Joint
consultation
conclusions
paper
onenhancements to the OTC derivatives regime forHong Kong to– (1) mandate the use of Legal Entity
Identifiers for the reporting obligation, (2) expand theclearing obligation and (3) adopt a trading
determination process for introducing a platform
trading obligation

June 2018

TABLE OF CONTENTS
Introduction..................................................................................... 1
Executive Summary........................................................................ 1
Comments and Conclusions on Mandating the Use of Legal
Entity Identifiers for the Reporting Obligation ............................. 3
Scope and Implementation Timeline .......................................................... 3
First Phase ..................................................................................................... 3
Second Phase ................................................................................................ 5
Overriding Principle ...................................................................................... 6
Clarification of other issues ......................................................................... 6

Comments and Conclusions on Phase 2 Clearing ....................... 8
Expansion of Product Scope to include certain standardized interest
rate swaps denominated in Australian Dollars ......................................... 8
Proposal not to add other new products (other than certain
standardized AUD IRS) for Phase 2 Clearing ............................................ 9
Scope of Prescribed Person ...................................................................... 10
Criteria for Financial Services Providers (FSP), proposed revised FSP
list and updating the FSP list ..................................................................... 12
Proposal to maintain the Clearing Threshold ......................................... 13
Proposal to maintain the Calculation Method, frequency of and lengthof Calculation Periods and the addition of eight Calculation Periods . 13

- i -

Comments and Conclusions on Adoption of a Trading
Determination Process for Introducing a Platform Trading
Obligation ...................................................................................... 14
Concluding Remarks and Way Forward...................................... 15
Appendix A - Proposed List of Financial Services Providers.... 16
Appendix B - List of Respondents .............................................. 19- ii -

Introduction
1.

In March 2018, the Hong Kong Monetary Authority (HKMA) and the Securities
and Futures Commission (SFC) issued a joint consultation paper(Consultation Paper) on enhancements to the OTC derivatives regime forHong Kong to – (1) mandate the use of Legal Entity Identifiers for the reporting
obligation, (2) expand the clearing obligation and (3) adopt a trading
determination process for introducing a platform trading obligation.

2.

The deadline for submission of comments was 27 April 2018. We received a
total of 20 written submissions. A list of respondents (other than those thatrequested to remain anonymous) is set out at Appendix B and the full text of
their comments (unless requested to be withheld from publication) can beviewed on the websites of the HKMA and the SFC.

3.

This conclusions paper (Conclusions Paper) summarises the comments
received to the Consultation Paper, our responses to such comments and ourconclusions. This Conclusions Paper should be read together with theConsultation Paper and the comments received.

Executive Summary
Mandating the use of Legal Entity Identifiers for reporting obligation
4.

We initially proposed mandating the use of Legal Entity Identifiers (LEIs) for
trade reporting over two phases. We received broad support for our proposal
for the first phase and will proceed with the entity coverage as proposed in theConsultation Paper.

5.

Based on market feedback, we have revised and clarified our proposal for the
first phase as follows –(a)Scope of entities: We would like to clarify that the first phase only
applies to parties on the reporting entity’s side of a transaction.
Reporting entities are not required to verify whether their counterparty
to a transaction falls under the list of entities to which the first phaseapplies;(b)

Scope of transaction reports: Our original proposal required the use of
LEIs in reporting new trades and life-cycle events that take place on orafter the implementation date as well as daily valuation information
reported on or after the implementation date. In response to market
concerns over technical difficulties in using LEIs in reporting life-cycle
events of outstanding trades, we now propose to require the use of
LEIs in respect of reporting of new trades and daily valuation
information only. This gives reporting entities more flexibility to deal
with existing entity identifiers for outstanding trades; and

- 1

-

(c)

Implementation timeline: Pursuant to market feedback that participantsrequire more time for system enhancement and preparation work, wewill change the implementation for the first phase of mandating the useof LEIs to 1 April 2019, ie, around nine months after the publication ofthis Conclusions Paper.

Further details are set out in paragraphs 14 to 20 below.
6.

In response to concerns about our proposal to extend the requirement to use
LEIs in trade reporting to transacting parties that are not covered in the firstphase, we will provide more flexibility so that parties may continue to be
identified in accordance with the waterfall of identifiers set out in the
Supplementary Reporting Instructions for OTC Derivative Transactions (SRI).
This means that, if the entity has an LEI, the LEI must be used to identify it intrade reporting. If it does not have an LEI, it can continue to be identified byother entity identifiers in the priority set out in the SRI. That said, reporting
entities are expected to put in place a process to request LEIs from theirclients after the implementation of the first phase on 1 April 2019. For thoseclients which do not already have LEIs, this process also includes educating
their clients about LEI and encouraging or assisting them to obtain one.
Please see paragraphs 21 to 26 below for further details.

