Securities and Futures (Amendment) Bill gazetted proposing a regulatory framework for Hong Kong’s over-the-counter derivatives market

The Securities and Futures (Amendment) Bill 2013 (the “Bill”) was gazetted on 28 June 2013 following a joint consultation exercise conducted by the Hong Kong Monetary Authority (“HKMA”) and the Securities and Futures Commission (“SFC”) which commenced in October 2011. The Bill aims to provide for a regulatory framework for the over-the-counter (“OTC”) derivatives market in Hong Kong together with other technical improvements. The proposed regime will be included in the Securities and Futures Ordinance (“SFO”) and will be jointly overseen and regulated by the SFC and HKMA.

The Bill is being driven by a current lack of regulation for OTC derivative transactions which has made it difficult for regulators to track OTC derivative positions which could have an impact on the broader market – issues highlighted by the global financial crisis. Additionally, G20 leaders have committed to regulating OTC derivative transactions and Hong Kong needs to keep in line with such regulatory developments.

Key aspects of the Bill

There are three main sets of proposals dealt with in the Bill:

(1) Mandatory reporting, clearing and trading obligations in line with G20 commitments – the mandatory requirements will apply only to authorised institutions, approved money brokers, licenced corporations and others prescribed by subsidiary legislation who will be required to report certain OTC derivative transactions to the HKMA. Only certain types of OTC derivative transactions will initially be caught (certain types of interest rate swaps and non-deliverable forwards). Clearing of certain OTC derivative transactions will be required to be done through a designated central counterparty (“CCP”), either directly or indirectly through a third party that is a member of the designated CCP. The mandatory trading regime is subject to further study and will not be introduced at the outset.

(2) Establishment and regulation of the necessary infrastructure through which the mandatory obligations will be fulfilled – the SFC will be responsible for designating CCPs (which must be a recognised clearing house or an authorised automated service provider under the SFO) and trading platforms (which must be a recognized exchange company or authorised automated service provider under the SFO) and for making rules specifying the requirements and procedures for such designation.

(3) Regulation and oversight of key players in the OTC derivative market – authorised institutions and approved money brokers serving as intermediaries in the OTC derivatives market will continue to be regulated by the HKMA.   Other entities engaged in dealing in, advising on or providing clearing agency services will require licences from the SFC under the new regime. Two new regulated activities (“RAs”) in relation to OTC derivatives will be introduced: (i) a new Type 11 RA for dealers and advisers, and (ii) a new Type 12 RA for clearing agents. The existing Type 9 RA (asset management) and Type 7 RA (provision of automated trading services) will be expanded to cover OTC derivative portfolios and transactions respectively.  There are also reporting requirements for “systemically important participants” who are not otherwise caught under the regime but due to their positions and activities in the OTC derivatives market have been brought within the scope.

Other proposals to improve regulation

The Bill also incorporates amendments to the SFO so that notifications and reports under Part XV “Disclosure of Interests” of the SFO will need to be filed electronically to speed up publication to the market. Additionally, the SFO and Organized and Serious Crimes Ordinance will be amended to enable courts to make disgorgement orders to recoup illegal gains made from market misconduct offences.

The Bill is due to be presented to Legco for a first reading on 10 July 2013. 

A copy of the bill and the Legco brief can be found here.

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