The Board of Directors of Hong Kong Exchanges and Clearing Limited (HKEx) has decided to establish a clearing house by the end of 2012 for derivatives traded in Hong Kong's over-the-counter (OTC) market to support global regulatory initiatives and take advantage of business opportunities in OTC derivatives clearing.
The new clearing house will complement the trade repository (TR) the Hong Kong Monetary Authority plans to set up to serve as a central registry and electronic database for transaction records from Hong Kong's OTC derivatives market. The clearing house and TR will help ensure Hong Kong remains in step with global regulatory trends.
Interest rate derivatives and non-deliverable forwards will be the first two products handled by the new clearing house. In the future, HKEx expects it also will handle other OTC derivatives traded in Hong Kong such as equity derivatives.
"While this is a relatively low-volume market in Hong Kong at the moment, it has tremendous potential for growth, particularly with the wider use of renminbi in international transactions," said HKEx Chief Executive Charles Li. "We aim to be at the forefront of that growth by providing a stable, transparent and efficient platform for the clearing of OTC derivatives."
HKEx will make an initial investment of $180 million in the new clearing house using internal resources. It is also considering different operating models and shareholder structures for the clearing house, which will be run independently of HKEx's other clearing houses.
Central clearing of OTC derivatives trades helps reduce counterparty risk in a financial system and is conducive to effective regulatory oversight of the trades. HKEx, with its extensive experience in central clearing of exchange-traded securities and derivatives transactions, is well equipped for the clearing of OTC derivatives trades in Hong Kong.
Li spoke about the plans to establish the clearing house for OTC derivatives at a joint press briefing held by the Hong Kong Monetary Authority, the Securities and Futures Commission and HKEx.