Over-the-counter derivatives to get clearing house

Hong Kong will set up a central clearing house for over-the-counter derivatives - securities transacted directly between two parties rather than through an exchange - in compliance with a global consensus to improve transparency and control risks in the financial market.

The move is part of Hong Kong's effort to implement an agreement by Group of 20 leaders to regulate such off-exchange trades. This means the Hong Kong stock exchange will act as an agent for buyers and sellers of derivatives and shoulder the risks.

'After the Lehman Brothers downfall, we felt there was a great need to establish a central counterparty,' explained Esmond Lee, executive director of the Hong Kong Monetary Authority's financial infrastructure department. 'In a future financial crisis, this will guarantee the market continues to trade stably.'

Chin-Chong Liew, a partner at Linklaters, said there were people who argued that in a doom scenario, the risks might be greater, because if the central clearing house failed, then the whole market failed. But Liew said that in general, it would reduce risk in the derivatives market.

The clearing house, known as a central counterparty, will be established by the exchange, which will work hand in hand with a local trading repository set up by the HKMA. The trading repository will be in charge of information collection and data compiling.

The Securities and Futures Commission will provide a legal framework for the development of the market.