Hong Kong Monetary Authority reform (HKMA reform)

Reducing risk on the Asian market

The Hong Kong Monetary Authority reform aims at improving transparency on the Asian derivatives market.



About the Hong Kong Monetary Authority (HKMA)

The Hong Kong Monetary Authority (HKMA) is the government authority in Hong Kong responsible for maintaining monetary and banking stability. Its main functions are:

  • maintaining currency stability within the framework of the Linked Exchange Rate system;
  • promoting the stability and integrity of the financial system, including the banking system;
  • helping to maintain Hong Kong's status as an international financial centre, including the maintenance and development of Hong Kong's financial infrastructure; and
  • managing the Exchange Fund.

Introduction to HKMA's market reform

Following the G-20 commitment to improve transparency and risk mitigation in the financial markets, a process of extensive regulatory change began across the Asia-Pacific region.

In 2011 and 2012, the HKMA and Securities and Futures Commission (SFC) consulted the market on a proposed regulatory regime for the Over-The-Counter (OTC) derivatives market. The Joint Supplemental Consultation, issued in July 2012, set out in more detail the scope of dealing, advising and other activities to be regulated under the new regime. The consultation also set out proposals for regulating the activities of persons whose positions are so large as to raise concerns about systemic risk (i.e. systemically important participants).

To comply with strict international standards, the new regulatory regime focused heavily on the OTC derivatives markets, including reporting of specified OTC derivatives transactions to the Hong Kong Trade Repository (HKTR), clearing of specified transactions at designated Central Counterparties and margining of non-cleared derivatives.

The Hong Kong Trade Repository will also provide services for trade matching and confirmation.

Supervision in line with Basel III

The HKMA seeks to establish a regulatory framework in line with international standards, in particular those recommended by the Basel Committee on Banking Supervision. The objective is to devise a prudential supervisory system to help preserve the general stability and effective working of the banking system, while at the same time providing sufficient flexibility for authorised institutions to take commercial decisions.

HKMA’s market reform and its impact on market participants

These new requirements impact market participants in most Asian countries, including Hong Kong, Australia, Singapore and Korea.

HKMA published the final rules in Q4 2014.

To view the Reporting requirements, please visit our HKMA Reporting page.

Last updated: 27 February 2017



The HKMA’s market reforms aim for increased transparency

The Hong Kong Monetary Authority (HKMA) introduced reporting requirements to bring more transparency in the derivatives markets to facilitate identification and mitigation of systemic risk. Collecting and providing Over-The-Counter (OTC) derivatives transaction information to regulatory authorities play a vital role in promoting a level of consistency in the quality of transaction data and supporting authorities in their market surveillance responsibilities, which will help maintain stability of the financial systems.

The Hong Kong Trade Repository (HKTR), created by the HKMA and launched in July 2013, provides an electronic platform to collect and maintain the records of all reported OTC derivatives trade data centrally as well as to match counterparty trades.

Authorized Institutions (AIs) and Approved Money Brokers (AMBs) licensed and regulated by the HKMA, Licensed Corporations (LCs) and recognised clearing houses (RCHs) licensed and regulated by the Securities and Futures Commission (SFC) are required to report specified OTC derivatives transactions. OTC Derivative Reporting Rules of IRS and non-deliverable FX forwards came into effect on 10 July 2015. The second phase of OTC derivative reporting comes into effect on 1 July 2017 and covers all other asset classes.


Margining of non-centrally cleared derivatives and risk mitigation standards

Margining of non-cleared derivatives

In keeping with its commitment to implement the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (BCBS-IOSCO) framework for non-centrally cleared derivatives, the HKMA introduces margin and risk mitigation standards for non-centrally cleared OTC derivatives in its Supervisory Policy Manual. The requirements enter into effect on 1 March 2017 with a six months’ transition period for variation margin (VM) and a scheduled phase-in of initial margin (IM) based on OTC derivative exposure consistent with the international standard.

The Initial and variation margin and risk mitigation rules apply to:

  • Hong Kong incorporated AIs, irrespective of where their trades are booked, and
  • Overseas incorporated AIs with respect to trades booked in its Hong Kong branch only when they enter into in-scope non-centrally cleared derivatives with a Covered Entity.

Covered entity refers to financial counterparties and significant non-financial counterparties which are not excluded entities.


Exempt non-centrally cleared derivatives

Physically-settled FX forwards and swaps, physically settled commodity forwards and FX transactions embedded in cross-currency swaps associated with the exchange of principal are exempt from VM (and IM) requirements. Significant non-financial counterparties that use non-centrally cleared derivatives predominantly for hedging purposes are not required to exchange IM and VM.

