15 December, 2014
The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) have published consultation conclusions on the draft rules for mandatory reporting of over-the-counter (OTC) derivatives and related record keeping. The draft rules have been amended, taking into account the comments received and providing greater clarity to the proposed regulatory regime. In the paper setting out the consultation conclusions, the HKMA and the SFC further consult on three ancillary issues, requesting comments by 23 December 2014. The draft rules are targeted to be introduced into the Legislative Council (LegCo) during the first quarter of 2015, to come into effect in the same quarter. The HKMA and the SFC also aim to launch the initial consultation on mandatory clearing and related record keeping requirements at around the same time. |
A. BACKGROUND
The Securities and Futures (Amendment) Ordinance 2014 (Amendment Ordinance) was enacted in April 2014 to amend the Securities and Futures Ordinance. The amendments provide the framework for the regulation of the OTC derivatives market in Hong Kong. The Amendment Ordinance has yet to come into effect pending the drafting of detailed rules for mandatory reporting, clearing and trading of OTC derivative transactions. In July 2014, the HKMA and the SFC issued a consultation paper to invite the public to comment on the draft of the first set of detailed rules, the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules (Reporting Rules). The HKMA and the SFC have now published a paper setting out the conclusions reached from the consultation as well as further consultation on three ancillary issues (November Paper). This briefing provides an overview of the key matters discussed in the November Paper.
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C. FURTHER CONSULTATION
In the November Paper, the HKMA and the SFC also conduct further consultation on the three ancillary matters. The deadline for comments on these matters is 23 December 2014. 1. Details on the requirement to report daily valuation transaction information
This requirement will apply to AIs, AMBs, LCs and CCPs only. It is intended to be implemented at a later stage, in around the first quarter of 2016. 2. Proposed list of jurisdictions for the masking relief
As discussed above, the HKMA and the SFC have proposed a list of 18 designated overseas jurisdictions, where the disclosure of counterparty identifying information is prohibited under the laws or by the regulators/authorities of the jurisdictions. 3. Proposed list of markets and clearing houses to be excluded from the OTC derivatives regulatory regime
The HKMA and the SFC have proposed a list of overseas markets and clearing houses which are to be excluded from the OTC derivatives regime, on the basis that they are already subject to regulation under their home jurisdiction. |
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The November Paper has provided welcome clarification to various issues and queries raised during the consultation. The decision to defer the implementation of mandatory reporting in relation to “Hong Kong persons” and Regulated Asset Managers, pending consideration of the outstanding issues, will enable the initial phase of implementation on active market participants (such as AIs and LCs) to be progressed without delay. It will also enable any teething problems to be addressed before the reporting obligation is extended to the wider population. The HKMA and the SFC intend to introduce the Reporting Rules into LegCo during the first quarter of 2015, with a view to implementing the Reporting Rules in the same quarter. This first phase of implementation will apply to AIs, AMBs, LCs and RCHs (ATS-CCPs will not be subject to mandatory reporting until mandatory clearing is implemented). In addition to the remaining phases of the implementation of mandatory reporting, further consultations are being planned in relation to detailed rules for other aspects of the OTC derivatives regulatory regime, including mandatory clearing and mandatory trading. With regards to the detailed rules for mandatory clearing and related record keeping, two rounds of consultation are being planned and are currently targeted to take place during the first to third quarters of 2015. Implementation is expected to take place no earlier than the fourth quarter of 2015, to initially apply to dealer-to-dealer trades only. Application to trades involving non-dealers are expected to take place no earlier than 2016. Market participants should take note of the draft Reporting Rules and review their internal reporting and record keeping policies to ensure that they comply with the Reporting Rules when such rules come into effect. The Reporting Rules are largely finalised, pending consultation on the three ancillary matters mentioned above, and review by the Department of Justice and the LegCo. Market participants should also take note of the impending consultations on mandatory clearing and mandatory trading and the potential impact on their OTC derivatives businesses. |
Appendix 1: Highlights of key changes to the draft Reporting Rules following consultation
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For further information, please contact:
William Hallat, Herbert Smith Freehills
Herbert Smith Freehills Regulatory & Compliance Practice Profile in Hong Kong