Jake's View

Hong Kong's SFC is the one that should 'hurry up and wait' on OTC reform

SFC chairman’s comments that Hong Kong should not delay on OTC reform
are an insult given that the SFC took six years to deliver its own report

PUBLISHED : Wednesday, 14 October, 2015, 9:20pm
UPDATED : Monday, 16 November, 2015, 4:43pm

Speaking to the South China Morning Post ... [Securities and Futures Commission chairman Carlson Tong Ka-shing] said: "There is a plan and timetable in which we have clearly articulated how the reform will be implemented now and in the future.

"... The reform plan for OTC derivatives is not for Hong Kong to decide. There are international standards to be met. So we must follow the international timetable for implementation. There is no room for delay."

Business, October 13

I have written before of the high-handedness of the SFC but these comments by Carlson Tong take it to the point of outright insult.

The background here is that the G20 group of governments, at a Pittsburgh summit more than six years ago, took the view that the financial crisis of the previous year had in part been caused by lax regulation of over-the-counter derivative instruments. It therefore proposed regulatory reforms to which Hong Kong, although not a member of the G20, also committed itself.

Two weeks ago, after six years of doing nothing, the SFC and the Hong Kong Monetary Authority finally published a dense 184-page consultation paper on the matter.

And then utterly ignoring those six years of dawdling, Carlson Tong took it on himself to say there is no room for delay and we must follow the international timetable for implementation.

Just who missed the timetable, Carlson?

More offensive yet is the affront of asking participants in the business to comment on the proposals when he clearly has no intention of paying their responses the slightest heed, as Carlson says: "The reform plan for OTC derivatives is not for Hong Kong to decide."

Let's have it straight that this consultation paper is no easy read. An example:

"In view of our proposals to implement the clearing leg of the extended definition of ATS, it follows that an overseas CCP that provides clearing services/facilities for OTC derivative transactions will need to become an authorised ATS provider if it intends to actively market its services to persons in Hong Kong."

There are 184 pages of the like and the SFC clearly expects senior financial executives to read it all closely as it asks them no less than 45 questions about this paper's provisions, all headed, "Do you have any comments or concerns…?"

I imagine there are plenty of regulatory holes and injustices in something so convoluted. The paper itself concedes that certain aspects "are highly technical, complex and lengthy".

But Carlson Tong will just slide your responses to any or all of the 45 questions straight into the rubbish bin. In his view, "there are international standards to be met" and "we have clearly articulated how the reform will be implemented".

In fact, this twists what the consultation paper says on the matter. It states, "The proposals in this paper have been developed in light of similar reform efforts in other major markets … and taking into account local features and characteristics."

How good to know. Would one of you people at the SFC then mind telling your chairman that, contrary to what he believes, there is some scope for Hong Kong to decide.

On the very slight chance - very, very slight indeed of course - that he might not himself have read the entire paper overly closely, could you also refer him to section 206 on page 73, which declares, "We believe our proposals strike the right balance, but as always, we welcome market views on where proposals may be problematic or result in unintended consequences."

It may, in fact, be appropriate to have a formal SFC statement conceding that the chairman spoke out of turn and that, contrary to the tenor of his remarks, the SFC will listen to the comments of the industry. And then let's have no more of this hurry up talk after six years of idleness.

I am fully prepared to believe that central clearing of derivate instruments is an advance on ramshackle exchanges of pieces of paper or dealing desk recordings of what traders said to each other.

It is not the only answer. G20 governments would also do well to consider how their own meddling in financial markets led to the 2008 crisis. But it takes the Hong Kong SFC to make an insult of an inquiry.