NewOTC derivative reform still confusing for many Hong Kong players
Survey finds 85.5pc of market players believe hedging costs are going to rise after the reforms
The jury is still out over whether the Hong Kong Monetary Authority and Securities and Futures Commission's recommended reforms on how over-the-counter (OTC) derivatives should be traded will do more harm than good.
"There are a lot of industry players in the mid-tier that don't know what's going on and what the practical implications are," said Urszula McCormack, partner at law firm King & Wood Mallesons, which advises the Hong Kong Association of Banks.
Banks in Hong Kong were given four weeks to read through a dense 184-page document that will form the basis of the rules and regulations expected to be voted into law by the Legislative Council in January. They have until the end of October to give their views.
Yet, as of last week, even senior business heads at top 10 banks contacted by the South China Morning Post who would be directly affected were unclear about the consequences. Most said they are unaware of the full scope of the changes.
That does not bode well for the world's fifth largest centre for forex activities. A single day's forex trades are worth US$274 billion in Hong Kong while interest rate derivatives turnover amounts to US$27.9 billion.
Starting from interest rate swaps in Hong Kong dollars, US dollars, euro, Japanese yen, and the pound, institutions will need to have their trades centrally cleared at the Hong Kong Exchange and Clearing or at a recognised overseas equivalent, possibly from June next year. This will replace the loose bilateral trading model that has existed for as long as interest rate swaps have been around since 1985.