On 5 February 2016, the Securities and Futures Commission (SFC) and Hong Kong Monetary Authority (HKMA) published their conclusions to the joint consultation paper they issued in September 2015 on introducing mandatory clearing and expanding mandatory reporting for the second stage of the over-the-counter derivatives regulatory regime.
Amongst other things, the conclusions defer the commencement of phase 1 (mandatory clearing) until 1 September 2016 and the commencement of phase 2 (mandatory) reporting until 1 July 2017, with both dates being subject to completion of the legislative process.
The main changes contained in the conclusions are set out below.
Phase 1 – introducing mandatory clearing:
The initial consultation was aimed at capturing dealer-to-dealer trading of interest rate swaps. After a period of public consultation, many of the proposals in the initial consultation remain unchanged, however, there are a few areas that the authorities have reviewed in light of the comments received, such as the introduction of:
- a definition for “financial services provider” that lists specific entities that will qualify as “financial services providers”. This list will determine who is caught by the regime and will be open to comments until 29 February 2016;
- a single clearing threshold to apply equally to all prescribed persons, whether incorporated in Hong Kong or overseas;
- deliverable FX swaps having the same status as deliverable FX forwards in being exempt from the clearing threshold calculation;
- an exit mechanism for exiting the clearing obligation for cases where there is a permanent change in the entity’s trading profile or business model; and
- certain transactions arising from a multiple portfolio compression cycle being exempt from the clearing obligation.
Phase 2 – expanding mandatory reporting:
As in phase 1, there were also several new changes introduced by the conclusions in relation to phase 2.
In an attempt to lessen the burden on those subject to the regime, the conclusions reduced the scope of having to report historical trades that are yet to mature (known as ‘backloading’), stating that all transactions reported prior to phase 2 reporting and maturing before 1 July 2018 will be exempt from the ‘backloading’ requirement. Certain FX forwards settled within the settlement cycle for the securities will also be excluded from the reporting obligation.
The SFC and HKMA intend to issue a separate conclusions paper on the specific data fields to be completed as part of phase 2 reporting in the near future.
