Securities and Futures (Amendment) Bill 2013 marks regulation of new framework for OTC derivatives

The Securities and Futures (Amendment) Bill 2013 (Bill) was gazetted on 28 June 2013 following a joint consultation conducted by the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC).

The Bill provides for a broad regulatory framework for the over-the-counter (OTC) derivative market in Hong Kong and incorporates other technical improvements to the regulation of the financial market. Details for implementation will be set out in subsidiary legislation which is expected to be proposed for public consultation later in the year.

The Bill comprises the following three key aspects: (a) the introduction of mandatory reporting, clearing and trading obligations in line with Hong Kong’s G20 commitments; (b) provision for the establishment and regulation of the necessary infrastructure through which the mandatory obligations will be fulfilled; and (c) the regulation and oversight of key players in the OTC derivative market. Under the new regime, the HKMA will oversee and regulate the OTC derivative activities of Authorised Institutions (AIs) and Approved Money Brokers (AMBs), while the SFC will continue to regulate the activities of licensed corporations.

The HKMA and the SFC also published their joint supplemental consultation conclusions in September 2013 on the proposed scope of certain new and existing regulated activities (RAs) as well as their regulation of Systemically Important Participants (SIPs), both of which are covered in considerable detail in the Bill. 

The modifications to the existing licensing regime include expanding Type 9 RA (asset management) to cover OTC derivative portfolios; and Type 7 RA (provision of automated trading services) to cover OTC transactions. Two new RAs will be introduced in relation to OTC derivatives, namely, a new Type 11 RA to cover the activities of dealers and advisers and a new Type 12 RA to cover the activities of clearing agents.

The regulatory oversight of SIPs in the Bill is intended to capture those persons in Hong Kong who are not otherwise regulated by the SFC or HKMA but whose positions or activities raise concerns of potential systemic risk. Among other things, they will be required to notify the SFC and have their names entered on a public SIP register if their derivatives positions exceed certain specified thresholds.The Securities and Futures (Amendment) Bill 2013 (Bill) was gazetted on 28 June 2013 following a joint consultation conducted by the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC).

The Bill provides for a broad regulatory framework for the over-the-counter (OTC) derivative market in Hong Kong and incorporates other technical improvements to the regulation of the financial market. Details for implementation will be set out in subsidiary legislation which is expected to be proposed for public consultation later in the year.

The Bill comprises the following three key aspects: (a) the introduction of mandatory reporting, clearing and trading obligations in line with Hong Kong’s G20 commitments; (b) provision for the establishment and regulation of the necessary infrastructure through which the mandatory obligations will be fulfilled; and (c) the regulation and oversight of key players in the OTC derivative market. Under the new regime, the HKMA will oversee and regulate the OTC derivative activities of Authorised Institutions (AIs) and Approved Money Brokers (AMBs), while the SFC will continue to regulate the activities of licensed corporations.

The HKMA and the SFC also published their joint supplemental consultation conclusions in September 2013 on the proposed scope of certain new and existing regulated activities (RAs) as well as their regulation of Systemically Important Participants (SIPs), both of which are covered in considerable detail in the Bill. 

The modifications to the existing licensing regime include expanding Type 9 RA (asset management) to cover OTC derivative portfolios; and Type 7 RA (provision of automated trading services) to cover OTC transactions. Two new RAs will be introduced in relation to OTC derivatives, namely, a new Type 11 RA to cover the activities of dealers and advisers and a new Type 12 RA to cover the activities of clearing agents.

The regulatory oversight of SIPs in the Bill is intended to capture those persons in Hong Kong who are not otherwise regulated by the SFC or HKMA but whose positions or activities raise concerns of potential systemic risk. Among other things, they will be required to notify the SFC and have their names entered on a public SIP register if their derivatives positions exceed certain specified thresholds.