The Securities and Futures Commission (SFC) will introduce two new licences next year to regulate investment banks conducting over-the-counter (OTC) trading and clearing as part of a global effort to curb risk and bolster transparency.
The reform will require a change in the law submitted to Legislative Council by the end of this year.
If passed, the SFC and the Monetary Authority (HKMA) will then implement the new rules on the US$2 trillion worth of OTC derivatives trading denominated in Hong Kong dollars or yuan in the city.
The changes would mean investment banks would have to get a licence from the SFC to do these kinds of trades and then settle them through a new clearing house being set up by Hong Kong Exchanges and Clearing (HKEx) or one approved by the SFC. Penalties for non-compliance would range from fines to licence withdrawals.
OTC trading refers to the trading of derivative products between two parties directly without using an exchange. Up until now, such trades have generally not been regulated and lacked transparency. But various factors including the 2008 global financial crisis and the collapse of US lender Lehman Brothers pushed Group of 20 leaders to step up regulation of OTC markets to control risks posed by major market players.
A second consultation about the licensing details will be held until the end of August. One licence would apply to those trading in OTC markets and the second would apply to those acting as clearing agents, SFC senior director Rico Leung Chung-yin said.