Summary of the Joint Consultation Paper: Proposed Amendments to the Clearing Rules for Over-the-Counter Derivative Transactions
This document outlines a proposed amendment to Hong Kong's regulatory regime for Over-the-Counter (OTC) derivatives, specifically focusing on the rules governing mandatory clearing. The consultation paper, jointly issued by the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC), aims to introduce a more efficient and certain methodology for determining future calculation periods for mandatory clearing obligations.
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Document Overview
This consultation paper, dated January 2026, is a formal request for public feedback on proposed amendments to the *Securities and Futures (OTC Derivative Transactions – Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules* (the "Clearing Rules"). The purpose of the proposed amendments is to streamline the process of establishing future calculation periods for mandatory clearing obligations, moving from a system of periodically adding new periods to a formulaic approach. This aims to enhance certainty for market participants and reduce the administrative burden of legislative amendments.
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Main Content
The core of this consultation revolves around the methodology for defining "Calculation Periods," which are crucial for determining when a "prescribed person" (defined as an authorized institution, approved money broker, or licensed corporation) is subject to mandatory clearing obligations for OTC derivative transactions.
Currently, Hong Kong's OTC derivatives regulatory regime, implemented since 2014 in line with G20 commitments, includes reporting, clearing, trading, and record-keeping obligations. Mandatory clearing, introduced on September 1, 2016, applies to specified standardized interest rate swaps undertaken by major dealers, contingent on meeting certain conditions within the Clearing Rules.
Current Approach:
- Rule 6 of the Clearing Rules dictates that a clearing obligation arises when a prescribed person's average (local) total position in relevant OTC derivative transactions within a "Calculation Period" reaches a predefined "Clearing Threshold."
- The Clearing Threshold is currently set at USD 20 billion.
- A Calculation Period is defined as a three-consecutive-month period.
- There are currently two Calculation Periods per calendar year, with a six-month gap between their start dates.
- If the Clearing Threshold is met during a Calculation Period, the prescribed person must clear relevant transactions with a designated central counterparty from the "Prescribed Day" onwards.
- The Prescribed Day is set seven months after the end of the corresponding Calculation Period, providing a grace period for operational adjustments.
- Schedule 2 of the Clearing Rules currently specifies these Calculation Periods, Clearing Thresholds, and Prescribed Days.
Evolution of Calculation Periods:
- Initially, in 2016, four Calculation Periods were established.
- Subsequent industry consultations in 2018 and 2021 led to the incorporation of sixteen additional Calculation Periods.
- The current list of Calculation Periods concludes on November 30, 2026, with the last Calculation Period spanning from September 1, 2026, to November 30, 2026.
Proposed Approach (Beyond 2026):
The HKMA and SFC propose a shift to a more efficient and certain methodology for determining future Calculation Periods, Prescribed Days, and maintaining the Clearing Threshold. This approach aims to embed the current successful framework into the rules without the need for frequent legislative amendments.
- Stability of Framework: The regulators have observed that the existing structure of two three-month Calculation Periods per year, with a seven-month lag to the Prescribed Day, has been effective. This has allowed for timely identification of entities subject to mandatory clearing and sufficient time for compliance.
- Clearing Threshold Appropriateness: The USD 20 billion Clearing Threshold has also been deemed appropriate, with the number of prescribed persons reaching this threshold increasing from 17 in 2017 to 27 in 2025.
- Proposed Amendment: To address the exhaustion of the current list of Calculation Periods by the end of 2026, the HKMA and SFC propose amending the Clearing Rules to adopt a formulaic approach.
- New Formulaic Structure (from March 1, 2027, onwards):
- Two designated Calculation Periods per calendar year:
- Period 1: March 1 to May 31 (inclusive).
- Period 2: September 1 to November 30 (inclusive).
- Clearing Threshold: Remains unchanged at USD 20 billion.
- Prescribed Day:
- For the March-May Calculation Period, the Prescribed Day will be January 1 of the following year.
- For the September-November Calculation Period, the Prescribed Day will be July 1 of the following year.
- Benefits of the Proposed Approach:
- Efficiency: Eliminates the need for regular amendments to the Clearing Rules to add new Calculation Periods.
- Certainty: Provides market participants with a predictable framework for identifying future Calculation Periods.
- Operational Simplicity: Does not necessitate operational changes for prescribed persons in their compliance efforts.
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Key Changes
The primary proposed change is the adoption of a formulaic method for defining Calculation Periods, Prescribed Days, and the ongoing application of the Clearing Threshold, replacing the current practice of sequentially listing these periods in Schedule 2 of the Clearing Rules.
- Shift from Listed Periods to a Formulaic Approach: The most significant change is the move from a fixed, sequential list of Calculation Periods to a defined calendar structure.
- Introduction of Perpetual Calculation Periods: From March 1, 2027, the rules will automatically generate Calculation Periods based on the specified formula, rather than requiring specific dates to be added to the legislation.
- Revised Specific Dates for Prescribed Days: While the seven-month lag is maintained in principle, the specific dates for Prescribed Days will be derived from the new formulaic structure (e.g., January 1 and July 1 of the following year).
- No Change to Clearing Threshold: The Clearing Threshold of USD 20 billion remains in place.
- No Change to Duration of Calculation Periods: Calculation Periods will continue to be three consecutive months.
