Regulators across the Asia-Pacific are preparing to
implement rules for central clearing of over-the-counter (OTC)
derivatives transactions by January 1 2013. But many
jurisdictions are stumbling on legal issues.
Following the 2008 financial crisis, G-20 leaders committed
to reform OTC derivatives transactions based on standards from
the International Organisation of Securities Commissions
Although it is almost November, most Asian jurisdictions
lack the legislation necessary to implement CCP clearing.
Moreover, the political environment and concerns about
conflicting regulations have stalled the process.
Trades can only be cleared once, and most
jurisdictions will likely have an element of
extraterritoriality to make sure that trades that could affect
their systemic stability are appropriately regulated,
said senior associate Urszula McCormack of King & Wood
Mallesons. So we need a way to resolve overlapping
Many key jurisdictions such as the US and Korea have
experienced regulatory uncertainty due in part to presidential
The Hong Kong Monetary Authority (HKMA) and Securities and
Futures Commission (SFC) published their
conclusions following the joint consultation process in
July. They also issued a
supplemental consultation paper introducing newly regulated
activities as well as regulatory oversight of systematically
important players (SIPs).
Counsel are still waiting for the introduction of the OTC
Reforms Bill, as well as a new round of consultation on
reporting and clearing thresholds and mechanics. Another
consultation in response to CPSS-Iosco principles of financial
markets infrastructure is also expected.
Singapore is in a similar situation as the proposed amendments
to the Securities and Futures Act for the regulation of OTC
derivatives were tabled on 15 October 2012.
Stamford Laws Wong Kee
Fong said that the amendments include mandating central
clearing and reporting of OTC derivatives, extending the
current regulatory regime for market operations, clearing
facilities and market intermediaries for OTC derivatives and
introducing a new regulatory regime for trade repositories.
In Australia the Corporations Legislation Amendment
(Derivative Transactions Bill) 2012 has been introduced into
third reading was agreed to on October 29.
A Seoul-based lawyer explained that for the Korea exchange
(KRX) to set up its platform to clear OTC derivatives
transactions it is necessary to amend
Koreas Financial Investments Services and Capital Markets
The amendment was scheduled to be passed by the
National Assembly earlier this year but was delayed become of
the end of term, he commented. The new term has now
begun but the amendment is still pending because, among other
things, Korea is going through a presidential
Moreover there are concerns about whether KRXs
implementation of the CCP will meet Ioscos standards.
Koreas bankruptcy law does not provide a solution for
what happens if the CCP - in this case the KRX - becomes
insolvent, which is not in compliance with CPSS-Iosco
But, according to the lawyer, Korea will move very rapidly
in terms of implementing the regulations once they are passed
by the National Assembly. The Korean government is required to
implement mandatory clearing by the end of 2012, he said, but
the laws delay means that we have little time to prepare.
This is because of the limited amount of time available between
the passing of the law and its enforcement.
If its passed in November, well only have
one month to prepare, he added.
Mitigating extraterritorial risk
Most issues however arise from extraterritorial regulations.
As well as the
CFTCs frequently-criticised rules on
extraterritoriality under Dodd-Frank and
similar regulations from the EU, each jurisdictions
regulations have extraterritorial components.
Domestic regulators have noted that each trade can only be
cleared once and have limited their regulations reach
accordingly. However most have stringent reporting
One report posted by the Australian Prudential Regulation
Authority (Apra), Australian Securities and Investments
Commission (Asic) and the Reserve Bank of Australia (Rba) has
outlined the regulators goals.
Although they recommend that a mandatory clearing obligation
for A$-denominated interest rate derivatives is not necessary
at this time, regulators may revisit this issue if central
clearing in this derivative class is not evident soon.
But the three regulators also said that having as many OTC
derivative transactions as possible reported to trade
repositories will enhance the efficiency of the Australian
market. They recommended that the government consider a
broad-based mandatory trade reporting obligation if the
Derivative Transactions Bill is passed.
Hong Kong also has broad reporting requirements. McCormack
said that a distinctive aspect of the Hong Kong OTC derivatives
reporting rules is that they extend to local entities and
branches that originate or execute a trade that has a Hong Kong
nexus, even if the trade is booked elsewhere.
This offshore booking model is popular here in Hong
Kong and the regulators are keen to ensure that they have as
much transparency as possible over what goes on here, she
Considering the definition of Hong Kong nexus, partner Kingsley
Ong of Eversheds said that it has been fine-tuned since its
introduction. It covers derivatives in which underlying asset,
currency or rate is denominated in or related to RMB and HKD.
In the case of credit and equity derivatives, it is where an
underlying portfolio of referenced entities contain both
HK-listed and other entities, and the HK-listed entities exceed
a certain percentage of the portfolio.
He commented, So there is some extraterritorial
effect, although narrower compared to original
Ong added that the HKMA and SFC have been careful to avoid
conflict of law issues. Complying with Hong Kong reporting
obligations may result in a breach of client confidentiality
rules in other jurisdictions, so the HKMA and SFC have proposed
an exemption in reporting obligations when the reportable
transactions are booked outside of Hong Kong. If reporting of
such transactions will result in the infringement of the laws
in the jurisdiction in which the transaction is booked
and reasonable efforts to avoid non-compliance have been
unsuccessful, then Hong Kong reporting obligations won't
Hong Kong regulators have also proposed to exempt
global institutions and central banks from reporting
requirements to avoid affecting their market stabilising
Singapore counsel agreed that the Monetary Authority of
Singapore (MAS) has been cognisant of extraterritorial
requirements for OTC derivative clearing as it looks to be a
clearing hub for the region.
Although it is presumed that
most Singapore statutes dont have extraterritorial effect
unless stated clearly, Wong said that the Securities and
Futures Act has an extra-territorial provision under section
339 which extends the laws jurisdiction to cross-border
activities wholly outside Singapore that could have a
substantial and foreseeable effect in Singapore.
However Singapore will not
require the trading of OTC derivative contracts to be on
exchanges or electronic trading platforms. This differs from
proposals in the US and Europe.
Korean regulations are equally simple: the lawyer said that
although there may be issues between Korean regulations and
foreign regulations such as the Dodd-Frank act, it may not be a
Under the KRX draft regulations, mandatory clearing
will only affect Korean won interest rate swaps in the initial
stage of implementation, so most of these products will likely
be local products and shouldnt be affected by regulations
under foreign law, he said.
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