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The Securities and Futures Commission (SFC) today released a consultation paper on proposed changes to the Securities and Futures (Financial Resources) Rules (FRR) relating to capital and other prudential requirements for licensed corporations engaged in over-the-counter derivatives (Note 1) activity. The consultation paper also proposes certain changes to non-over-the-counter derivatives-related FRR requirements. The three-month consultation ends on 16 October 2015.
The proposals aim to ensure that licensed corporations maintain their capital and liquidity at levels which are commensurate with the risks they undertake pertaining to derivative businesses as well as to encourage them to adopt more advanced risk management standards. The proposed FRR treatments can be calibrated to permit different capital approaches for different levels of over-the-counter derivatives activity.
The SFC proposes a small number of changes to FRR treatments applicable to licensed corporations which do not engage in over-the-counter derivatives activity. These include lowering the haircut percentages for certain types of shares and funds and introducing measures to better facilitate third-party clearing by general clearing brokers.
“The proposed changes aim to enhance our prudential regulatory regime to better align with recent developments in international capital standards for investment intermediaries. This will help maintain Hong Kong’s position as an international financial centre,” said Mr Ashley Alder, the SFC’s Chief Executive Officer.
The consultation paper’s proposals cover seven key areas:
- minimum capital requirements for licensed corporations engaging in over-the-counter derivatives activity;
- capital treatments for market risks of over-the-counter derivatives and other proprietary trading positions;
- capital treatments for counterparty credit risks arising from over-the-counter derivatives transactions;
- introduction of an internal models approach to calculate the capital requirements for market risk for proprietary investments and counterparty credit risk arising from over-the-counter derivatives transactions;
- measures to address operational risks of licensed corporations engaging in certain types of regulated over-the-counter derivatives activities or opting into certain capital approaches;
- notification and reporting requirements related to over-the-counter derivatives activity; and
- miscellaneous technical changes to other areas of the FRR.
Following the consultation, the SFC plans to further consult the public on subsidiary legislation which sets out the proposed changes.
The public is invited to submit their comments to the SFC by 16 October 2015. Written comments may be sent online via the SFC website (www.sfc.hk), by email to frr_consultation@sfc.hk, by post or by fax to 2523 4598.
Note:
- For the meaning of “over-the-counter derivatives”, please see details in the consultation paper.
