Hong Kong: (Update) The Impact Of Dodd-Frank And Emir In APAC: Developments In Hong Kong And Singapore

Last Updated: 29 May 2014
Article by Gareth Pyburn

G-20 regulatory authorities (in particular the US and EU) have launched many initiatives aimed at over-the-counter ("OTC") derivatives, some of which have extraterritorial impact in APAC.  Regional regulatory initiatives have been launched by Hong Kong and Singapore in particular, which aim to ensure integration with the rapidly evolving global regulatory system.  InsightLegal Asia ( www.insightlegalasia.com) specializes in 'clarifying complexity' and below we provide an update to our previous Dodd-Frank/EMIR guidance. Specifically, we analyze how global regulatory initiatives affect Asia-Pacific financial institutions and focus on how key regional regulatory frameworks are being re-shaped as a result?

I. Overview

Many market participants across Asia remain confused about how the new US and EU regulations affect them and what additional registration, reporting and documentation are required in order to be compliant therewith.  The most significant outcome in terms of documentation following years of regulatory activity in the US and EU manifests itself in the form of protocols to which certain counterparties are bound to adhere to when entering into certain OTC derivative transactions.  

In the US, we have seen the August 2012 ("Dodd-Frank I") and March 2013 Dodd-Frank ("Dodd-Frank II") Protocols (collectively, the "DF Protocols"), while in the EU the European Securities and Market Authority ("ESMA") pursuant to its July 2012 European Market Infrastructure Regulation ("EMIR") launched the NFC Representation Protocol ("EMIR NFC Protocol") and Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol ("EMIR Disclosure Protocol") (collectively, the "EMIR Protocols").

Beyond the DF-Protocols and EMIR Protocols, there are also a number of additional documents that market participants should be aware of, such as the Dodd-Frank Disclosure Documents, Cross-Border Swaps Representation Letter and the EMIR Timely Confirmation Amendment Agreement ("Ancillary Documentation"). 

Let us consider the extraterritorial impact of US and EU regulations in turn, followed by a look at the efforts by the International Swaps and Derivatives Association ("ISDA") to ensure new regulatory requirements are captured in standardized market documentation.

II. US Regulatory Framework

Regulation of OTC derivatives in the US is bifurcated, with the Commodity Futures Trading Commission ("CFTC") overseeing "swaps" and the Securities and Exchange Commission ("SEC") overseeing "security-based swaps".  Since Asian OTC markets consist mainly of foreign exchange and interest rate swaps, CFTC regulations are the most relevant and the most material requirements are:

  • Anyone who is deemed to be a swap dealer ("SD") or major swap participant ("MSP") is required to register as such with the CFTC.
  • SDs and MSPs must have policies and documentation that comply with the CFTC's swap-related requirements in order to offer or enter into new swaps or modify or unwind  existing swaps. The application of these requirements differs depending on:

(i) whether the entity is a US or non-US person;

(ii) in the case of a US SD or MSP, whether the swap is with its foreign branch; and

(iii) whether the counterparty is a US or non-US person, the foreign branch of a US person, or is guaranteed by or an affiliate conduit of a US person ("GCA").

  • The CFTC's requirements are categorized into (a) entity-level and (b) transaction-level requirements:

(a) Entity-level requirements.  Generally apply to US SDs and MSPs, including their foreign branches. It also generally applies to non-US SDs and MSPs, except that 'substituted compliance'–which allows for compliance with local rules in certain jurisdictions (i.e., those with sufficiently similar regulatory standards)–is potentially available for the first category of entity-level requirements.  Substituted compliance is also potentially available to the same firms for entity-level requirements (except for large trader reporting ("LT Reporting")), but only where the counterparty is a non-US person.  For swap data reporting purposes, a non-US person cannot be a GCA and the CFTC must have direct access to the data housed at the foreign trade repository.

