Reporting

The Hong Kong Monetary Authority (HKMA) introduced reporting requirements to bring more transparency in the derivatives markets to facilitate identification and mitigation of systemic risk. Collecting and providing Over-The-Counter (OTC) derivatives transaction information to regulatory authorities play a vital role in promoting a level of consistency in the quality of transaction data and supporting authorities in their market surveillance responsibilities, which will help maintain stability of the financial systems.

The Hong Kong Trade Repository (HKTR), created by the HKMA and launched in July 2013, provides an electronic platform to collect and maintain the records of all reported OTC derivatives trade data centrally as well as to match counterparty trades.

Authorized Institutions (AIs) and Approved Money Brokers (AMBs) licensed and regulated by the HKMA, Licensed Corporations (LCs) and recognised clearing houses (RCHs) licensed and regulated by the Securities and Futures Commission (SFC) are required to report specified OTC derivatives transactions. OTC Derivative Reporting Rules of IRS and non-deliverable FX forwards came into effect on 10 July 2015. The second phase of OTC derivative reporting comes into effect on 1 July 2017 and covers all other asset classes.

Margining of non-cleared derivatives

In keeping with its commitment to implement the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (BCBS-IOSCO) framework for non-centrally cleared derivatives, the HKMA introduces margin and risk mitigation standards for non-centrally cleared OTC derivatives in its Supervisory Policy Manual. The requirements enter into effect on 1 March 2017 with a six months’ transition period for variation margin (VM) and a scheduled phase-in of initial margin (IM) based on OTC derivative exposure consistent with the international standard.

The Initial and variation margin and risk mitigation rules apply to:

• Hong Kong incorporated AIs, irrespective of where their trades are booked, and
• Overseas incorporated AIs with respect to trades booked in its Hong Kong branch only when they enter into in-scope non-centrally cleared derivatives with a Covered Entity.

Covered entity refers to financial counterparties and significant non-financial counterparties which are not excluded entities.

Physically-settled FX forwards and swaps, physically settled commodity forwards and FX transactions embedded in cross-currency swaps associated with the exchange of principal are exempt from VM (and IM) requirements. Significant non-financial counterparties that use non-centrally cleared derivatives predominantly for hedging purposes are not required to exchange IM and VM.

Substituted compliance

Substituted compliance is available for cross-border transactions with

• Australia, Canada, the European Union, India, Japan, Republic of Korea, Mexico, Russia, Singapore, Switzerland and the United States, which are deemed comparable jurisdictions until HKMA has completed a comparability assessment, and
• Jurisdictions for which the HKMA has issued a comparability determination.

Non-netting jurisdictions and non-segregation jurisdictions

Exchange of margin is not required when Covered Entities trade with counterparties located in non-netting jurisdictions or non-enforceable collateral jurisdictions. Instead, they are required to put in place appropriate internal limits and risk management policies and procedures.

HKMA has issued Risk Mitigation Standards (RMS) to promote legal certainty over the terms of the non-centrally cleared OTC derivatives transactions, foster effective management of counterparty credit risk and facilitate timely resolution of disputes. These rules rely on:

• Execution of written trading relationship documentation;
• Confirmation of the material terms of the non-centrally cleared OTC derivative after the transactions are executed;
• Valuation of non-centrally cleared derivatives in an objective manner;
• Regular reconciliation of the material terms and valuations of all transactions in a non-centrally cleared derivatives portfolio; and
• Resolution of disputes in a timely manner.

To view the OTC derivatives requirements in full, please visit the HKMA website.