Hong Kong regulators kicked off the consultation process on Monday to improve the regulation and supervision of the over-the-counter (OTC) derivatives market in a bid to reduce systemic risk in the wake of the 2008 Lehman Brothers debacle.

The main proposals included in the consultation paper released by the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) include both mandatory reporting and central clearing of OTC transactions.

They are also advocating that Hong Kong Exchanges and Clearing Ltd - the city's bourse operator - establish a clearing house for transactions while the HKMA create a trade repository to collect data on the market. The consultation period is due to end on November 30.

Monday's move marked the latest move by the city's financial regulators to honor a commitment agreed by the G20 to keep in check derivatives trades that have become obscure and risky due to a lack of transparency, a problem that was seen as contributing to the global financial crisis in 2008.

The G20 Leader's September 2009 Communique called for all standardized OTC derivatives contracts to be traded on exchanges or electronic trading platforms and cleared through central counterparties by the end of 2012 at the latest.

"We have to be in step with international practices," said Edmond Lau, executive director of the HKMA,at a media briefing held in the city on Monday. The collapse of Lehman Brothers and bailouts of major markets have led to views among mature markets that regulations are necessary, Lau added in a statement.

Both the clearing house and the repository are set to begin operations in the third quarter of 2012, according to a document handed to reporters.

Global regulators have been looking for stricter OTC rules since the collapse of Lehman Brothers in 2008. Meanwhile, the OTC derivative market reached $601 trillion last year, according to Bank of International Settlements data compiled by Bloomberg.

The Financial Stability Board (FSB) said last week that global implementation of the tighter rules is running behind schedule. Some G20 markets - including Hong Kong, Canada, India, Mexico, South Korea and Russia - are among those that may miss the end-2012 deadline to implement the new rules.

"Hong Kong can't be a leader on this matter, but we can't lag behind," HKMA's Lau said. "As an international financial center, we need to follow international standards."

The FSB brings together regulators and finance ministry officials from the G20, as well as standard-setting bodies such as the Basel Committee on Banking Supervision.

The local OTC derivatives market is relatively small, compared with other major markets. Based on figures from Bank of International Settlement, based on a survey of 197 authorized institutions, their total notional amount of OTC derivatives outstanding as at the end of June 2010 stood at about HK$40 trillion, or less than 1 percent of the global outstanding.

"Given the cross-border nature of the OTC derivatives market, a global effort is required to establish international standards," said Ashley Alder, chief executive officer of the SFC.

"Hong Kong cannot drive the reform initiatives, but we will continue to coordinate with overseas jurisdictions to address some of the key aspects of the reform."

Bloomberg contributed to this story.

joyli@chinadailyhk.com

China Daily

(HK Edition 10/18/2011 page2)