Following a consultation paper issued by the Securities and Futures Commission (SFC) in July 2015, the SFC, on 24 July 2017, published consultation conclusions and further consultation on the proposed capital and other prudential requirements for licensed corporations engaged in over-the-counter derivatives (OTCD) activities and other proposed changes to the Securities and Futures (Financial Resources) Rules (FRR).
With the aim of aligning Hong Kong regulation with international standards, yet being conscious of the need to adapt to local market characteristics, the SFC decided to proceed with the implementation of the proposed regime subject to certain modifications. These modifications, which are set out in detail in the consultation conclusions, include reducing the minimum capital requirements for central dealing desks of fund managers and extending the transitional period for full compliance with the proposed regime from six months to one year. The criteria for approval of the use of an internal models approach for calculating capital requirements will also be updated to reflect the latest standards introduced by the Basel Committee on Banking Supervision.
The consultation conclusions also cover proposed changes that are not specific to OTCD activities and other technical changes.
Further, following an earlier consultation conducted in May 2011 and recent market developments, the list of specified exchanges in the FRR will be updated to reflect the new names of certain exchanges and to include four additional Mainland commodity exchanges.
Since the drafting of the FRR amendments that are not specific to OTCD activities is relatively straight-forward, the SFC’s priority is to finalise these changes, so that these rules can be implemented as soon as possible. The draft FRR amendments that are not specific to OTCD activities were included in the consultation conclusions for further consultation. The amendments to the rules specific to OTCD activities will follow and will be published for public consultation when they are ready.
The SFC’s proposed changes should be welcomed by market participants. While the proposed regime has incorporated the latest international standards, notably the new non-model based approach for measuring counterparty credit risk exposure of OTCD activities introduced by the Basel Committee, local market nuances have also been taken into account by the SFC. The proposed regime should help to develop Hong Kong as a derivatives hub and risk management centre in Asia.
The consultation is open until 23 August 2017. The public is invited to submit their comments in respect of the proposals and draft amendment rules to the SFC on or before this date. A copy of the consultation conclusions can be found here.
For more information, please refer to our previous blog entry.