Phase 2 Clearing
7.

We received overwhelming support for our proposal to only expand the
product scope to certain standardized interest rate swaps denominated inAustralian Dollars (AUD IRS) for Phase 2 Clearing. We will proceed topropose a revision of the Securities and Futures (OTC Derivative Transactions– Clearing and Record Keeping Obligations and Designation of Central
Counterparties) Rules (Clearing Rules) accordingly.

8.

We believe the commencement of AUD IRS clearing 12 months after thegazettal of the amended Clearing Rules should give market participants andcentral counterparties (CCPs) sufficient time to prepare. Taking into accountthe required legislative work, we do not expect mandatory clearing of AUD IRS
would commence before Q4 2019. Please see paragraphs 37 to 48 below forfurther details.

9.

We received overwhelming support in respect of the other proposals on Phase
2 Clearing. We intend to proceed as proposed in the Consultation Paper, withsome fine tuning. Further details are set out in paragraphs 49 to 69 below.

Adoption of trading determination process for introducing a platform
trading obligation
10.

We received overwhelming support for the proposed trading determination
process and criteria for considering which products are appropriate to be
subject to a platform trading obligation in Hong Kong.

- 2

-

11.

The proposed trading determination process and criteria are therefore
adopted, and are being used in the process to determine which products may
be appropriate for Hong Kong to introduce a platform trading obligation.
Please see paragraphs 70 to 75 for further details.

Comments and Conclusions on Mandating the Use of Legal
Entity Identifiers for the Reporting Obligation
Scope and Implementation Timeline
12.

We received broad support for the proposal to mandate the use of LEIs in
OTC derivatives trade reporting. In the Consultation Paper, we specified the
below list of in-scope entities and proposed that the use of LEIs for entities in
categories (a) to (e) be implemented in the first phase whereas those in
category (f) be implemented in the second phase –
(a)
(b)
(c)
(d)
(e)
(f)

13.

reporting entities (ie, the entities that are subject to reporting
obligation);transacting parties that reporting entities report or act for (ie,transacting parties under the “Reporting For” data field);Hong Kong Trade Repository (HKTR) members;
CCPs;
providers of clearing services; andother entities that are transacting parties to reportable trades but do
not fall into any of the above categories.

Several respondents sought clarification of the precise scope of our proposed
entity coverage for the first phase of mandatory use of LEIs in trade reporting,and some also expressed concerns about implementing the second phase.

First Phase
14.

Clarification of the scope of entities: There was no objection to the categories
of entities covered in the first phase of implementation but some respondents
expressed concerns that they may not always know whether their counterparty
to a transaction falls under categories (a) to (e) above. For example, they may
not know that their counterparty is a provider of clearing services for othermarket participants.

15.

We wish to clarify that entities caught under categories (a) to (e) inparagraph 12 above only refer to parties on the reporting entity’s side of atransaction. Reporting entities are not required to verify whether theircounterparty to a transaction falls under any of these categories. In addition,
we wish to clarify that categories (d) and (e) only apply to situations where thereporting entity (or the transacting party that it reports for) is a CCP or aprovider of clearing services, or when the reporting entity needs to fill in thedata field for the CCP or the clearing broker to indicate how the transaction will
be cleared on the reporting entity’s side.

- 3

-

16.

Change in the scope of transaction reports: We proposed that the use of LEIs
be applicable to reporting new trades and life-cycle events that take place onor after the implementation date as well as daily valuation information reported
on or after the implementation date. Some respondents highlighted potential
system and operational issues that could arise for reporting entities using theservices of reporting agents to replace the existing entity identifier with an LEI
when reporting a life-cycle event.

17.

We would like to clarify that the current design of the HKTR does not require
reporting entities to withdraw and backload outstanding trades for replacing
the existing entity identifier with an LEI when reporting life-cycle events. Thatsaid, we acknowledge that technical difficulties may exist due to specificrequirements imposed by some service providers. However, we do not thinksuch technical difficulties apply to daily valuation reporting as the Valuation
template only requires the identification of the reporting entity and not any of
the transacting parties. As such, we now propose that the requirement to use
LEIs will only apply to reporting new trades and daily valuation information, but
not life-cycle events. However, reporting entities may report life-cycle eventswith LEIs if they wish to do so.

18.

Based on information in the HKTR, the level of long-dated transactions is not
significant. Accordingly, the problem with using different entity identifiers forthe same transacting party will eventually fade away. In addition, we expectthat some reporting entities will ultimately maintain only one system of entity
identifiers (ie, LEIs) and over time, all their outstanding trades will be identified
using LEIs, where available. We are therefore comfortable that the revised
proposal to give reporting entities more flexibility in dealing with the existing
entity identifiers used for outstanding trades will not have significant impact ondata aggregation and analysis in the long run.

19.

