Hong Kong Announces Consultation on OTC Derivatives

Hong Kong regulators are looking for input on how to better manage risks specifically related to over-the-counter (OTC) derivatives like swaps or exotic options.

The move is part of an ongoing push to improve reporting standards and better protect investors from risk, all the while aligning Hong Kong with international standards and boosting its standing as a global financial center.

UTIs wanted

In April, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) put forward a joint proposal to recommend the use of unique transaction identification codes (UTIs) in the reporting of OTC derivatives trades. Under the proposal, the regulators would also remove 17 jurisdictions designated for masking relief.

The UTIs is a globally unique identifier used to identify financial transactions. It was first introduced in late 2012 in the U.S. Europe followed suit in 2014.

The HKMA and the SFC are hoping that the new proposals will help strengthen the city’s financial markets and ensure that reporting and settlement systems in Hong Kong align with global standards. The two regulatory agencies are expecting comments until June 25. The UTI is expected to be implemented in April 2020.

“These proposals ensure that the Hong Kong reporting and clearing regimes keep up with international developments and remain relevant and appropriate,” said the regulators in an April 26 statement.

This type of regulations are part of Hong Kong’s efforts to enhance reporting standards to prevent market manipulation and fraud.

In recent years, Hong Kong has been stepping up compliance rules to improve the monitoring of threats to financial stability.

Say your name

In March 2018, the HKMA and the SFC made Legal Entity Identifiers (LEIs), a 20-digit unique alphanumeric identifier, a requirement for companies reporting OTC derivative trades. The use of the identifier will help authorities analyse how much exposure companies have to other companies and to risks of default. Every entity involved in a transaction has to submit their LEI to the Hong Kong Trade Repository. The use of the LEI is mandatory since April.

“This introduction of LEI and UTI in OTC derivatives regime are probably in the best interest of the investing public,” said Philip Ho, director of Hong Kong-based BCP Investment Limited.
Ho noted that enhancing the reporting standards will help boost Hong Kong’s image as an international financial center.

“Firms will now have to put more human and financial resources if they are to comply with the requirements, because the amended measures impose greater obligations in the reporting of OTC derivatives transactions,” he added.