Substituted compliance

Substituted compliance is available for cross-border transactions with

  • Australia, Canada, the European Union, India, Japan, Republic of Korea, Mexico, Russia, Singapore, Switzerland and the United States, which are deemed comparable jurisdictions until HKMA has completed a comparability assessment, and
  • Jurisdictions for which the HKMA has issued a comparability determination.

Non-netting jurisdictions and non-segregation jurisdictions

Exchange of margin is not required when Covered Entities trade with counterparties located in non-netting jurisdictions or non-enforceable collateral jurisdictions. Instead, they are required to put in place appropriate internal limits and risk management policies and procedures.


Risk Mitigation Standards

HKMA has issued Risk Mitigation Standards (RMS) to promote legal certainty over the terms of the non-centrally cleared OTC derivatives transactions, foster effective management of counterparty credit risk and facilitate timely resolution of disputes. These rules rely on:

  • Execution of written trading relationship documentation;
  • Confirmation of the material terms of the non-centrally cleared OTC derivative after the transactions are executed;
  • Valuation of non-centrally cleared derivatives in an objective manner;
  • Regular reconciliation of the material terms and valuations of all transactions in a non-centrally cleared derivatives portfolio; and
  • Resolution of disputes in a timely manner.

To view the OTC derivatives requirements in full, please visit the HKMA website.

Last updated: 27 February 2017


Clearing requirements

The Hong Kong Monetary Authority (HKMA) adopted a mandatory clearing obligation, in which a ‘prescribed person’ (authorised financial institution, approved money broker, licensed corporation) must clear specified Over-The-Counter (OTC) derivative transactions through a ‘designated Central Counterparty Clearing House’ (CCP).

A ‘prescribed person’

The clearing obligation applies to prescribed persons when they trade an in-scope product with another prescribed person or a financial services providers designated by Securities and Futures Commission (SFC). If the prescribed person is incorporated outside of Hong Kong, the obligation arises if the trade is recorded in its Hong Kong books.

A ‘designated Central Counterparty Clearing House’

A ‘designated CCP’ is a CCP approved by the SFC as a recognised clearing house. There is no location requirement for a designated CCP.

The prescribed person may clear a transaction with a designated CCP either directly or through a third party (‘clearing agent’). Mandatory clearing applies to basis swaps and fixed to floating swaps in USD, EUR, GBP, JPY and HKD, (28 days to 10 years) and overnight index swaps in USD, EUR and GBP (7 days to 2 years).

Supervision of Clearing Agents in OTC derivatives

The HKMA proposes to regulate and supervise the activities of persons who serve as clearing agents in OTC derivatives under the new ‘Type 12 RA (Regulated Activity)’.

What does ‘Type 12 RA’ cover?

  • Type 12 RA covers the provision of clearing and settlement services on behalf of another person in respect of that other person’s OTC derivatives transactions (i.e. client clearing services).
  • Type 12 RA does not cover clearing and settlement activities in relation to a person’s own proprietary positions in OTC derivatives transactions.

About the new ‘Type 12 RA’ and OTC Derivatives Clearing

In order to manage counterparty risk arising from bilateral OTC derivatives transactions, market participants have started clearing their OTC derivatives transactions through a Central Counterparty Clearing House. They can do so directly (i.e. by becoming a member of the CCP) or indirectly (i.e. by clearing with a CCP through a third party). Due to the stringent admission criteria of CCPs, not every market participant may become member of a CCP and clear directly. They may instead engage third parties who provide clearing agency services so that they can clear indirectly through a CCP. As mandatory clearing obligations are introduced to cover more market participants, the demand for indirect clearing is likely to increase.

The HKMA’s Joint Supplemental Consultation Conclusions, released in September 2013, proposes scope for the new Type 12 RA, which is intended to capture the activities of those who serve as clearing agents for OTC derivatives.

Submitting OTC derivatives transactions to central clearing is a relatively new practice around the world, and entirely new in Hong Kong, and there are few established providers of such services. Therefore, persons who provide such services are likely to be newcomers. Consequently, the HKMA extended the two-year experience requirements for Type 12 RA to also recognise overseas experience, experience of an affiliate company in the same group of companies and experience in clearing proprietary trades in OTC derivatives.

Timeline and impact to market participants

To regulate these activities, the HKMA and SFC are expected to issue rule amendments and further guidance to address the proposed licensing regime for dealing in, and advising on, OTC derivatives and for providing clearing services for OTC derivatives.

For more information on the HKMA’s OTC regulation, please visit HKMA’s website.

Last updated: 27 February 2017