Change in the implementation timeline: We received feedback suggesting alonger implementation period for system enhancement, ranging from 12months to 18 months. Some respondents noted that reporting entities would
require a significant period of time to obtain LEIs from their counterparties andto verify them, or to build a system to block trades with counterparties without
LEIs.

20.

As mentioned above, the requirement to use LEIs for trade reporting only
applies to the first phase entities. Consequently, it will not be necessary tobuild a system to block trades with counterparties without LEIs. Having said
that, we acknowledge that there may still be some system enhancements
required to cater for the first phase of mandatory use of LEIs in trade reporting.
We will therefore change the first phase implementation date from theoriginally proposed six months after publication of this Conclusions Paper to 1
April 2019, ie, around nine months after publication. This allows more time forany necessary preparation work and avoids implementation around the freeze
period for system development at the end of the calendar year.

- 4-

Second Phase
21.

Revised approach: Regarding the second phase of mandatory use of LEIs in
trade reporting, several respondents noted that some entities falling undercategory (f) in paragraph 12 above may be less ready to adopt the use of LEIs
as they are incorporated in jurisdictions where there is no requirement to use
LEIs in trade reporting. As such, a few respondents proposed a further
staggered approach by imposing different implementation timelines for entities
incorporated in countries where the use of LEIs has already been mandated
and for entities incorporated in other countries.

22.

One respondent suggested providing an exemption for small andmedium-sized entities executing transactions for economic hedging purposes
and with aggregate notional amounts below certain quantitative thresholds.
This will avoid imposing an excessive regulatory burden arising from the costsof the issuance, annual renewal and administration of LEIs.

23.

More importantly, we also received comments from respondents suggestingthat regulators should coordinate a harmonised approach to requiring the useof LEIs in the Asia Pacific region to avoid regulatory arbitrage or an unevenplaying field for market participants in Hong Kong.

24.

In response to these concerns, we will provide more flexibility in theimplementation of the mandatory use of LEIs in trade reporting with respect totransacting parties that are not first phase entities so that these entities may
continue to be identified in accordance with a waterfall of identifiers in the SRI(see paragraph 26 below). This means that, if the entity has an LEI, the LEI
must be used to identify it in trade reporting. If it does not have an LEI, it cancontinue to be identified by other entity identifiers in the priority set out in the
SRI.

25.

That said, after implementation of the first phase on 1 April 2019, reporting
entities are expected to put in place a process to request LEIs from theirclients. For those clients which do not already have LEIs, this also includes
educating their clients about LEIs and encouraging or assisting them to obtainone. We will maintain close dialogue with reporting entities in this regard andmonitor the progress on the adoption rate of LEIs via the HKTR data. We will
also keep international development in view to evaluate the need to make any
further requirements for the use of LEIs in trade reporting. If we consider there
is such a need, we will adopt a coordinated approach with other regulators in
the Asia Pacific region where appropriate. In that event, we expect reporting
entities will be able to achieve a relatively swift and smooth implementation
since they have already been engaging with their clients about the use of LEIs
for a period of time.

- 5-Overriding Principle
26.

In cases where the use of LEIs in trade reporting is not mandatory, the use ofidentifiers for entities which are not private individuals should follow thewaterfall outlined under the section on “Identifiers for transactions andcounterparties” in the SRI (the latest version dated August 2017) published on
the HKTR website. As HKTR members will have obtained LEIs when the firstphase commences, we will remove HKTR member codes (which currently
have the same priority as LEIs) from the waterfall of identifiers in the SRI on 1
April 2019. Accordingly, the waterfall of identifiers in the SRI will be revisedwith LEIs being the only first priority starting from 1 April 2019. This means that,when an entity (including an entity that is a counterparty to a transaction) has
an LEI, the reporting entity must use the LEI to identify the entity concerned.
HKTR members should also notify the HKTR in a timely manner of any
change to their entity identifier information.

Clarification of other issues
27.

Registration Status of LEIs: We received comments regarding the registration
status of LEIs. A few responses suggested that regulators should specify
requirements for the registration status of LEIs, ie, requiring current and valid
LEIs in trade reporting. Clarification was also sought as to whether reporting
entities would be responsible for ensuring that the LEIs of their counterpartiesare renewed on an annual basis. We have also received a request to clarify
HKTR’s LEI validation rule.

28.

To align with requirements in other jurisdictions, we expect reporting entities totake reasonable steps to verify the LEIs that they obtain from theircounterparties. This means that reporting entities should ensure that the LEIs
they obtain pertain to the entities concerned and are included in the Global LEI
database. Although we do not expect reporting entities to check theregistration status of their counterparty’s LEI before reporting each trade, theyshould have appropriate arrangements in place for their counterparty to
update them if there is any change in the counterparty’s LEI status. In any
case, reporting entities should ensure that current and valid LEIs aremaintained and used for their own groups of companies in trade reporting.
Regarding HKTR’s validation rule, we clarify that the HKTR contains rules tovalidate the format of the LEIs reported.

