April 26, 2018

Financial Stability Surveillance Division
Hong Kong Monetary Authority
55/F Two International Finance Centre
8 Finance Street, Central
Hong Kong
Supervision of Markets Division
The Securities and Futures Commission
35/F Cheung Kong Center
2 Queen’s Road Central
Hong Kong

Comments on the joint consultation paper on enhancements to the OTC derivatives
regime for Hong Kong issued by the Hong Kong Monetary Authority and Securities andFutures Commission
Dear Sirs/Madams:
We, the Japanese Bankers Association (JBA), would like to express our gratitude for thisopportunity to comment on the joint consultation paper on enhancements to the OTC
derivatives regime for Hong Kong issued on March 27, 2018 by the Hong Kong Monetary
Authority (HKMA) and Securities and Futures Commission (SFC) (collectively, “theRegulators”).
Proposals within the joint consultation paper on mandating the use of Legal Entity
Identifiers (LEIs) for the reporting obligation, expanding the clearing obligation and adopting
a trading determination process/criteria for introducing a platform trading obligation would
contribute to the further enhancement of market transparency in Hong Kong OTC derivatives
market.
However, there are some areas of concern in the proposals as specified below and we
respectfully expect that the following comments will contribute to your further discussion.

11. Question 2:
Will you have any difficulties adopting the use of LEIs in OTC derivatives trade reporting
according to the proposed timelines? If so, please provide details of your difficulties.

(Our comments)
Given regulations in the U.S. and EU, we have no objection to the use of LEIs for tradereporting purposes.
Nevertheless, the Regulators are requested to allow financial institutions about six months
to one year grace period for implementing the first phase after the publication of theconclusions for financial institutions to confirm LEIs with their counterparties and to complete
other necessary compliance actions.
While there is no particular issue with the timeline for the second phase the Regulators
should consider taking some actions to encourage small-sized entities to obtain LEIs.
(Rationale)
The joint consultation paper proposes timelines for implementing the mandatory use ofLEIs in trade reporting, classifying entities falling within paragraphs 28(a) to (e) into the firstphase (a six-month gap between publication of the conclusions and the implementation) andentities falling under paragraph 28(f) into the second phase (after January 2020), respectively.
Recently in complying with EU MiFID II / MiFIR, some reporting entities had failed toobtain LEIs from all of their counterparties (particularly from non-EU entities) before January
2018, and as a result, the authorities have determined to allow entities an additional period of
six months under certain conditions1. As can be seen from this case, financial institutions
would require a significant period of time to establish a framework for obtaining LEIs fromcounterparties and verifying them (including ensuring of any renewals). Therefore it is noteasy in practice to commence the use of LEIs with six-month gap only, just because a numberof outstanding transactions were reported with LEIs as described in the joint consultation
paper. In order to enable smooth preparation (e.g. verification of LEIs of counterparties) by
those financial institutions subject to the reporting obligation, we believe that about at least sixmonths to one year grace period would be necessary between publication of the conclusion
and implementation of the requirement to use LEIs.
In this regard, it is considered that the proposed timeline for the second phase provides a
sufficient period of time for preparation. On the other hand, since there is a relatively weak
incentive for small-sized entities falling into paragraph 28(f) to obtain LEIs, we believe that1

https://www.esma.europa.eu/press-news/esma-news/esma-issues-statement-lei-implementation-under-mifid-ii

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outreach by the Regulators, such as public relations activities, would be beneficial for smooth
implementation.
2. Question 12:
Do you have any comments or concerns regarding our proposed trading determination
process and criteria? If you do, please provide specific details.

(Our comments)
We have no objection to the six factors set out in paragraph 72 to be taken into account in
the trading determination process for considering which products are appropriate to be subject
to trading obligation. Nevertheless, in selecting products subject to the obligation, it isrequested that the Regulators propose a well-balanced regulation, not overly focusing on only
one of the factors, and taking into account relevant regulations of other jurisdictions.
(Rationale)
Similar criteria are taken into account under regulations of other jurisdictions as well.
However, some products do not necessarily meet all of such factors. For example, while major
currency denominated interest rate swaps (such as USD, EUR) traded on SEF (SwapExecution Facility) or MTF (Multilateral Trading Facility) would meet many of the factors,
HKD denominated interest rate swaps may meet the factor (b) and/or (d) in paragraph 72 but
would not meet the factor (e). If the HKD-IRS is subject to the platform trading obligation,
additional burdens will be imposed on both trading platform operators and financial
institutions. It should be noted that such costs may offset regulatory benefits or may
undermine international alignment which the Regulators place emphasis on.
In this view, the Regulators are requested to propose a well-balanced platform trading
obligation by not overly focusing on just one of the factors in the process of drafting rules andperforming an in-depth analysis of regulations in other jurisdictions and regulatory burdens ofinvolved parties.

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