European market participants will feel the impact of Hong Kong’s proposal to remove 17 jurisdictions from the masking relief of its reporting obligations.
“A lot of European financial institutions would have clients or counterparties in Asia or Australia, so it may be a small number of transactions, but it would affect most counterparties,” says Quinn Perrott, co-CEO of TRAction Fintech.
“It’s a step in the right direction. Both Singapore, Hong Kong, and other parts of Asia have been quite far behind the likes of Europe, Australia, and the US in implementing over-the-counter derivative reporting and also, the infrastructure around it, specifically legal entity identifies and unique transaction identifiers,” he says.
On April 26, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) released a joint consultation paper on further enhancements to the region’s OTC derivatives regime.
The proposal to remove the masking relief was in response to a publication by the Financial Stability Board (FSB) in November on legal barriers to trade reporting.
The FSB report stated that it had found “discrepancies between the jurisdictions in respect of which masking relief is given by individual FSB member jurisdictions, and the jurisdictions (both FSB and non-FSB members) that reporting entities report as having legal barriers.”
Under the HFMA’s proposals, only the People’s Republic of China (PRC) will be granted masking relief. Keeping the PRC on the list, William Hallatt, head of Hebert Smith Freeehill’s financial service regulation practice in Asia believes was strategically proposed to lessen the initial effect on Hong Kong.
“I think the most interesting thing about this is the one jurisdiction that was left on the list, which is China. Sitting here in Hong Kong SAR, the fact that China has been allowed to remain on that designated masking relief list may reduce the immediate impact of these changes in practice,” says Hallatt.
“As the HKMA and the SFC say, China was categorized as uncertain in the 2018 FSB report, and we therefore believe it’s prudent to allow it to remain on the designated list. It is also quite convenient when you look at trading in Hong Kong, the number of transactions that will involve China will be very high compared to other jurisdictions. Therefore, that may minimize some of the initial impact, at least in Hong Kong.”
But Hallatt says the proposal could impact long-dated forwards. Jurisdictions have opposing positions on the matter.
“I think the market should have been anticipating the impact rolling back masking relief would have following the FSB paper, and maybe people didn’t think that they’d go so far as to remove 17,” says Hallatt. “The fact that they have done so is obviously a significant point. We will see responses to this consultation that highlight that impact and actually push back on it, but I think it is very unlikely that it will change because it is essentially implementation of international guidance.
“Where people have entered into pre-existing transactions on a masked basis, and they are now going to be required if the consultation goes ahead as planned to unmask them, then of course I think that is going to have some form of impact because some of those transactions people may be sensitive around the counterparties etc.”
On May 2, the Bank of International Settlement published statistics on OTC derivatives for the second half of 2018. The report stated that the notional total of OTC derivatives dropped $51trn from June to December last year. This was due to a $44rtn decline in interest rate derivative contracts.