29.

Early Termination and Error Corrections: As mentioned in paragraph 16 above,some respondents related difficulties in replacing the existing entity identifier
with an LEI when reporting a life-cycle event of an outstanding trade. One
respondent also noted that under our initial proposal, reporting entities may
not be able to unwind a trade if their counterparty refuses to obtain an LEI
since they will not be able to report such a life-cycle event without an LEI. We
wish to reiterate that our proposal for the mandatory use of LEIs in the firstphase applies only to parties on the reporting entity’s side of a transaction.
Under the revised scope of the transaction reports, the mandatory use of LEIs
does not apply to the reporting of life-cycle events (such as early termination).
- 6-

We therefore believe that the respondent’s concerns are no longer relevant.
Also, we would like to take this opportunity to clarify that the requirement touse LEIs will not apply to error corrections.
30.

Masking Relief: We were asked to confirm whether transactions eligible formasking relief would be affected by the requirement to use LEIs. As mentioned
in the Consultation Paper, the masking relief currently applicable under the
Securities and Futures (OTC Derivative Transactions – Reporting and Record
Keeping Obligations) Rules (Reporting Rules) will not be affected by the
mandatory use of LEIs in trade reporting. Transactions currently eligible formasking relief should be reported according to the instructions outlined under
the section on “Identifiers for transactions and counterparties” in the SRI. In
view of the recommendations of the Financial Stability Board (FSB) calling forthe removal of reporting barriers by June 2018, we intend to look into theappropriateness of continuing to provide masking relief at a later stage.

31.

Fund Allocation: We received some comments regarding the reporting of LEIs
for transactions with a fund manager. Respondents sought clarification as towhether they should report the LEIs of the order placers/fund managers or the
LEIs of the principals/funds. We were also asked to confirm whether provisionof the LEIs of the fund managers would be acceptable prior to fund allocationof the trade. We wish to clarify that the reported LEI should pertain to thecounterparty of the transaction. If the reporting entity reports the transaction
after the allocation, the report should contain the LEI of the correct
counterparty of the transaction (or transactions as the case may be) at thefund level. If, however, the report is submitted to the HKTR prior to fundallocation, reporting entities should report the counterparty informationaccording to the instructions outlined under the section on “Fund allocation” in
the SRI.

32.

Daily Valuation Reporting: One respondent sought clarification as to whether
the LEIs of the transacting parties were required when submitting daily
valuation information to the HKTR and whether any new fields would be added
to the Valuation template. We confirm that the Valuation template requires theidentification of the reporting entity only and not any of the transacting parties.
This means that the identifying information (whether LEI or otherwise) of anyof the transacting parties is not required when reporting a transaction’s daily
valuation information. Reporting entities should follow the instructions outlined
under the section on “Information and particulars relating to the valuation of
the transaction” in the SRI when reporting the daily valuation information.

33.

Publication of the list of in-scope entities: A few respondents requested that
regulators maintain and publish a list of in-scope entities for the first phase of
mandatory use of LEIs. We believe that the clarifications in paragraphs 14 and15, together with the list of HKTR members published on the HKTR website,would provide sufficient clarity to reporting entities and remove the need forsuch a list.

34.

Legislative effect of the LEI requirement: One respondent suggested thatcompelling clients to subscribe for LEIs could be easier if the mandatory use of- 7-

LEIs in trade reporting is given statutory effect. To clarify, the requirement touse LEIs as the entity identifier will be reflected in the SRI which, per Rule21(2) of the Reporting Rules, must be complied with when reporting via theHKTR. The revised approach after the implementation of the first phase alsomeans this suggestion is no longer relevant.
35.

Background on the LEI: A few respondents requested that we provide a
detailed background on the LEI to explain the purpose of its use and thegovernance framework for its providers. As mentioned in the Consultation
Paper, the creation and adoption of a global LEI system was supported by theG20 Leaders after the 2008 global financial crisis to help authorities andmarket participants identify and manage financial risks. The Global LEI
System (GLEIS) was subsequently created by regulators and private-sector
entities based on the recommendations of the FSB which were endorsed by
the G20 Leaders. The GLEIS, and its operational arm, the Global LEI
Foundation (GLEIF) are coordinated and overseen by the LEI Regulatory
Oversight Committee (LEI ROC), a group of more than 70 public sector
authorities, including the HKMA. Market participants should refer to thewebsites of the LEI ROC and the GLEIF for further details of the governanceframework of the GLEIS.

36.

As LEIs are now widely adopted in various FSB jurisdictions to support
regulatory activities, we believe information is widely available to market
participants about the use and the registration of LEIs. We suggest reporting
entities that have difficulties obtaining such information approach theirrespective industry association for further guidance.

