FSB finds more work to be done on OTC market reforms in Hong Kong

The Financial Stability Board (FSB) has published  its peer review of Hong Kong. This completes the first round of country reviews of FSB member jurisdictions. A second round, to be undertaken over a longer cycle (corresponding to around three reviews per year) and focusing on topics that support the G20 implementation agenda, will be launched in late 2018.

The Hong Kong peer review examined two topics relevant for financial stability: over-the-counter (OTC) derivative market reforms, and the framework for resolution of financial institutions. The review focused on the steps taken by the authorities to implement reforms in these areas, including by following up on relevant International Monetary Fund (IMF) Financial Sector Assessment Program (FSAP) recommendations and G20/FSB commitments.

The peer review finds that good progress has been made in recent years on both topics, reflecting Hong Kong’s strong commitment to implementing international standards, driven by its status as an international financial centre. The authorities have put in place a well-defined legal and regulatory framework – in terms of scope, assignment of responsibilities and enforcement – to implement the G20 commitments to reform OTC derivatives markets. Considerable progress has been made in implementing some OTC derivatives reform areas – trade reporting, central clearing, margin/capital requirements for non-centrally cleared derivatives – while work is underway to implement the remaining areas and measures. A comprehensive cross-sectoral resolution regime with a broad range of powers and a statutory framework for the recognition of cross-border resolution actions was introduced in 2017.

Notwithstanding this progress, the review concludes that there is additional work to be done:

  • On OTC derivatives market reforms:
    • adopting a tailored regulatory regime for OTC derivatives trading venues and publishing comprehensive standards/criteria for determining when products should be platform traded;
    • enhancing the transparency of OTC derivatives transactions by expanding the scope and timeliness of public disclosure, improving transparency on price levels, and accelerating unmasking of counterparties in trade reporting;
    • actively promoting the use of the Legal Entity Identifier for trade reporting; and
    • completing the timely implementation of margin requirements, risk mitigation standards and higher capital requirements for non-centrally cleared derivatives.
  • On the framework for resolution of financial institutions:
    • completing the remaining elements of the framework by adopting necessary rules as well as by enhancing internal governance and cross-sectoral coordination arrangements for crisis management and resolution;
    • advancing resolution strategies and planning, and developing approaches to resolvability assessments; and
    • operationalising resolution funding mechanisms.

The peer review report includes recommendations to the Hong Kong authorities in order to address these issues.

Lesetja Kganyago, Governor of the Reserve Bank of South Africa and Chairman of the FSB Standing Committee on Standards Implementation that oversees the functioning of peer reviews, said “The FSB began a regular programme of country and thematic peer reviews in 2010, which has given the opportunity for FSB members to engage in dialogue with their peers and to share implementation lessons and experiences. We will continue to undertake these reviews in support of the full, timely and consistent implementation of G20 reforms.”