Hong Kong OTC derivatives regulation – phased implementation of reporting obligations

On 28 November 2014, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) issued their conclusions on a joint public consultation on the mandatory reporting and record keeping obligations under the new over-the-counter (OTC) derivatives regulatory regime.

In the consultation conclusions, the SFC and HKMA have scaled back the initial application of the mandatory reporting rules. In contrast to the original approach that included reporting obligations for “Hong Kong persons” and asset managers for trades entered into on behalf of their clients, the SFC and HKMA have chosen to start with a more gradual, measured approach. As a result, the initial reporting obligations will be limited to regulated entities such as banks, approved money brokers and SFC-licensed corporations where either they are counterparties to reportable transactions or they conduct trades in Hong Kong on behalf of their affiliates (acting as counterparty). Consistent with the more gradual approach, the SFC and HKMA have also extended the period permitted to set up reporting connections to the trade repository from three months to six months. The broader reporting obligations for asset managers and “Hong Kong persons“ have been deferred until some time in the future.

There are a number of other technical changes to the reporting rules which give welcome clarity to those who will be subject to the reporting obligations.

Industry participants have asked throughout the consultations on regulation of OTC derivatives in Hong Kong to permit substituted compliance (e.g. ability to meet the Hong Kong reporting obligation through reporting to an overseas trade repository) and one-sided reporting (e.g. sufficient that only one counterparty report). The SFC and the HKMA have reiterated the requirement for reporting in Hong Kong (no substituted compliance) and two-sided reporting.

Overall, the approach the SFC and the HKMA are adopting is commendable – it enables Hong Kong’s mandatory reporting regime to start in early 2015, it focuses on those entities, the dealers, that are closest to the market, and it gives time to address any teething issues before broadening the scope of reporting obligations to asset managers and Hong Kong persons. It appears designed to enable a smooth start to mandatory reporting, and a solid base on which to add reporting obligations for different entities and transaction types in future.

The conclusions paper also seeks further views on three ancillary matters:

• daily reporting of valuation transaction information
• designation of a list of jurisdictions for the purposes of the masking relief (meaning that counterparty information does not need to be disclosed in the reports to the Hong Kong trade repository), and
• the list of stock markets, futures markets and clearing houses to be prescribed for the purposes of defining the scope of the OTC derivatives regime – instruments that are traded and cleared through such markets will not be OTC derivatives and so will not be subject to the mandatory reporting regime.

Comments on these issues may be submitted to either the HKMA or the SFC by 23 December 2014.