Hong Kong Regulators Propose LEI Mandate

The mandate aims to improve transparency in Hong Kong’s OTC derivatives market. This would mean that all entities in a transaction report, which will be submitted to the Hong Kong Trade Repository (HKTR) will eventually be identified by their LEIs.

The HKMA and SFC have released a joint consultation paper focusing on mandating the use of LEIs, the expansion of the second phase of mandatory clearing, and the adoption of a trading determination process for introducing a platform trading obligation.

The regulators say that in order to achieve transparency it is important that information about the relevant parties to a trade is included in transaction reports submitted to the HKTR. “This enables the aggregation of information about positions of the same party received from different reports or sources for the purposes of data analysis and the identification of significant players in the market who may contribute to systemic risks,” they stated in the proposal, which covers HKTR members, reporting entities, transacting parties of trades, and other entities contained in transaction reports, such as central counterparties (CCPs) and providers of clearing services.

This move does not come as a surprise. The Depository Trust & Clearing Corporation (DTCC) tells Inside Reference Data that the broader adoption and use of LEIs on a mandatory basis is part of the system’s natural evolution. “The LEI system was formulated to provide transparency across regulatory regimes and asset classes, and the HKMA’s proposal is aligned with that original premise,” a DTCC spokesperson says.

The HKMA and SFC suggest staggering the implementation timelines for the mandatory use of LEIs for trade reporting in Hong Kong.

In the first phase, reporting entities, transacting parties that reporting entities report or act for, HKTR members, central counterparties, as well as clearing services providers, will be required to be identified by their LEIs in trade reporting within six months of the publications of the conclusions to its consultation paper.

As for other transacting parties to reportable trades that fall outside those categories, the regulators have proposed a later date of January 2020. They believe the former categories of entities should not face issues with obtaining an LEI as they either already have one or are in the process of obtaining one to meet overseas requirements.

“The last category of entities may include many small-sized entities, and we have therefore provided more time before we impose the requirement to use LEIs to identify them,” the regulators said.

The DTCC spokesperson adds: “Firms that have not yet applied for an LEI will be required to obtain it. However, entities subject to OTC derivatives trade reporting obligations in Hong Kong are typically among the most sophisticated in the region; it is therefore highly likely that they are familiar with the LEI. Coupled with the rapidity and simplicity of the process of obtaining an LEI, this mandate will likely accelerate the adoption of LEIs amongst Asian firms.”

For trades that have already been reported to the HKTR, the HKMA and SFC clarified that reporting entities are not required to replace previously reported entity identifiers with LEIs unless there is a life-cycle event on or after the implementation dates.  

At the moment, the HKTR supports a variety of identifiers, including member codes issued by the HKTR, LEIs issued under the Global LEI System, BICs issued by SWIFT under ISO 9362, Certificate of Incorporation numbers or Certificate of Registration of Non-Hong Kong Company numbers issued by the Company Registry of Hong Kong, as well as Business Registration numbers issued by Hong Kong’s Inland Revenue.

The proposal to mandate the use of LEIs is part of the regulators’ overall implementation of a regulatory regime for the OTC derivatives market in Hong Kong, which started in July 2015, followed by a second phase of reporting on July 1, 2017, covering all five asset classes of OTC derivatives—interest rates, foreign exchange, credit, commodities, and equities. The regime provides the introduction of reporting, clearing, trading and record-keeping obligations for OTC derivatives transactions.

Stephan Wolf, CEO of the Global Legal Entity Identifier Foundation (GLEIF), says the objective behind the introduction of the LEI following the global financial crisis was to increase authorities’ ability to evaluate systemic and emerging risk, identify trends and take corrective steps.

“While organizations across the globe need to keep on the right side of the regulators, they also need the tools to make smarter, less costly and more reliable decisions about who to do business with. We are convinced that the LEI can significantly contribute to meeting this goal,” says Wolf.

GLEIF encourages organizations to “think beyond compliance” and to consider adopting LEIs in their day-to-day processes.

“The potential uses for the LEI extend well beyond the current uptake and GLEIF is keen to explore this idea with other organizations in a variety of sectors. Ultimately, there should be one identity behind every business. The LEI can help to achieve this objective,” he adds.

The DTCC says that further adoption of LEIs increases the value of the identifier, as it enhances the ability of regulators to obtain a more complete picture of risk across different jurisdictions: “Standardizing around a single value also adds operational efficiencies, and further expands risk management capabilities, enabling [firms] to comply with additional requirements such as AML and KYC.”