Hong Kong looks for digital response to trade reporting burden

Hong Kong derivatives market participants looking to implement new trade reporting rules are facing a significant compliance burden, as local regulators have requested more data than some other major jurisdictions.

“In some cases, it seems that regulators have just asked for more detail for particular fields which market participants may not think necessary,” says I-Ping Soong, a partner at law firm Linklaters in Hong Kong.

The Hong Kong Monetary Authority and Securities and Futures Commission jointly issued a consultation paper in March this year, in a bid to advance the current over-the-counter derivatives reporting regime. The deadline for submitting feedback was May 17, with a compliance date of September 29, 2025 for implementation.

Firms will need to change their systems and operations to comply with the new rules

Andrew Fei, King & Wood Mallesons

The core of the reforms will introduce new standards adopted by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions. These include the unique transaction identifier, unique product identifier and critical data elements.

As these standards are global, compliance should be straightforward for cross-border firms operating in Hong Kong, although the task will be more difficult for smaller firms with less capacity to upgrade IT systems.

“Most of the implementation tasks are on the operational and systems side,” says Andrew Fei, a partner at law firm King & Wood Mallesons. “Firms that are currently reporting based on the existing Hong Kong rules will need to change their systems and operations to comply with the new rules.”

Fei notes that certain longer-dated legacy trades will also need to be “re-reported”. During this period, he adds, the volume of work will depend on the degree of automation in each firm’s current reporting setup, whether they have already gone through “similar compliance exercises” in other jurisdictions, and the volume and complexity of their derivatives transactions.

“This data reporting could be a factor to contribute the change in structure of the brokerage market in Hong Kong to favor bigger players” by acting as a barrier to entry for smaller firms, says Irene Wong, chief executive of crypto index firm IX Capital.

However, Hong Kong regulators have also surprised the market by listing more than 200 required data elements in the consultation paper, compared with around 170 in the US, 140 in Australia and just over 130 in Singapore.

Linklaters’ Soong believes more detailed requirements in one jurisdiction will “cause headaches” for global banks in implementing a simple solution. She explains that some of the fields are specific to the Hong Kong Trade Repository, while others follow the fields used in the EU reporting requirements. But at least some of the new requirements seem to be the initiative of the Hong Kong regulators alone. Soong thinks this will present operational challenges regarding the issue of data reporting inconsistency across banks.

Fei at King & Wood Mallesons adds that different firms may have “diverging views” about which category a trade or data point belongs to when it comes to complex and bespoke derivatives products, which may create grey areas. However, he points out that this is a risk even with global standardization, because data fields require firms to “compartmentalize” the features of their transactions.

“The reality is that sometimes these features don’t always neatly fall into the prescribed categories, and there will be some interpretive issues around the edges,” says Fei.

Take the tech road

Market participants suggest the new reporting requirements will drive closer co-operation between front office, legal and technology teams. Wong says larger firms tend to handle International Swaps and Derivatives Association master agreements mainly via the legal team at present, but that will need to change.

In particular, she believes chief technology officers must become more familiar with financial products and their legal documentation; the new reporting rules will mean boiling down some of the terms of those Isda agreements to populate the regulatory reporting data fields.

One source of hope is that Isda’s digital regulatory reporting (DRR) initiative might provide an industrial solution. The trade association announced in April that it plans to expand the DRR offering from the US, EU and Japan at present, to include Australia, Singapore and the UK later this year, with Hong Kong and Canada to be added in 2025. That might allow firms to adopt this solution in time for the implementation of the new Hong Kong reporting standards.

Andrew Bayley, senior director of data and reporting at Isda, agrees with Fei that one of the key problems with new trade reporting rules is that firms interpret them differently. This means the same data point submitted by two counterparties may not be completely “like for like”.

“The Isda DRR is the solution to that, as it provides a single and unambiguous interpretation of how to represent reporting logic, bringing transparency to the industry and regulators,” says Bayley.

He adds that by using the DRR, firms know they are in line with a “mutualized industry interpretation” of the rules, which are represented as “machine-executable codes” that reporting entities can adopt into their reporting systems.

Xiangjing Ng, senior director of public policy for Asia-Pacific at Isda, thinks DRR is also good news for regulators, because it fosters consistency in the reports that regulators receive. The more reporting entities use the DRR, the more regulators can get “very high-quality data”, without having to make significant efforts to clean it up.

Some market participants share the optimism. Evan Lam, a partner at Linklaters, believes industry solutions like DRR could be a “very effective and efficient” operational solution for global banks. The industry has accepted that every jurisdiction is going to have its “own nuances” on data reporting requirements, says Lam, but harmonizing the process as far as possible makes the challenge more manageable.

“DRR is important because there is a very large rewrite of the rules in many jurisdictions, and it requires firms to handle a large amount of data in a very short amount of time,” says Lam.

DRR is not a panacea, however. One market source tells Risk.net, WatersTechnology’s sibling publication, that the underlying trade data has to be accurate in the first place, because the system cannot automatically identify and correct errors in booking systems.

Editing by Philip Alexander