Chief operating officers in Hong Kong are still studying proposed changes to mandatory reporting rules for over-the-counter (OTC) derivatives just weeks before a deadline to submit their views.
The rules, due to be vetted by Hong Kong’s legislature in the fourth quarter of this year, would apply to trustees and partners of Hong Kong-domiciled funds, and managers of collective investment schemes in the city.
Hong Kong is working towards compliance with commitments made by the G20 to improve transparency and supervision of the OTC derivatives market, as is Singapore and Australia.
In mid-July, Hong Kong’s securities and currency regulators jointly released a consultation paper outlining proposed rules for mandatory reporting of OTC derivative transactions.
Both the Hong Kong Investment Funds Association and the Alternative Investment Management Association are gathering members’ views, while chief operating officers of fund firms contacted by AsianInvestor say they are still studying the paper.
The rules seek to impose reporting obligations both at the fund and fund manager level. In other words, the changes would impose obligations not only on licensed asset managers, but also on the legal owners of unit trusts.
Under the Hong Kong persons definition, funds that the rules could apply to are termed "reporting entities", which encompasses trusts, companies, partnerships and other entities established under the city’s legislation.
Managers licenced or registered to carry out type 9 asset management activities, defined as authorised institutions (AI) or licenced corporations (LC), are also captured as reporting entities.
Both LCs and AIs managing hedge funds, managed accounts or collective investment schemes would be obliged to report their OTC transactions if, for example, they are counterparties to OTC trades.
They would also be required to link to the Hong Kong Monetary Authority’s electronic reporting system and report their OTC trades for a fee to upload the trades (capped at HK$1 million annually, and HK$3 per trade).
The rules would apply to offshore funds structured as a company under Hong Kong law. However, offshore funds not structured in that way could still be required to comply if their OTC transactions were done by a manager registered as an AI or LC.
Yvonne Siew, a partner at Allen & Overy in Hong Kong, explains: “If a fund that falls under the ‘Hong Kong person’ definition, even if it is not managed by an authorised institution or licensed corporation registered or licensed to carry on type 9 regulated activity, the legal owner of the fund still needs to fulfill mandatory reporting requirements if certain thresholds are crossed.”
Mandatory reporting obligations would be triggered if a Hong Kong person’s open IRS positions reach $3 billion over six months. For NDF positions, that threshold would be $1 billion.
The HKMA and SFC estimate that 95% of Hong Kong persons would be exempt from reporting at these thresholds. But they will be lowered to $1 billion and $500 million after 2017.
Initially funds would be required to report interest-rate swaps (IRS) and non-deliverable forwards (NDFs). Equity and FX derivatives would be added later.
When an OTC transaction is reportable at both the fund and fund manager level, the former would be exempted.
The deadline for submission of industry views is August 18.
G20 commitments to improve transparency and supervision of the OTC derivatives market include the introduction of central clearing, increased capital and margin requirements for transactions not cleared by a central counterparty clearing house (CCP), and the trading of contracts on exchanges or electronic trading platforms.