Hong Kong’s financial watchdogs said on Wednesday that they planned to offer more flexibility in their proposed new rules for over-the-counter derivative trading.
Regulators around the world are bringing in new rules to force derivatives that are traded over-the-counter to be centrally cleared and for data on those trades to be reported to them.
The aim is to make the $650 trillion over-the-counter derivatives market more transparent and reduce the risk posed to the wider financial system if a bank or broker were to collapse.
The Hong Kong Monetary Authority (HKMA)and the Securities and Futures Commission said following a consultation they will now not force banks to clear at a local onshore clearing house but allow them the option to use a foreign clearer, provided it meets certain regulatory requirements.
This will likely make it cheaper for big global banks to clear trades, as using multiple clearing houses requires more collateral and reduces the chances of getting “netting benefits” by putting offsetting trades through a single clearer.
The regulators also said their proposed new rules will not apply to trades that are executed or originate at a Hong Kong bank or broker but are booked overseas. The aim is to ensure their rules don’t clash with foreign regulations.
“We have to launch such reforms or else international financial institutions will withdraw from Hong Kong. But we will allow some flexibility,” said Edmond Lau, executive director for monetary management at the HKMA at a press conference.
The regulators said they expected the new rules in Hong Kong to take effect by mid-2013.
Under the new regulations, interest rate swaps and non-deliverable foreign exchange forwards will be the first products subject to mandatory central clearing requirements. This will include transactions denominated in offshore yuan as well as the Hong Kong dollar.
The rules could be extended to other asset classes such as equity derivatives in due course.
There will not though be any requirement yet for these products to be traded on exchanges or electronic trading platforms, unlike in the US and Europe.
“Electronic trading could proceed later as we’re not yet at a mature stage,” said Lau.
Category: Hong Kong