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.