Subject to OTC derivatives mandatory clearing
On 10 March 2023, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) published a joint consultation paper proposing certain changes to the types of transactions subject to the Hong Kong mandatory clearing obligation for OTC derivatives [1], in order to reflect the progress made in the global interest rate benchmark reform.
By way of background, Hong Kong has implemented phase 1 mandatory clearing for OTC derivatives since September 2016. Transaction types subject to phase 1 mandatory clearing in Hong Kong include certain standardised interest rate swaps (IRS) denominated in HKD and G4 currencies (USD, GBP, JPY and EUR) in the basis swaps, fixed-to-floating swaps and overnight index swaps (OIS) categories [2] between major dealers.
With a view to keeping the Hong Kong Clearing Rules relevant and appropriate as the market transitions from certain interbank offered rates (IBORs) to alternative reference rates (ARRs), the HKMA and the SFC are proposing the following changes to the transaction types subject to the mandatory clearing obligation in Hong Kong:
- To remove the requirement to clear the basis swaps and the fixed-to-floating swaps referencing USD LIBOR, GBP LIBOR and JPY LIBOR as currently specified in the Hong Kong Clearing Rules;
- To add a requirement to clear OIS (with tenors ranging from 7 days to 50 years) referencing USD SOFR and to clear OIS (with tenors ranging from 7 days to 30 years) referencing JPY TONA;
- To revise the requirement to clear OIS (with tenors ranging from the current 7 days to 2 years to 7 days to 50 years) referencing GBP SONIA;
- To remove the requirement to clear OIS referencing EUR EONIA and to add a requirement to clear OIS (with tenors ranging from 7 days to 3 years) referencing EUR €STR;
- To add a requirement to clear OIS (with tenors ranging from 7 days to 10 years) referencing HKD HONIA. It should be noted that the existing requirement to clear basis swaps and fixed-to-floating swaps referencing HKD HIBOR (as specified in the Hong Kong Clearing Rules) is retained and reflects the “multi-rate” approach adopted in Hong Kong in maintaining both HIBOR and HONIA.
The proposed changes are broadly in line with the clearing requirements in other major jurisdictions such as the US, the UK, the EU, Japan and Australia. No other changes to the Hong Kong Clearing Rules are proposed at this stage.
The consultation period ends on 11 April 2023. The regulators said that they will then table the required subsidiary legislation before the Legislative Council for negative vetting in 2023 with a target to implement the proposed changes between Q4 2023 and Q1 2024. Market participants subject to the mandatory clearing obligation in Hong Kong should start considering how these changes would affect their clearing requirements and raise any concerns with the regulators.
For further information, please contact:
Chin-Chong Liew, Partner, Linklaters
chin-chong.liew@linklaters.com
Footnotes:
[1] In the Securities and Futures (OTC Derivative Transactions – Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules (Cap. 571AN) (the “Hong Kong Clearing Rules”)
[2] As specified in Schedule 1 to the Hong Kong Clearing Rules
