Changes to the Hong Kong OTC derivatives mandatory reporting and clearing requirements

Hong Kong has implemented mandatory reporting and clearing requirements for certain OTC derivatives transactions. On 27 March 2018, the Hong Kong Monetary Authority and Securities Futures Commission issued a joint consultation paper (Consultation) that proposed the following changes to these requirements:

• mandating the use of Legal Entity Identifiers (LEIs) for reporting purposes; and

• expanding the scope of the mandatory clearing obligation to include Australian Dollar (AUD) interest rate swaps (IRS).

The Consultation also requested comment on a trading determination process that the regulators intend to formally adopt to identify which OTC derivative products are appropriate to be subject to a mandatory platform trading obligation in Hong Kong.

The Consultation will close on 27 April 2018. It is intended that the mandatory use of LEIs will be implemented by the end of 2018 and that legislative amendments relating to the expansion of the mandatory clearing obligation will be gazetted and tabled with the Legislative Council for negative vetting in the second half of 2018.

Reporting

The initial mandatory reporting requirements took effect on 10 July 2015 and related to certain IRS and non-deliverable currency forward contracts. The mandatory reporting requirements were expanded to include additional asset classes (other interest rate and foreign exchange OTC derivatives, credit, commodity and equity OTC derivatives) with effect from 1 July 2017.

Currently, parties reporting a transaction to the Hong Kong Trade Repository (HKTR) may use different identifiers (including LEIs) to indicate the identities of parties to the transaction that are not private individuals. The Consultation proposes that LEIs be required for all reporting:

• six months after the publication of the conclusions to the Consultation, in the case of reporting entities; transacting parties which reporting entities report or act for; HKTR members; central counterparties; and providers of clearing services; and

• by January 2020, in the case of other transacting parties to reportable trades.

Reporting entities will not be required to replace the identifiers they used for trades already reported before the LEI requirement comes into effect. However, where the reporting of daily valuation information for a trade occurs on an on-going basis, use of LEIs will be required for all reports filed on or after implementation of the LEI requirement.

Clearing

Mandatory clearing requirements were first introduced on 1 September 2016 and cover certain standardized IRS.

The Consultation proposes that the mandatory clearing obligation be expanded to include certain standardized AUD IRS.

The Consultation also proposes changes to the existing list of “financial services providers” (FSPs), which has the effect of expanding the mandatory clearing obligation to OTC derivative transactions where the newly-added FSPs are counterparties. The regulators indicated it is their intention to update the list of FSPs annually.

Platform trading

The Consultation proposes a trading determination process for the regulators to identify which products will be subject to a mandatory trading obligation in Hong Kong in future.

It is proposed that the process should take into account the following factors:

• whether the product is sufficiently standardised for platform trading;

• the nature, depth and liquidity of the market for the product;

• the availability of trading venues that may be designated for trading that product;

• whether the product is already subject to the central clearing obligation in Hong Kong;

• whether regulators in other jurisdictions consider such a product to be suitable for platform trading; and

• the impact on the market and market participants of imposing a platform trading obligation for the product.