Saturday, September 07, 2013

Hong Kong Regulators Issue Proposals on OTC Derivatives Regulation

The Hong Kong Monetary Authority and the Securities and Futures Commission have, after consultation, issued additional proposals on the regulation of OTC derivatives and the oversight of systemically important participants (SIP).  Two new regulated activities were proposed to be regulated involving the activities of dealers and advisers in relation to OTC derivatives transactions, as well as clearing agents in OTC derivatives under the OTC derivatives regime.
In order to manage counterparty risk arising from a bilateral OTC derivatives transaction, market participants have started clearing their OTC derivatives transactions through a central counterparty. They can do so directly by becoming a member of the central counterparty or indirectly by clearing with a central counterparty through a third party. Due to the stringent admission criteria of central counterparties, noted the authorities, not every market participant may become member of a central counterparty and clear directly. They may instead engage third parties who provide clearing agency services so that they can clear indirectly through a central counterparty. As the regulators implement mandatory clearing obligations to cover more market participants, the demand for indirect clearing is likely to increase.

It was also proposed that market participants in Hong Kong whose OTC derivatives positions exceed a prescribed notification level should notify the SFC, and their name and details should then be entered in the SIP register. Additionally, the HKMA and SFC should have the power to require registered SIPs to provide information and take certain action in respect of their OTC derivatives positions and transactions as may be required.

The authorities proposed that penalties for breach of a notification requirement by an SIP should be set at the same level as penalties for unlicensed activities. They also proposed to give SIPs a right of appeal in respect of agency decisions on various matters, including registration and de-registration by the SFC and directions by the SFC or the HKMA for the SIP to take specified action.