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    HKMA Updates Policy Module for Non-Centrally Cleared OTC Derivatives

    September 11, 2020

    HKMA revised the Supervisory Policy Manual module CR-G-14 on margin and other risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives transactions. HKMA issued the revised module CR-G-14 as a statutory guideline under section 7(3) of the Banking Ordinance. The module sets out minimum standards that HKMA expects authorized institutions to adopt in relation to margin and other risk-mitigation techniques for non-centrally cleared OTC derivatives transactions. HKMA had consulted on revisions to the module from May 25 to June 25, 2020.

    Authorized institutions that are in scope for the margin requirements and risk mitigation standards but have not applied the provisions set out in the revised paragraphs of the module should comply with these requirements from September 01, 2021. Early adoption is also allowed. In the revised module, HKMA:

    • Revises the phase-in schedule of initial margin requirements, according to the announcement made by BCBS and IOSCO in April 2020
    • Defers the remaining implementation phases of the risk-mitigation standards to align with the updated initial margin implementation phase-in schedule
    • Extends the exemption of non-centrally cleared single-stock options, equity basket options, and equity index options from the margin requirements
    • Provides clarification on the documentation, reporting, and notification requirements for authorized institutions adopting substituted compliance
    • Updates the list of member jurisdictions, of BCBS-IOSCO Working Group on margin requirements, deemed comparable under the margin requirements and risk mitigation standards of HKMA
    • Clarifies that genuine amendments made to existing derivatives contracts to give effect to benchmark reforms will not be considered as new contracts subject to the margin requirements
    • Introduces new guidance on authorized institutions’ derivatives transactions with leasing entities that are part of manufacturing groups
    • Updates the guidance in relation to valuation with counterparties, portfolio reconciliation, dispute resolution, monitoring of model performance, and collateral eligibility

    Keywords: Asia Pacific, Hong Kong, Banking, Securities, Supervisory Policy Manual, OTC Derivatives, Counterparty Credit Risk, Initial Margin, Banking Ordinance, Basel, BCBS, IOSCO, HKMA

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