- No Change to Frequency of Calculation Periods: There will still be two Calculation Periods per calendar year.
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Important Dates
- Consultation Period Deadline: February 27, 2026. All comments must be submitted by this date to the HKMA or SFC.
- Tabling of Subsidiary Legislation: Target date for tabling necessary subsidiary legislation before the Legislative Council is the third quarter of 2026.
- Effective Date of Amendments: Proposed commencement date for the amendments is March 1, 2027. This is strategically timed to align with the commencement of the first new formulaic Calculation Period.
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Impact Scope
- Applicable Parties: The proposed changes will affect "prescribed persons" as defined under the Clearing Rules. This includes:
- Authorized institutions regulated under the Banking Ordinance.
- Approved money brokers regulated under the Banking Ordinance.
- Licensed corporations regulated under the Securities and Futures Ordinance.
- Affected Institutions: Primarily financial institutions engaging in OTC derivative transactions in Hong Kong. This encompasses major dealers and other entities whose OTC derivative positions may reach or exceed the clearing threshold.
- Degree of Impact: The impact is expected to be low in terms of operational changes for most institutions. The proposed formulaic approach is designed to maintain operational continuity and provide greater certainty. However, entities currently approaching or fluctuating around the USD 20 billion threshold will need to be aware of the ongoing monitoring and the fixed schedule of Calculation Periods. The primary benefit will be enhanced predictability and reduced administrative burden for both the regulators and the industry.
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Compliance Requirements
- Ongoing Monitoring of Positions: Prescribed persons must continue to monitor their applicable average (local) total positions in relevant OTC derivative transactions.
- Identification of Obligation: If a prescribed person's position reaches or exceeds the USD 20 billion Clearing Threshold during a Calculation Period (either the current ones ending in 2026 or the future formulaic ones from March 1, 2027), they will be subject to the mandatory clearing obligation from the corresponding Prescribed Day.
- Clearing with Central Counterparty (CCP): Upon becoming subject to the obligation, transactions must be cleared through a designated CCP.
- Reporting: While not directly addressed as a new requirement in this consultation, the overall OTC derivatives regime includes reporting obligations, and entities subject to mandatory clearing must comply with those as well.
- No New Reporting Requirements: This specific consultation paper does not introduce new reporting requirements. The compliance focus is on understanding and adhering to the defined Calculation Periods and Prescribed Days for the clearing obligation.
- Implementation Guidance: Further technical guidance, similar to the existing "Frequently Asked Questions on the Implementation and Operation of the Mandatory Clearing Regime" on the SFC's website, may be issued to clarify the practical application of the amended rules.
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Technical Details
- OTC Derivative Transactions: Refers to derivative contracts that are not traded on an organized exchange.
- Mandatory Clearing: A regulatory requirement for certain standardized OTC derivative transactions to be cleared through a central counterparty (CCP) to reduce systemic risk.
- Prescribed Person: An authorized institution or approved money broker under the Banking Ordinance or a licensed corporation under the Securities and Futures Ordinance.
- Clearing Rules: Refers to the *Securities and Futures (OTC Derivative Transactions – Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules*.
- Calculation Period: A specified period of time used to calculate a prescribed person's average (local) total position in relevant OTC derivative transactions.
- Current Duration: Three consecutive months.
- Proposed Future Duration: Three consecutive months (March 1-May 31 and September 1-November 30 annually).
- Clearing Threshold: The pre-defined level of average (local) total position in OTC derivative transactions that triggers a mandatory clearing obligation.
- Current and Proposed Value: USD 20 billion.
- Prescribed Day: The day from which a prescribed person must clear relevant OTC derivative transactions once they have met the Clearing Threshold.
- Current Rule: Seven months after the end of the corresponding Calculation Period.
- Proposed Future Rule:
- January 1 of the following year for the March-May Calculation Period.
- July 1 of the following year for the September-November Calculation Period.
- Average (Local) Total Position: The metric used to assess a prescribed person's exposure for the purpose of the clearing obligation.
- Central Counterparty (CCP): An entity that interposes itself between the buyer and seller in a derivative contract, becoming the buyer to every seller and the seller to every buyer.
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Annex Content
The Annex to the consultation paper provides the draft amendments to the *Securities and Futures (OTC Derivative Transactions —Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules*. This draft is marked up for reference and specifically details the proposed changes to Schedule 2 – Calculation Periods, Clearing Thresholds and Prescribed Days.
The draft clearly shows the transition from a numbered list of specific date ranges for Calculation Periods to a new structure incorporating formulaic definitions from March 1, 2027, onwards. The existing entries (items 1 through 20) would remain until their specified end dates, culminating in item 20 which covers September 1, 2026, to November 30, 2026.
The new entries, items 21 and 22, introduce the formulaic approach:
- Item 21: "From 1 March 2027 onwards, 1 March to 31 May in a year" with a corresponding "Prescribed day" of "1 January in the following year." The Clearing Threshold remains "US$20 billion."
- Item 22: "From 1 March 2027 onwards, 1 September to 30 November in a year" with a corresponding "Prescribed day" of "1 July in the following year." The Clearing Threshold remains "US$20 billion."
This Annex visually confirms the core proposal of embedding a perpetual, formulaic system for determining future Calculation Periods and Prescribed Days into the Clearing Rules.