Comments and Conclusions on Phase 2 Clearing
Expansion of Product Scope to include certain standardized interest rate
swaps denominated in Australian Dollars
37.

We received overwhelming support for our proposal to add certain
standardized AUD IRS to our list of products mandated for clearing underPhase 2 Clearing. We will therefore proceed to propose a revision of the
Clearing Rules on this basis.

38.

One respondent requested clarification of the process for a CCP that isalready a designated CCP (under section 101J of the Securities and Futures
Ordinance (Cap.571) (SFO)) to also provide clearing services for AUD IRS for
meeting the clearing obligation.

39.

Although Section 101J of the SFO provides that the SFC may designate arecognised clearing house or an authorized automated trading services (ATS)provider as a designated CCP in respect of OTC derivative transactions
generally or for a class or description of OTC derivative transactions specified
in the designation, we are minded to do so only for specified classes of OTC- 8-

derivative transactions for the time being. Consequently, both a new CCP and
an existing designated CCP who wishes to be designated for AUD IRS would
need to make a new application under section 101J of the SFO. The process
will be similar to that for the designation of CCPs in respect of the current
specified classes of OTC derivative transactions.
40.

In respect of a new CCP that has yet to be authorized as an ATS provider, aswith Phase 1 Clearing, we will be mindful of the time required to process theapplication to ensure that sufficient CCPs are designated for providing clearing
services in AUD IRS when Phase 2 Clearing comes into effect. We will
therefore process applications with the implementation timeline in mind.

41.

One respondent requested clarification of the commencement date fortransactions in AUD IRS to be subject to clearing obligation. Another
respondent asked regulators to bear in mind that some banks incorporated inmainland China may have difficulty accessing client clearing because some
service providers may consider the Mainland as a non-netting jurisdiction.
Accordingly, the respondent asked for sufficient time for banks to prepare for
implementation.

42.

Having regard to the above, we believe the commencement of AUD IRS
clearing 12 months after the gazettal of the amended Clearing Rules would
give market participants and CCPs enough time to get ready. Taking into
account the required legislative work, we do not expect mandatory clearing of
AUD IRS to commence before Q4 2019.

43.

One respondent reiterated its support for an exemption from the clearing
obligation for “new administrative transactions” arising from post-trade risk
reduction activities. It suggested that the exemption should include theproposed AUD IRS, Phase 1 clearing products and any further products
subject to the clearing obligation in the future. We confirm that exemptions
from the clearing obligation currently set out in the Clearing Rules will beavailable to transactions in AUD IRS and further products subject to clearing
obligation in the future if the conditions for exemption are met. However, wecurrently provide an exemption for transactions resulting from multilateral
trade compression and not for other types of post-trade risk reduction activities.
We will keep in view international developments and consider theappropriateness of expanding the clearing exemption to other types ofpost-trade risk reduction services accordingly.

Proposal not to add other new products (other than certain standardized
AUD IRS) for Phase 2 Clearing
44.

Other than one respondent, we received overwhelming support for not
expanding the proposed scope of products for Phase 2 Clearing other thanincluding certain standardized AUD IRS. We will therefore proceed to only
include such AUD IRS as an additional product in Phase 2 Clearing.

- 9

-

45.

The respondent suggested that regulators consider expanding the tenors for
fixed-to-floating IRS in G4 currencies to include swaps duration of up to 50
years (or 30 years for JPY) and to coordinate with global regulators toconsider if certain foreign exchange non-deliverable forwards (FX NDFs) are
now suitable for the clearing mandate.

46.

As noted by the respondent, there remains only minimal activity in long dated
fixed-to-floating IRS transactions in Hong Kong. Based on the latest datareported to HKTR, outstanding positions of fixed-to-floating IRS with longdated tenors in Hong Kong continue to be insignificant and are unlikely to be asource of systemic risk. Therefore, we do not propose to include additionaltenors for fixed-to-floating IRS in Phase 2 Clearing. We will continue to monitor
HKTR data to ensure that the scope of products remains appropriate andrelevant at all times.

47.

We appreciate the respondent’s comments on FX NDF. From time to time, we
coordinate with global regulators to consider the appropriateness of products
for the clearing obligation. However, we do not propose to lead the way inmandating FX NDF, given that Hong Kong is not the leading market in that
product.

48.

Another respondent noted that while it agrees not to introduce products that
account for a small outstanding gross notional value for the clearing mandate,it provided a caveat in situations where the volume of the transaction issignificantly higher. We note the comment. Although we are not aware of asituation other than trade compression where the volume of the trades issignificantly higher than the corresponding outstanding gross value, we will
stay vigilant and monitor market activities from this perspective.

Scope of Prescribed Person
49.

