Unpacking the new OTC derivatives regime: what you need to know

27 November 2024 | Asia | Articles

The HKMA and SFC have released a conclusion paper on 26 September 2024 regarding enhancements to the over-the-counter derivatives reporting regime. Following a consultation paper published in March 2024, the regulators proposed mandating several identifiers, such as Unique Transaction Identifiers and Unique Product Identifiers, along with the reporting of Critical Data Elements and the adoption of the ISO 20022 to HKMA’s trade repository to align with international standards from the G20. With the new over-the-counter derivatives rewrite around the corner, these steps allow Hong Kong firms to brace themselves successfully.

Respondents generally supported the proposals, recognizing the benefits of standardization across global over-the-counter (OTC) derivatives reporting. Based on feedback, the HKMA and SFC have refined certain proposals for smoother implementation, which is set to take effect on 29 September 2025.

What were the conclusions of the consultation?

The HKMA and SFC detailed the following notable points in the paper:

• Mandate the use of Unique Transaction Identifiers (UTIs), Unique Product Identifiers (UPIs) and the reporting of Critical Data Elements (CDEs) effective from 29 September 2025.
• Base UTIs on the UTI Technical Guidance.
• Report standardized UTIs according to the steps proposed in the Consultation Paper, including allowing the delegation of UTI generation from one party to another for the later steps, if there’s a bilateral agreement.
• Allow the use of interim UTIs.
• Fully adopt the UPI Technical Guidance and the ISO 4914 standard for the structure and format of UPIs.
• Adjustments on CDEs align the number of mandated data fields with those in the EU, US, and other APAC regions.
• Re-report certain fields of live legacy trades on a best-effort basis.
• Adopt the ISO 20022 XML standard messaging.
• Updates to the to the HKMA’s trade repository (HKTR) Administration and Interface Development Guide (AIDG).
• Additional updates to the Supplementary Reporting Instructions (SRI) and FAQs to follow.

What were the lessons learned from MAS and ASIC rewrite?

From the recent MAS and ASIC rewrite go live, S&P Global Market Intelligence Cappitech witnessed promising ACK rates of 99.62% and 99.15% since the first two weeks of the MAS and ASIC go-live respectively. ACK rates broadly refer to the success rate at which submitted transactions are officially received and accepted by the regulator. Below are some of the key lessons learned from the MAS and ASIC rewrite rollout:

Establish communications early

Internally, make sure business and front office functions are also aware of this regulatory change, and not just compliance and operations. Emphasize the business impact of UTI consumption / generation, as well as introduce new requirements such as UPI implementations to the stakeholders. Externally, bilaterally agree on the UTI-sharing process with your counterparties or what additional support you’d require if using a provider.

Seek professional advice

Generally, the bigger inter-dealers, brokers, and global asset managers have dedicated change management teams and IT developers to work on these regulatory change projects. However, mid-tier to smaller firms may not have such in-house expertise. You might want to see early support from a trusted service provider who can support the interpretation of rules and regulations, the scope of reportable products and fields, XML coding, operations, and project management.

Health checks

If you’re already reporting transactions (pre-rewrite era), it would be sensible to perform an independent audit of the accuracy and completeness of the data being reported. This will make sure that all fields are reported in accordance with the regulator’s rules. The results will also supplement the preparations for the rewrite. In other words, you can use these audits to draw lessons that may help avoid making the same mistakes under the new reporting regime.

Document processes for audit and record purposes

Ensuring that policies and procedures are thoroughly documented is key, including technology stack workflows, operational governance, and business continuity plans (BCP).

A Business Requirement Document (BRD) is also fundamentally important, as it essentially informs a firm’s IT Development team on how to meet the regulator’s reporting requirement in a simple manner. This will likely minimize unnecessary mistakes at the development stages and ensure that all stakeholders’ understanding of matters is aligned.

Extensive testing

Allow ample time to “test, remediate, and re-test”. Permutate as many likely scenarios as possible within your test script and flag issues early. Errors requiring fixes need to be logged and tracked closely.

Industry engagement

We observed that firms which didn’t engage with community working groups or forums were unaware of the current industry issues, forcing them to play catch up late into the project timeline. We highly recommend being plugged into these channels for awareness and knowledge purpose, even post-rewrite.

What are some ways you can prepare for the Hong Kong rewrite?

• Observe the proposed regulatory changes, analyze the specifics of the OTCD rewrite, and conduct an impact assessment to identify how changes will affect existing processes, systems, and operations.
• Engage and collaborate with relevant stakeholders, including internal departments, and external stakeholders so that everyone’s roles and responsibilities are clear. Set aside ample time for paperwork if you’re contracting with a reporting provider or need to seek budget to support the project internally.
• Revise internal policies and procedures to align with the new requirements and strengthen your compliance framework to ensure continued compliance with the new regulations.
• Assess current reporting and risk management systems to determine necessary upgrades or replacements. Consider investing in new technological solutions that facilitate compliance with the OTCD rewrite. Data collection and management processes must be reviewed to ensure they’re robust and capable of meeting new reporting standards.
• Establish a data governance framework to oversee data accuracy, consistency, and security. Implement pilot testing of new processes and systems to identify potential issues before full-scale deployment. Inform stakeholders on the impact of their functions before any deployment.
• Set up monitoring mechanisms to track compliance and performance against the new regulations. Schedule regular reviews of processes and systems to ensure ongoing alignment with regulatory expectations, including post-implementation plans to oversee new staff training, existing fixes, workflow updates, and documentation refreshes.

Following these steps can effectively prepare firms for the new OTCD rewrite and ensure a smooth transition while maintaining compliance. And with the runway to September 2025 now less than a year away, it’s vital to start now if firms haven’t already!

Is data quality important post-rewrite?

OTC Derivatives Reporting will continue to evolve as technology advances in this digitalized world. The focus for reporting participants is to fulfil your reporting obligations while understanding how accurate, complete, and timely your daily submissions are. It’s therefore important to instill discipline in advocating data quality.

We think regulators may commence surveys or thematic inspections to review the robustness of the processes that firms have put in place and assess the accuracy and completeness of the data being reported. Regulators will likely take enforcement actions against firms that have blatantly breached regulatory requirements.

What should I be doing to prepare?

With limited time remaining until the 29 September 2025 deadline, the reporting community is highly encouraged to start preparing now.

For firms preparing in-house support, the best practice is to establish a taskforce with a regular cadence of meetings involving key stakeholders. If outsourcing is an alternative option, ensure that you clearly outline all requirements when engaging with your provider or consultant.

OTC derivatives reporting is here to stay – always stay ahead of regulatory changes and do not belittle the potential cost of compliance.