Monday, April 04, 2011

Securities and Futures Commission CEO Details Hong Kong’s Globally Consistent Hedge Fund and Derivatives Regulation

The Hong Kong Securities and Futures Commission is determined to continue its robust regulation of hedge funds by participating with IOSCO in setting internal standards and good practice for the hedge fund industry and performing joint inspections with the SEC on some dual-registered hedge fund managers who are both licensed in Hong Kong and registered with the SEC, said SFC Chief Executive Officer Martin Wheatley . In recent remarks, he noted that, in response to the growth and the changing landscape of the hedge fund industry in Hong Kong, the Commission streamlined and clarified the licensing procedures for fund managers in 2007. This has resulted in the simplification of the licensing process for firms which are already registered as investment managers or advisors in other jurisdictions and which have a good compliance record and serve only professional investors.

In addition, the Commission has completed its third fact-finding survey on the Hong Kong hedge fund industry in conjunction with the data collection exercise coordinated by IOSCO to collect information concerning global hedge fund activities. According to the results of this latest survey, assets under management in Hong Kong increased 14 percent from the time of the last survey in March 2009 to US$63.2 billion as at September 2010. The number of hedge funds managed by SFC-licensed hedge fund managers in Hong Kong stood at 538 at the same time, nearly five times the level in 2004.
Hong Kong was the first jurisdiction to introduce guidelines to regulate hedge funds offered to the public. While some jurisdictions are now putting in place a regulatory regime covering hedge fund managers, the Commission has had regulatory supervision over those hedge fund managers who operate in Hong Kong. There is no minimum size exemption from the licensing requirement, noted the CEO, who added that licensed hedge fund managers are subject to the Management, Supervision and Internal Control Guidelines issued by the SFC, as all other licensees are. These Guidelines include guidance and suggested controls on risk management

With regard to short selling, whose potential for misuse was highlighted by the financial crisis, the Commission, unlike most jurisdictions, did not have to introduce any temporary measures to restrict short selling at the time of the financial turmoil in 2008. Instead, Hong Kong held onto its established framework for regulating short selling, said the CEO,.which has proven to be robust throughout the financial crisis.

That said, the SFC remained proactive by issuing a Consultation with the aim of introducing a short-position reporting regime to enhance transparency of short-selling activities in Hong Kong. The proposed short-position reporting regime is risk-based and will only be applicable to constituent stocks of the Hang Seng Index, the H-share Index, financial stocks and other stocks specified by the SFC. Derivatives will not be included. The SFC will publish aggregated short positions of each stock on an anonymous basis. The new reporting model will be implemented by a new subsidiary legislation, on which the SFC will be consulting the public in due course.

Regarding derivatives regulation, the Hong Kong Monetary Authority and the Hong Kong Stock Exchange have respectively decided to establish a trade repository and a central counterparty for OTC derivatives transactions in Hong Kong. These key financial market infrastructures are designed to enhance the transparency of, and reduce overall counterparty risk in, the OTC derivative markets. The new clearing house will complement the trade repository the Hong Kong Monetary Authority plans to set up to serve as a central registry and electronic database for transaction records from Hong Kong’s OTC derivatives market. The clearing house and TR will help ensure Hong Kong remains in step with global regulatory trends. Interest rate derivatives and non-deliverable forwards will be the first two products handled by the new clearing house.

In the future, the new regime is expected to also handle other OTC derivatives traded in Hong Kong such as equity derivatives.The Hong Kong regulators envision that the trade repository will be a centralized registry that maintains an electronic database of records of OTC derivatives transactions. By providing OTC derivatives transactions information to regulators, the trade repository will play a vital role in supporting authorities in carrying out their market surveillance responsibilities, which will help maintain stability of the financial systems in Hong Kong. It also helps increase transparency in the market, promotes standardization, and provides a level of consistency in the quality and availability of transaction data

The CEO pledged that the SFC will continue to work with the Government and other relevant stakeholders to build a regulatory regime for OTC derivatives markets covering the reporting and clearing of OTC derivatives transactions. At the initial stage, the reporting and clearing requirement will be applied to interest rate swaps and non-deliverable forwards. The SFC plans to consult the market on the regulatory regime by the third quarter of 2011.

Hong Kong regulatory authorities want to implement a trade repository and central counterparty regime for OTC derivatives in line with G-20 principles and harmonized with the Dodd-Frank Act derivatives regulatory provisions and the derivatives legislation that emerges from the European Union.