Draft Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules (Rules) were published on 27 November 2014 together with associated consultation conclusions and a further related public consultation. This follows the HKMA and SFCs public consultation on the topic in July 2014. The Rules will be placed before the Legislative Council for negative vetting in Q1 2015 and are expected to commence in Q1 2015.
The key conclusions, which are reflected in the Rules, are :
- Interest rate swaps and non-deliverable forwards will be the first products covered by the Rules. The Rules, for now, are not intended to cover commodity-related transactions.
- The regulators have clarified the meaning of “conducted in Hong Kong”; it is not intended to capture sales activities but to capture transactions where the decision to do the trade is made in Hong Kong. Clarity is also provided on what this means for transactions that are booked in a global book, or executed on an electronic platform or subject to an order routing arrangement. The HKMA and SFC will also issue FAQs on the topic.
- CCPs will be required to report transactions to which they are a counterparty, and if a CCP by virtue of section 95 Securities and Futures Ordinance, then only those transactions where the other counterparty is a Hong Kong incorporated company.
- For now, Type 9 licensed or registered firms will not be required to report OTC derivative transactions entered into on behalf of a counterparty. This will be consulted on further with a view to introducing a reporting regime for Type 9 firms in the future. For the present managers will only be required to report proprietary trades once the regime is introduced.
- Reporting by Hong Kong persons i.e. persons that are based in or operating from Hong Kong (including Hong Kong domiciled funds) will be deferred until a later date.
- The conclusions reiterate that reporting via the electronic reporting system developed and operated by and on behalf of the HKMA (HKTR) is still necessary. Market participants have continued to request that reporting to an acceptable overseas trade reporting (TR) should amount to “substitutive compliance”. This has been rejected, although the regulators will permit agency reporting (and an agent could be an overseas TR).
- Exempt person relief will be implemented in relation to specified OTC derivative transactions within a product class and to which the person is a counterparty. However the limit on the number of outstanding transactions (at which point relief was proposed to be unavailable) has been removed and instead a person will be exempt where its OTC derivative transactions remain below US$30 million calculated on a gross notional position limit. The regulators have not agreed to revivals of the relief, which is to be available only once.
- The concession period and grace period following introduction of the reporting regime have been extended from 3 and 6 months respectively to, 6 and 9 months.
- The record retention period has been reduced to 5 years from the initially proposed 7 years. The time frame runs from when the transaction has matured or been terminated.
- Fees for reporting are to be increased from the proposed HK$3 per transaction reported to the HKMA that is still outstanding on the last business day of a month to HK$4.5. The maximum annual fees payable has been increased to HK$1.5 million per reporting entity (from HK$1 million).
A further public consultation has been launched with responses required by 23 December 2014. The questions posed relate to (1) reporting of valuation transaction information; (2) designated lists for marking relief; and (3) views on the prescribed list of stock/futures markets and clearing houses for the purposes of products being excluded from the “OTC derivative product” definition.