In the past, we saw some market participants move their derivatives activities out of their US and EU subsidiaries and into Asian affiliates, because of assumed regulatory arbitrage opportunities from Asian post-crisis regulatory efforts lagging behind those in the US and EU.
Times have changed. MAS in Singapore and Hong Kong’s HKSFC and HKMA have been steadily strengthening requirements for firms entering into OTC derivatives contracts since the 2008 global financial crisis. In addition, European equivalent rules on this (EMIR) apply to some trades entered into outside of Europe. Asian firms, whether or not they are financial counterparties, should consider the impact of all these changes on the way they do business.
Singapore OTC derivatives market
MAS made a commitment to the G20 a number of years ago to overhaul the way that OTC derivatives are regulated in relation to reporting and clearing obligations, and MAS has entered phase two of the roll out of change. Current steps underway to ensure stability of the OTC derivative markets include:
- Extending the existing regulatory regime for market operators to entities which intend to establish or operate facilities for the trading of OTC derivatives
- Clarifying that the definition of a “derivatives contract” is not intended to capture contracts that are transacted at the current spot price and intend for the actual delivery of the underlying asset
- Extending the regulation of OTC derivatives to capital markets intermediaries, and changing the definitions of certain regulated activities and their licensing exemptions. For example, persons managing CIS that invest solely in derivatives of physical assets will now be subject to the provisions of the SFA for carrying on the regulated activity of fund management.
- MAS are monitoring developments in other jurisdictions that have forced OTC derivatives to be traded on organised trading platforms (in particular in the US and Europe), consulting the industry and conducting detailed analyses to determine the conditions that might make a trading mandate necessary. We understand that MAS anticipates presenting to its Parliament in the first half of 2016 standards for determining when a product should be traded on organised trading platforms. In the meantime, MAS is assuming the power do this if it deems it necessary in the future.
- Requiring reports of short selling and publication of aggregate short positions to improve transparency in the short selling of securities
- Strengthening the effectiveness of the enforcement regime in deterring market misconduct.
We are still waiting for the start of mandatory clearing of certain OTC contracts – initially this will apply to certain SGD and USD interest rate derivatives where both counterparties are based in Singapore and exceed a clearing threshold. Currently, this is expected to be rolled out mid-2016.
Hong Kong OTC derivatives market
Hong Kong’s primary legislation – the Securities and Futures Ordinance – was amended in 2014 to pave the way for a new regulatory framework for OTC derivatives. The HKMA and SFC’s initial focus was on mandatory trade reporting to the Hong Kong Trade Repository. For now only certain contracts executed by certain counterparties are caught. Notably, fund managers are not included in the initial phase. And only trades “conducted in Hong Kong” are reportable, raising some interesting questions for firms operating in a number of countries. There’s a grace period and a concession period for each product type – firms therefore need to carefully consider whether a particular trade needs to be reported, and if so when.
The next step is mandatory clearing – we’re expecting a consultation on this during the course of Q4 2015.
Impact from Europe OTC derivatives market
EMIR – the European Markets Infrastructure Regulation – is the legislation designed to enact the G20’s OTC derivative market reforms. It came in force a few years ago and since then, more technical rules and procedures have been finalised and now apply. Despite this, there are still some outstanding provisions still to come and so the journey is not yet over.
Third country firms, such as those in Singapore or Hong Kong, need to carefully consider whether and how EMIR affects them. Some of the touch points are below:
- You are a financial counterparty wishing to trade with an EU financial counterparty
- You are a non-financial counterparty whose derivatives positions exceed EMIR’s clearing threshold, and you wish to trade with an EU financial counterparty
- You are trading with other third country firms in volumes exceeding EMIR’s clearing threshold and the contract has a “direct, substantial and foreseeable effect within the EU”
How Bovill can help
Bovill can help you to determine whether the regulations apply to your activities. And if they do, the most practical and straightforward way to meet your obligations.