The Securities and Futures (Amendment) Ordinance was gazetted on 4 April 2014 and will come into effect on a future date, to be specified. The Amendment Ordinance amends the Securities and Futures Ordinance to create the framework for regulation of OTC derivatives in Hong Kong.
The Amendment Ordinance is substantially the same as the Securities and Futures (Amendment) Bill, which was submitted to the Legislative Council in June 2013. In particular, the transitional provisions for the new licensing regime remain the same. Please refer to our earlier client alert for a summary of the Bill and the transitional provisions as they will apply to asset managers. Note the window to apply for a deemed licence under the transitional provisions is three months from the commencement of the new licensing regime.
Detailed rules for the reporting, clearing and other obligations will be set out in subsidiary legislation. Public consultation on the subsidiary legislation will be conducted in phases. The government press release accompanying the gazetting of the Amendment Ordinance indicated that the first batch of subsidiary legislation will be laid before the Legislative Council by the end of 2014.
Changes from the Bill include the following:
- Narrowing of the definition of “dealing in OTC derivative products” – the following categories that appeared in the original Bill have been deleted from the Amendment Ordinance; “(c) entering into or offering to enter into an arrangement with another person, on a discretionary basis or otherwise, to facilitate an act referred to in paragraph (a) or (b); or (d) inducing or attempting to induce a person to enter into an arrangement with another person, whether on a discretionary basis or otherwise, to facilitate an act referred to in paragraph (a) or (b);”
- Narrowing of the exemption from “dealing in OTC derivative products” for persons who are “price takers” – the exemption will only apply where the person enters into or offers to enter into an OTC derivative transaction; it will not apply where the person induces or attempts to induce another to enter into an OTC derivative transaction;
- Addition of a record-keeping obligation relating to OTC derivative transactions
- Addition of an express statement that failure to comply with the reporting, clearing, trading or record-keeping obligations in relation to an OTC derivative transaction will not of itself invalidate the transaction or affect any rights or obligations arising under, or relating to, the transaction;
- Addition of an ability for the Chief Executive in Council to set fees payable to the Monetary Authority for use of the reporting system;
- For determining whether a person is a “systemically important participant” (SIPs), positions of other persons where the SIP has guaranteed the obligations of those persons under OTC derivative transactions must be included in calculating whether the SIP has reached the threshold that triggers a notification to the Securities and Futures Commission as a SIP;
- Amendments to clarify the provisions dealing with insolvency overrides for contracts between members of a central counterparty and their clients.