(b) Transaction-level requirements.  A US SD or MSP must comply with all transaction-level requirements. Where the swap is with its foreign branch, it must also comply with all transaction-level requirements where its counterparty is a US person.  If its foreign branch's counterparty is the foreign branch of a US bank that is a SD or MSP or a non-US person (including a GCA), it need only comply with Category A transaction-level requirements, and substituted compliance may be available.  Non-US SDs or MSPs (not acting through their US branches) must comply with all transaction-level requirements only where the counterparty is a US person (other than a foreign branch of such US person).  Where its counterparty is the foreign branch of a US person or a GCA, only Category A transaction-level requirements apply with the possibility of substituted compliance.  No transaction-level requirements apply where its counterparty is a non-US person that is not a GCA.

  • Where the swap is with the foreign branch of a US SD located outside of the six acceptable jurisdictions for purposes of 'substituted compliance' (namely Australia, Canada, EU, Hong Kong, Japan or Switzerland), the "5% exemption" is also potentially available where its counterparty is a non-US person that is not a GCA.  Compliance with local law requirements in place of Category A transaction-level requirements is allowed if:

(i)             the aggregate notional value of the swaps of all its foreign branches in all jurisdictions other than the six jurisdictions does not exceed 5% of the aggregate notional value  (measured on a quarterly basis) of all the swaps of the US SD; and

(ii)            it maintains records with supporting information to verify point (i) and to identify, define and address any significant risk that may arise from the non-application of these requirements.

III. EU Regulatory Framework

EMIR applies to financial counterparties and non-financial counterparties ("NFCs") established in the EU and therefore by extension to firms dealing with them.  A EU-established entity includes its foreign branches.  There is some extraterritorial application where transactions between third country entities that have a "...direct, substantial and foreseeable effect within the EU...", or where "...necessary or appropriate to prevent evasion..." of any provision of EMIR.  ESMA has made some progress in identifying what entities are covered by EMIR's obligations:

  • At least one counterparty is a third country entity guaranteed by an FC;
  • Both counterparties are EU branches of third country entities; or
  • Where the primary purpose of the transaction is to defeat the object, spirit or purpose of any provision of EMIR that would otherwise apply.

All OTC and exchange-traded derivative transactions where one party is a NFC and the other a FC are subject to trade reporting requirements.  Further, OTC derivative contracts subject to mandatory clearing must be cleared if the parties to such contracts are financial counterparties or non financial counterparties that exceed any of the prescribed asset class clearing thresholds ("NFC+s").

Further, if the other party is an entity established in a third country that would have been subject to mandatory clearing had it been established in the EU, the transaction must be cleared.  Risk mitigation requirements for un-cleared trades apply to both financial counterparties and NFC+s. Only the risk mitigation requirements relating to timely confirmations, portfolio reconciliation and compression and dispute resolution apply to non-financial counterparties that do not exceed any of the clearing thresholds ("NFC–s").

IV. ISDA Protocols

ISDA protocols and other documents address the plethora of regulatory requirements arising from Dodd-Frank and EMIR where such requirements either (a) necessitate changes to documentation or (b) can be fulfilled through further documentation.  As the Dodd-Frank and EMIR requirements become effective at different dates, the publication of ISDA protocols and Ancillary Documents have to be synchronized to account for such effective dates.

A detailed summary of the ISDA protocols and Ancillary Documents that may be of relevance to an Asian counterparty (i.e., a non-US person that is not a GCA and not established in the EU) that is not registered as a SD or MSP (assuming that neither substituted compliance nor the 5% exemption is available) is available in the appendices to this briefing upon request.

V.  OTC Regulatory Developments in Hong Kong

Hong Kong's response to the new global OTC regulatory landscape is summarized below.

OTC Clearing Hong Kong Limited ("OTC Clear") launched its OTC derivatives clearing services in November 2013, making OTC Clear the first CCP to clear OTC derivatives in Greater China.

OTC Clear provides market participants the necessary financial market infrastructure to comply with mandatory clearing requirements.  Market participants may now clear certain interest rate swaps ("IRSs") and non-deliverable forwards ("NDFs") on a voluntary basis in anticipation of mandatory clearing, which is expected to come into effect later this year.

OTC Clear has been established in accordance with the requirements set out in the report on Principles for Financial Market Infrastructures published by CPSS-IOSCO (the "FMI Principles").

