting.

The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) today published conclusions to the proposals made in a joint consultation on introducing mandatory clearing and expanding mandatory reporting for the second stage of the over-the-counter (OTC) derivatives regulatory regime. The current phase of mandatory reporting, covering only certain interest rate swaps and non-deliverable forwards (phase 1 reporting), was implemented on July 10th 2015.

The conclusions paper sets out the revised proposals after taking into account market comments and feedback and seeks to further consult on the initial list of financial services providers.

Highlights include:

Introducing mandatory clearing (phase 1 clearing)

  • deferring commencement of phase 1 clearing from July 1st 2016 to September 1st 2016, subject to the legislative process;
  • defining “financial services provider” by reference to a list of entities to be published in the Government Gazette and seeking views on the initial list of financial services providers by February 29th 2016;
  • having a single clearing threshold which applies to all prescribed persons, whether they are incorporated locally or overseas;
  • excluding both deliverable FX forwards and deliverable FX swaps from the clearing threshold calculation;
  • providing a mechanism for exiting from the clearing obligation;
  • exempting from the clearing obligation certain transactions resulting from a multilateral portfolio compression cycle;

Expanding mandatory reporting (phase 2 reporting)

  • further deferring commencement of phase 2 reporting from January 1st 2017 to July 1st 2017, subject to the legislative process;
  • narrowing the backloading requirement for transactions reported prior to phase 2 reporting so that it does not apply to transactions maturing before July 1st 2018; and
  • excluding from the reporting obligation FX forwards which are entered into for the purposes of buying or selling securities in a foreign currency and which are settled within the settlement cycle for the securities.

Central counterparties who are authorized to provide automated trading services will be subject to mandatory reporting in its current form (phase 1 reporting) from September 1st 2016 to align with the commencement of phase 1 clearing. 

A separate conclusions paper on the specific data fields to be completed under phase 2 reporting will be issued shortly.

The conclusions paper can be downloaded here (PDF).

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