Hong Kong regulators have deferred the implementation of phase 1 of the new rules that will introduce mandatory clearing and reporting for OTC derivative transactions by three months from July 1 to  September 1 2016.

 

The decision to defer the implementation was made in order to ensure that there will be enough designated central counterparties (CCP) who can participate in phase 1 of the mandatory clearing when it becomes effective, according to the conclusion paper, issued on February 5, of a joint consultation paper launched by the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) on September 2015.

 

Although there was broad support for the proposed clearing-determination process and the product scope for “phase 1 clearing”, a number of concerns raised by participants in the consultation paper centred around whether there will be a sufficient number of CCPs that will have been designated by the time phase 1 clearing is implemented.

 

“We do not foresee that there will be a lack of designated CCPs. We will also be mindful of the timeline for implementing phase 1 clearing when processing applications for CCP designation. However, as an added measure, we will defer commencement of the Clearing Rules by a few months to September 1 2016, subject to the legislative process,” according to the conclusion paper.

 

Another reason for the deferment is so that the implementation of phase 1 clearing should not “front run” clearing obligations under the European Market Infrastructure Regulation (EMIR).

 

“Our proposed timeline for phase 1 clearing should not result in any “front running” and hence we do not see this as an issue,” according to the conclusion paper.

 

Other highlights of the conclusion paper are:

* Definition of “financial services provider” by reference to a list of entities to be published in the Government Gazette and seeking views on the initial list of financial services providers by February 29 2016;

* There will be a single clearing threshold which applies to all prescribed persons, whether they are incorporated locally or overseas;

* The exclusion of both deliverable FX forwards and deliverable FX swaps from the clearing threshold calculation;

* The provision of a mechanism for exiting from the clearing obligation; and