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Hong Kong SFC chairman Carlson Tong Ka-shing poses in his office in the city’s Central business district. Photo: David Wong

UpdateHong Kong’s SFC chairman says no room for delay in OTC derivatives reform

Carlson Tong said regulatory reform must follow the global schedule, despite market push back from industry objecting to limited time for proper consultation

There is no room for delay in the implementation of over-the-counter (OTC) derivatives reforms proposed by the Securities and Futures Commission and Hong Kong Monetary Authority, SFC Chairman Carlson Tong Ka-shing said on Monday.

 Speaking to the South China Morning Post after his keynote address at the joint Hong Kong Institute of Certified Public Accounts and  IFRS Conference, Tong said: “There is a plan and timetable in which we have clearly articulated how the reform will be implemented now and in the future.

 “We need to work with the Legislative Council’s schedule. 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. This is very important.”

 Hong Kong’s financial industry has  until the end October to respond to the SFC-HKMA joint consultation which will reshape how derivatives will be traded in the city.

 Under the proposed plan, financial institutions with trade positions exceeding US$20 billion will continuously remain on the regulator’s radar.

 Starting with interest rate derivatives denominated in Hong Kong dollars, US dollars, euro, Japanese yen and the pound, institutions must have their derivatives trades centrally cleared by Hong Kong Exchange and Clearing  or at a recognised overseas equivalent, replacing the longstanding model of bilateral trades between participants in the industry.

 The daily turnover of the OTC interest rate derivatives market in Hong Kong is US$27.9 billion, 10 per cent of the average daily US$274.6 billion in forex transactions. The global daily turnover of the OTC derivatives market is US$1.4 trillion, according to the HKMA’s last survey conducted with the Bank of International Settlements at the end of 2013.

 The SFC and HKMA’s plan will be expanded to include products making up the more substantial parts of the derivatives market, with the immediate next step the mandatory reporting of trading positions.

 Hong Kong’s biggest banks, including  HSBC, Standard Chartered and the Bank of China (Hong Kong), are among the key trading participants to be affected by the plan.

The International Swaps and Derivatives Association has said time is limited for the financial industry to respond.

 The bill is expected to be sent to Legco for approval in January. The industry believes that if the SFC and HKMA miss the January window, it will likely derail the global schedule and push back the implementation, meaning it would be 2016 or even 2017 before Hong Kong can comply with the global standards driven by G20 nations.

 At the IFRS event, Tong also urged the accountancy profession to stamp out “fake accounting” in Hong Kong. More than just stamping out  inaccurate information reported by companies, the profession needs to be vigilant about ending deliberate misinterpretation of accounting standards.

Tong said the industry must be prepared to switch roles and become “bloodhounds” rather than the “watchdog it had played in the past.”

 “Auditors must sharpen their teeth and be prepared to take a bite more often. Auditors must be prepared to take a position with clients when it comes to interpretation of auditing standards. [They]  must ensure there is no fake accounting,” he said.

 Under more volatile market conditions, Tong said a listing commission at the SFC will adopt a more prudent stance to study special applications for listings – especially transitions from the growth enterprise board, adding that “using shell companies to list is a part of normal market operations which we will monitor”.

 He said the SFC has been working closely with the China Securities and Regulatory Commission on the matter of the Shenzhen-Hong Kong Stock Connect. Hong Kong regulators are waiting for release of the plan at a “suitable time”,  adding that the regulator will work with the HKEx in market liberalisation and investor protection.