SFC concludes consultation on margin requirements for non-centrally cleared OTC derivatives

The Securities and Futures Commission (SFC) today released consultation conclusions on proposals to impose margin requirements for non-centrally cleared over-the-counter (OTC) derivatives (Note 1).

The proposals will be adopted with some amendments and clarifications. A licensed corporation which is a contracting party to a non-centrally cleared OTC derivative transaction entered into with an authorized institution, a licensed corporation or another defined entity would be required to exchange margin with the counterparty if the notional amount of their outstanding non-centrally cleared OTC derivatives exceeds specified thresholds.

“Imposing margin requirements for these transactions will help reduce systemic risk in our markets,” said Mr Ashley Alder, the SFC’s Chief Executive Officer. “The SFC will continue to work closely with local and international authorities to refine and update the regulatory regime for OTC derivatives in Hong Kong.”

Amendments to the Code of Conduct (Note 2) to effect the changes will be gazetted in due course. The initial margin requirements (Note 3) will be phased in starting from 1 September 2020, which is also the date the variation margin requirements (Note 4) will take effect.

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Notes:

1. On 19 June 2018, the SFC launched a Consultation on the OTC derivatives regime for Hong Kong – Proposed margin requirements for non-centrally cleared OTC derivative transactions, which ended on 20 August 2018. The SFC received eleven written submissions from industry associations, market participants and other stakeholders. Respondents generally agreed with the proposed requirements.
2. Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
3. Initial margin collateralises the potential future exposure of a non-centrally cleared OTC derivative transaction to changes in the mark-to-market value of the derivative during the time it takes to close out and replace the position in the event of a counterparty default.
4. Variation margin collateralises the exposure of a non-centrally cleared OTC derivative transaction to fluctuations in mark-to-market values after the transaction has been executed.