Other than one respondent, we received overwhelming support to maintain thecurrent scope of Prescribed Person. We will therefore proceed withmaintaining the current scope of Prescribed Person.

50.

The respondent referred to information set out in the ISDA Asia Pacific OTC
Derivatives Study published in November 2017 (ISDA Study), and noted that
the ISDA Study stated that “other financial institutions” (ie, non-dealers)
accounted for approximately 36% of IRD trading activity in Hong Kong in 2016.
Consequently, the respondent was of the view that regulators should consider
expanding the scope of Prescribed Person so that more liquid andstandardized OTC derivatives transactions entered into in Hong Kong will fallwithin the clearing obligation.

51.

In response to the above, we note that the analysis in the ISDA Study is basedon data from the Bank for International Settlements (BIS) Triennial Central
Bank Survey of foreign exchange and OTC derivatives markets, which isbased on turnover data reported by the sales desks of reporting dealers,
regardless of where a trade is booked. This means the BIS Survey may- 10-include trades of reporting dealers which were not conducted or booked in
Hong Kong but whose salesmen were based in Hong Kong.
52.

Consequently, we believe that, in assessing the percentage of IRS activity in
Hong Kong by different category of persons, it would be more appropriate touse updated information submitted to the HKTR.

53.

We have already explained in our Consultation Paper that, based on datareported under Phase 2 Reporting, the OTC derivatives market in Hong Kongcontinues to be dominated by inter-dealer trades and these are mainly
authorized institutions (AIs) and licensed corporations (LCs), with AIs being
the dominant players. Based on a conservative estimate, approximately 87%
of outstanding IRS transactions were transactions between a Prescribed
Person and another Prescribed Person or a Financial Services Provider (FSP).
Consequently, we believe that the current scope of Prescribed Person remains
appropriate. We also believe that extending the scope of Prescribed Person tomore market participants would not yield benefit substantial enough tocompensate for the increased compliance burden.

54.

The respondent also noted that a recent analysis of data from the HKTR foundthat, following the implementation of Phase 1 Clearing, only approximately
40% of the new fixed-to-floating IRS trades reported to the HKTR are reported
as “intended-to-be cleared”.

55.

If the quoted clearing rate was calculated directly from published HKTR data,
the result should be interpreted with caution because the data would haveincluded transactions outside our clearing regime, ie, transactions conductedin Hong Kong but booked outside Hong Kong, intragroup transactions andtransactions entered into before the commencement of the clearing obligation.

56.

According to data reported to the HKTR, of the fixed-to-floating IRS
transactions which were booked in Hong Kong and outstanding at the end of
2017, after eliminating intragroup transactions and legacy transactions
entered into before commencement of the local clearing obligation, less than
10% were not cleared.

57.

As noted in the paragraph 53 above, market participants outside the scope of
Prescribed Person represent a small proportion of our OTC derivative markets.
Consequently, they do not pose any material systemic risk.

58.

Further, we need to weigh the costs and benefits to other market participants
should they be included within the scope of Prescribed Person. In view of thepotential difficulties arising from the availability of client clearing service
providers and the costs associated with these services, we do not believe weshould subject these market participants to mandatory clearing which may
potentially limit the counterparties that they could deal with or their ability toproperly hedge their risk exposure. Nonetheless, these market participants arewelcome to carry out voluntary clearing should they wish to take advantage ofthe benefits derived from central clearing.

- 11

-

59.

We would therefore maintain the current scope of Prescribed Person. Thatsaid, we intend to observe developments in this area, including international
developments with respect to the availability of client clearing service
providers, and from time to time will assess the appropriateness of expanding
the scope of Prescribed Persons.

60.

Request for updated list of Prescribed Persons: Separately, one respondent
requested an updated list of Prescribed Persons so that FSPs would knowwhether a transaction would be subject to the clearing obligation. Since thepublication of the list of Prescribed Persons that have reached the Clearing
Threshold, the regulators have not received any notification from Prescribed
Persons that would cause changes to be made to the list. We can therefore
confirm that the current list remains valid. We will ensure that the market isinformed of any future changes to the list.

Criteria for Financial Services Providers (FSP), proposed revised FSP list
and updating the FSP list
61.

We received overwhelming support on the following related proposals on
FSP –
(a)
(b)
(c)

to maintain the FSP criteria;
to revise the FSP list as proposed; andto update the FSP list annually.

We will therefore proceed on the basis proposed in the Consultation Paper.
The proposed FSP list is set out in Appendix A.
62.

One respondent noted that regulators should not extend the extraterritorial
reach of the Hong Kong clearing mandate to include entities which are notrequired to clear in their home country should we decide to expand the FSP
criteria in the future. We will bear this in mind.

63.

