HONG KONG, July 18 Hong Kong moved one step closer to implementing the G20 post-crisis reform agenda on Friday with the publication of a long-awaited consultation on the treatment of derivatives trades.
The paper, jointly-issued by the Hong Kong Monetary Authority (HKMA), the city's de facto central bank, and the Securities and Futures Commission (SFC), will help establish detailed rules on how information relating to privately-negotiated derivatives trades are reported to the regulators.
The rules form part of Hong Kong's broader efforts to comply with the post-crisis G20 reform agenda, which aims to reduce the risk of trading over-the-counter derivatives by making transactions in this market transparent to watchdogs.
Prior to the crisis, banks like Lehman Brothers were able to accumulate huge piles of risk deriving from these instruments that lay hidden from the gaze of regulators.
Hong Kong is Asia's third-largest OTC derivatives trading hub after Singapore and Australia, with the vast majority of trades relating to foreign exchange, according to research published by consultancy Celent in conjunction with bank trade group, the International Swaps and Derivatives Association April last year.
Hong Kong this year launched a new legal framework that introduces mandatory reporting, clearing, trading, and record-keeping obligations for OTC derivatives through amendments to the Securities and Futures Ordinance, but the details have yet to be drawn up.
Clearing helps mitigate the counterparty risk involved in trading OTC derivatives by passing the trade through a third-party which holds cash as security against either party defaulting.
The month-long consultation is one of several the HKMA and SFC expect to issue on the new legislation which focuses specifically on the trade reporting and record-keeping aspect of the new regime.
It aims to establish which types of trades will be reported, which firms will be required to report, how quickly firms ought to report, and the content of reports.
Trade reporting has become an issue of intense debate, following a bungled implementation of G20 trade reporting rules in the United States and Europe, which saw regulators overwhelmed with confusing data. Further subsidiary legislation will be drawn up once the regulators have received feedback from the industry. (Reporting by Michelle Price; Editing by Denny Thomas)