Hong Kong Exchanges and Clearing Limited ("HKEx") holds 75% of OTC Clear with the remaining 25% (non-voting) held by a consortium of 12 shareholders, which means that HKEx retains 100% of the voting power.

Key Points to Note:

  • OTC Clear has launched clearing services for IRSs denominated in, and NDFs referencing, a wide range of currencies--including RMB;
  • OTC derivatives contracts cleared by OTC Clear benefit from insolvency protection under the SFO;
  • Authorized institutions and licensed corporations carrying on business in Hong Kong can be admitted as clearing members, while remote clearing members will be considered for future membership; and
  • Client clearing and acceptance of non-cash collateral are expected in the near future. 

An overview of the key features of OTC Clear include:

Scope of Clearing Services: 
OTC Clear intends to offer clearing services for a wide range of OTC derivatives products.  Initially, clearing services are offered for IRSs denominated in RMB, HKD, USD and EUR; in addition, clearing services for NDFs referencing RMB, TWD, KRW and INR are available.  Although clearing services (including RMB) currently only cover inter-dealer trades, OTC Clear plans to launch client clearing in the future alongside the implementation of mandatory clearing obligations in Hong Kong1.
  • Novation: 
Contracts between two clearing members are 'instantly' novated to OTC Clear, meaning that OTC Clear acts as the buyer to every seller and as the seller to every buyer in the original bilateral trade (i.e., OTC Clear is a CCP).  Post-novation, OTC Clear is the counterparty to each party to the original bilateral trade, thereby guaranteeing the performance of the trade to one party in case a party to the original trade defaults.
  • Membership: OTC Clear only admits clearing members who are either an authorized institution or a licensed corporation carrying on business in Hong Kong; however, OTC Clear is considering admitting clearing members that are neither authorized institutions nor licensed corporations and do not have a place of business in Hong Kong ("remote clearing members").  The SFC and foreign regulators will need to ensure that there is proper and sufficient regulatory oversight of remote clearing members.

  • Insolvency Protection: The Securities and Futures Ordinance (Amendment) Bill includes provisions to support the clearing of OTC derivatives in addition to transactions in securities and futures contracts in Hong Kong.  Pending the passing and the implementation of such changes, interim measures to support the clearing of IRSs and NDFs are provided by way of the Securities and Futures (Futures Contracts) Notice (the "s392 Notice") issued by the Financial Secretary, pursuant to which certain OTC derivatives currently cleared by OTC Clear are designated as "futures contracts" under the Securities and Futures Ordinance ("SFO").  Furthermore, margin provided by clearing members to OTC Clear and provisions in the clearing rules of OTC Clear (the "Clearing Rules") dealing with the default of a clearing member also enjoy insolvency protection under the SFO as "market collateral" and "default rules".
  • Margin and Guarantee Fund: Consistent with developing international market practices with regards to OTC derivatives clearing (e.g., the FMI Principles), OTC Clear requires the provision of margins by clearing members and the maintenance of a guarantee fund.

§  Margin: Initial margin and variation margin must be provided in the amounts, forms and times prescribed by OTC Clear.  OTC Clear only accepts margin in the form of and outright transfer of cash to OTC Clear.

§  Guarantee Fund: The Clearing Rules set forth the payment waterfall that becomes applicable in the event that a defaulting clearing member's margin is insufficient to cover losses. Both clearing members and OTC Clear contribute to the guarantee fund.

§  Non-cash collateral: Eventually, OTC Clear will accept non-cash collateral in the form of margin by way of security, and in the form of guarantee fund will be accepted by way of outright transfer.

  • Default Protection: In the event of a default or the insolvency of OTC Clear, OTC Clear may terminate outstanding cleared contracts and determine the net termination amount in respect of the affected clearing member(s). Further, the liability of non-defaulting clearing members' is capped and replenishments to the guarantee fund are limited in such an event, even if multiple clearing members default in close succession during a severe financial crisis.  Upon the default of a clearing member, OTC Clear will close out such defaulting party's contracts and the cleared contracts of the defaulting clearing member will be auctioned to non-defaulting clearing member(s) to replace the closed out contracts.