Another respondent requested that a specific date be set for an annual updateof the FSP list, so that a newly named FSP would be given at least six months
to react and comply. As we have explained in our Consultation Paper, we willtake a snapshot of the entities that fall within the FSP criteria at the end ofeach calendar year and consult the market within Q1 of the following year.
Instead of the updated FSP list taking effect on 1 September the following year,
we now propose to align the effective date to the Prescribed Day of the
Calculation Period nearest to when the consultation conclusion is published.
For example, if the consultation is in Q1 2019 and the conclusion is publishedin Q2 2019, the effective date of the FSP list will be 1 January 2020, thePrescribed Day of the Calculation Period of 1 March 2019 to 31 May 2019.
That should give Prescribed Persons who trade with new FSPs adequate timeto get ready.

- 12

-

Proposal to maintain the Clearing Threshold
64.

Other than one respondent, we received overwhelming support to maintain the
Clearing Threshold. We will therefore proceed with maintaining the current
Clearing Threshold of US$ 20 billion.

65.

The respondent suggested that the Clearing Threshold should be reduced to
EUR 8 billion to align with the initial margin requirements on financial
institutions.

66.

In response, we would like to clarify that the methodologies for formulating theClearing Threshold and the threshold for initial margin take different factors
into account. When formulating a Clearing Threshold, we need to consider
additional factors such as access to clearing including client clearing formarket participants that need to comply with the clearing obligation. Therefore,
we do not believe it is correct to align the two thresholds, particularly as
access to client clearing remains an open issue.

Proposal to maintain the Calculation Method, frequency of and length of
Calculation Periods and the addition of eight Calculation Periods
67.

We received overwhelming support for the following related proposals –
(a)
(b)
(c)
(d)

to maintain the current Calculation Method for outstanding positions to
be measured against the Clearing Threshold;to maintain the current frequency of two Calculation Periods in a year;
to maintain the length of three months for each Calculation Period; andto add eight additional Calculation Periods.

We will proceed on this basis.
68.

One respondent requested clarification of whether there is a Calculation
Period from 1 September 2018 to 30 November 2018. We confirm that in viewof the time needed to complete the consultation and the necessary legislative
process, we have proposed that the first new Calculation Period willcommence on 1 March 2019. In other words, there will not be a Calculation
Period between 1 September 2018 and 30 November 2018.

69.

The respondent also requested that regulators consider whether the proposed
Calculation Periods may be made permanent such that additional
consultations for new Calculation Periods will not be required after 2022. We
are not able to commit at the moment. We will closely monitor HKTR data, anddetermine at the appropriate juncture whether the current number ofCalculation Periods is adequate to serve the purpose of capturing new dealersin our market.

- 13

-

Comments and Conclusions on Adoption of a Trading
Determination Process for Introducing a Platform Trading
Obligation70.

We received overwhelming support for our proposed trading determination
process and criteria for considering which products are appropriate to be
subject to a platform trading obligation in Hong Kong.

71.

The proposed trading determination process and criteria are therefore
adopted, and are being used in the process to determine which products may
be appropriate for Hong Kong to introduce a platform trading obligation.

72.

Two respondents proposed that we include the following criteria in
trading determination –

our

(a)

whether imposing a trading obligation in relation to the product isnecessary and desirable in all the circumstances, having regard to theavailability of less onerous regulatory requirements; and(b)whether the product pricing is fair, reliable and generally acceptable fortrading.

73.

In respect of the suggested criterion in paragraph 72(a), we would like toclarify that if we decide to proceed with implementing a platform trading
obligation, we would have taken this into consideration. In respect of thesuitability for a product to be subject to a trading obligation, we would then lookat the six factors that we have proposed.

74.

We wish to confirm that we have already included the suggested criterion inparagraph 72(b) in our clearing determination process. One factor in our
trading determination process is whether the product is already subject to thecentral clearing obligation in Hong Kong. Consequently, this criterion isalready embedded within the process.

75.

We would like to thank the respondents for setting out various factors that
regulators would need to consider when designing and implementing a trading
obligation. Should we decide to proceed with imposing a trading obligation, we
will take into consideration the various issues raised by respondents informulating our proposal which we will consult the market in due course.

- 14

-

Concluding Remarks and Way Forward
76.

We take this opportunity to thank everyone who took the time and effort tocomment and assist us in finalising our proposals.

77.

The SRI, and where appropriate, the Frequently Asked Questions andgazetted data fields for mandatory reporting will be amended accordingly to
implement our proposals in LEIs.

78.

To implement our proposals on Phase 2 Clearing, we will –(a)publish the revised FSP list for implementation on 1 January 2019, thePrescribed Day for the last Calculation Period of 1 March 2018 to
31 May 2018; and(b)work with the government on the legislative process for the revised
Clearing Rules to add certain standardized AUD IRS to the scope of
products subject to the clearing obligation and to add eight additional
Calculation Periods.

