THE rapid development of derivatives trading and its growing complexity are making it increasingly difficult for Hong Kong's securities watchdogs to regulate the industry without stifling it, Securities and Futures Commission (SFC) chief Anthony Neoh says. He told a conference on risk management yesterday that the SFC and Hong Kong Monetary Authority needed to be responsive to market needs to be able to grasp the nature of the risks involved in derivatives. He described current responses by regulators as inadequate. They either introduced jurisdictions that severely curtailed the use of derivatives instruments, or allowed for a relatively wide scope for these activities. 'While derivative markets are by no means new, the increasing scope of activity in these products and their growing intricacy has in the last few years caused regulators to pose increasingly vexing questions to themselves as to the nature of the risks inherent in these markets,' he said. At the same conference, Hong Kong Monetary Authority deputy chief executive (banking) David Carse said risk profiles could change quickly, and the rapid growth in derivatives could render certain controls inappropriate. He said the complexity of derivatives could make risks difficult to measure, monitor and manage. He called for market players to have adequate internal risk management controls and high capital reserves, to raise the transparency of their exposure to derivatives activities, and to ensure the supervisory capability of management. Citibank derivatives marketing head Quentin Hill said: 'Hong Kong's standards are the most enlightened and constructive in the region.'