VI. OTC Regulatory Developments in Singapore

Singapore has made some great strides in terms of compatibility with global regulatory initiatives. On 31 December 2013, the Singapore Exchange ("SGX") adopted several changes to its rules, including the introduction of remote clearing members ("RCMs") and closer alignment of SGX Derivatives Clearing Limited's ("SGX-DC's") rules with the CFTC's regulations.  In so doing, SGX-DC has taking active steps to fulfill its obligations to qualify as a derivatives clearing organisation ("DCO") (under the CFTC's rules).

SGX's primary purpose for introducing the RCM category was to create a class of membership that would be appropriate for FCMs2, but there is scope within the RCM category to allow for RCMs from jurisdictions other than the U.S. in the future.  More stringent eligibility criteria and on-going obligations apply to RCMs.

SGX-DC Clearing Fund and OTCF Default Management Procedures:  SGX proposed refinements to its Clearing Fund structure and improvements to the auction process for managing defaults of a member that clears OTC financial derivatives contracts ("OTCF"), such as:

  • Apportioning SGX-DC's 25% contribution to the Clearing Fund across two layers to cater for multiple defaults in different contract classes.  SGX-DC will contribute at least 15% of the Clearing Fund to the first layer and make a further contribution of at least 10% of the Clearing Fund to an intermediate layer.  The first layer will be used before members' contributions and in the event of subsequent member default in a different contract class, the intermediate layer will be used before members' contributions.
  • If the auction of a defaulting member's OTCF portfolio is unsuccessful, each member's Clearing Fund contribution will be used to offset losses according to the distance of the member's bid from the successful bid.  Currently, the aggregate Clearing Fund contributions of each non-defaulting clearing member who clears OTCF contracts are used on a pro-rata basis in proportion to their Clearing Fund contributions, regardless of whether the non-defaulting clearing member was required to participate in the auction.

VII. Conclusions

While the new global regulatory landscape impacts certain financial institutions in APAC, the extent of such impact depends entirely on the type of entity involved, in addition to the scale and type of OTC activity undertaken by such entity. 

Hong Kong and Singapore have both brought their regulations up to par with the major global jurisdictions (and 'substituted compliance' applies for the most part) and the level of OTC derivatives activity in both of these markets reflects this fact. 

Hong Kong's OTC derivatives markets are generally well served by OTC Clear, even more so once the acceptance of non-cash collateral and mandatory clearing obligations come into effect (expected during 2014).  In the midst of a rapidly changing regulatory environment brought about by international regulations such as EMIR and Dodd Frank, OTC Clear—and by extension Hong Kong--is well poised to handle such complex regulations.  OTC Clear intends to apply for recognition under EMIR as a third country CCP. 

Singapore's SGX-DC has made considerable progress to qualify as a DCO for CFTC purposes and its RCM category opens the door for broader membership going forward.  The default management procedures and tiered auction structure are state of the art and go over-and-beyond what the global FMI Principles require. 

Beyond Hong Kong and Singapore, the extent to which other Asia-Pacific jurisdictions will implement the G-20 OTC derivatives reforms in line with the US and EU approaches is difficult to predict--as is the timing of any such regional reforms.  What is clear is that the rest of APAC remains a diverse patchwork of regulators and exchanges, many of which have considerable work to do in order to integrate their regulations with a fast evolving global regulatory system.  The rate of regulatory integration within each jurisdiction will directly affect the growth of and product availability in such OTC markets.

1 Once the Securities and Futures Ordinance (Amendment) Bill has been implemented, clients clearing on OTC Clear will be protected from the default of clearing members.

2 The FCM is derived from the US Commodity Exchange Act, section 4(d)(f)(1), which stipulates that an intermediary accepting collateral from a U.S. person for a swap contract cleared through a DCO must be a futures commission merchant ("FCM") registered with the CFTC. 


1 Undertakings for Collective Investment Schemes in Transferable Securities, Directives 2001/107/EC and 2001/108/EC.

2 The over-broad and controversial scope of the Directive on Alternative Investment Fund Managers ("AIFMs") captures the management and marketing of most fund vehicles as well as those that are not really 'funds' at all.  AIFMs who are established in the EU now require authorization.

3 Cap 571.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.