We will continue to maintain close dialogue with the industry as we consult onother proposals regarding the OTC derivatives regulatory regime in future.

- 15

-

Appendix A - Proposed List of Financial Services Providers
The following entities are proposed to be designated as Financial Services Providers
for the purposes of the Clearing Rules.

Name of the entities(in alphabetical order)
1.

Abbey National Treasury Services plc

2.

Agricultural Bank of China Limited

3.

Banco Santander S.A.

4.

Bank of America, N.A.

5.

Barclays Bank PLC

6.

Barclays Capital Inc.

7.

BNP Paribas Fortis SA/NV

8.

BNP Paribas SA

9.

BNP Paribas Securities Corp.

10.

CACEIS Bank SA

11.

Citibank, N.A.

12.

Citigroup Global Markets Inc.

13.

Citigroup Global Markets Japan Inc.

14.

Citigroup Global Markets Limited

15.

Credit Agricole Corporate and Investment Bank

16.

Credit Foncier de France

17.

Credit Suisse (Schweiz) AG

18.

Credit Suisse AG

19.

Credit Suisse International

20.

Credit Suisse Securities (Japan) Limited

21.

Credit Suisse Securities (USA) LLC

22.

Deutsche Bank AG

23.

Deutsche Bank Securities Inc.

24.

Deutsche Postbank AG

25.

Goldman Sachs & Co. LLC

26.

Goldman Sachs Bank USA

27.

Goldman Sachs Financial Markets Pty Ltd

28.

Goldman Sachs International

29.

Goldman Sachs Japan Co., Ltd.

30.

HSBC Bank plc

31.

HSBC Bank USA, N.A.
- 16

-

32.

HSBC France

33.

HSBC Securities (USA) Inc.

34.

ING Bank N.V.

35.

ING Bank Slaski S.A.

36.

ING-DiBa AG

37.

JPMorgan Chase Bank, N.A.

38.

JPMorgan Securities Japan Co., Ltd.

39.

J.P. Morgan Securities LLC

40.

J.P. Morgan Securities plc

41.

Merrill Lynch Capital Services Inc.

42.

Merrill Lynch International

43.

Merrill Lynch Japan Securities Co., Ltd.

44.

Merrill Lynch, Pierce, Fenner & Smith Incorporated

45.

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

46.

Mizuho Bank, Ltd.

47.

Mizuho Capital Markets LLC

48.

Mizuho International plc

49.

Morgan Stanley & Co. International plc

50.

Morgan Stanley & Co. LLC

51.

Morgan Stanley Capital Services LLC

52.

Morgan Stanley MUFG Securities Co., Ltd.

53.

MUFG Securities EMEA plc

54.

NATIXIS

55.

Nomura Financial Products & Services, Inc.

56.

Nomura Global Financial Products, Inc.

57.

Nomura International plc

58.

Nomura Securities Co., Ltd.

59.

Nomura Securities International, Inc.

60.

Nordea Bank AB

61.

RBC Capital Markets, LLC

62.

RBC Europe Limited

63.

Royal Bank of Canada

64.

Santander Investment Securities Inc.

65.

SG Americas Securities LLC

66.

SMBC Capital Markets Inc.

67.

SMBC Nikko Securities Inc.

68.

Societe Generale

- 17

-

69.

Societe Generale International Limited

70.

Standard Chartered Bank

71.

Sumitomo Mitsui Banking Corporation

72.

Sumitomo Mitsui Trust Bank, Limited

73.

The Bank of New York Mellon

74.

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

75.

The Royal Bank of Scotland plc

76.

UBS AG77.

UBS Limited

78.

UBS Securities LLC

79.

UniCredit Bank AG

80.

UniCredit Bank Austria AG

81.

UniCredit S.p.A.

82.

Wells Fargo Bank, N.A.

83.

Wells Fargo Securities, LLC

- 18

-

Appendix B - List of Respondents(in alphabetical order)
Respondents whose comments are published on the websites of the HKMA andthe SFC in full
1.

Bloomberg, L.P. – Open Symbology Group2.

Citadel LLC

3.

Depository Trust & Clearing Corporation, The

4.

DTC Association, The

5.

Global Financial Markets Association

6.

Global Financial Markets Association – Global Foreign Exchange Division

7.

Global Legal Entity Identifier Foundation

8.

Hong Kong Association of Banks, The

9.

Hong Kong Bar Association

10.

International Organization for Standards (ISO) TC68/AG2

11.

International Swaps and Derivatives Association, Inc.

12.

Japanese Bankers Association

13.

LCH Group

14.

State Street Corporation

15.

SWIFT

16.

Tradeweb Europe Limited

Respondents who requested their names and comments to be withheld
17.

Anonymous

18.

Anonymous

19.

Anonymous

20.

Anonymous- 19-