HKMA Rewrite for OTC Derivatives Reporting

Securities regulators across the globe have been working for years to standardize and harmonize over-the-counter (OTC) derivatives reporting to improve transparency, accuracy and timeliness. As part of this effort, the Securities and Futures Commission (SFC) and Hong Kong Monetary Authority (HKMA) are aligning the Hong Kong regime with other jurisdictions. In March 2024, they published a joint consultation paper containing the details of the changes which concluded in Sep 2024. These changes come into effect on September 29, 2025.

In less than one year, broker-dealers will need to comply with four new mandates. They will need to use Unique Transaction Identifiers (UTIs) to identify each reported OTC derivatives transaction, as well as Unique Product Identifiers (UPIs) to denote a specific OTC derivatives product. UTIs and UPIs must conform to the structure and format set out by the Committee on Payments and Markets Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) in 2017.

In addition, firms must adopt and report Critical Data Elements (CDEs), a standard set of OTC derivatives transaction data elements (other than UTIs and UPIs), formats and allowable values. CDEs were published by the CPMI and IOSCO in 2018 and the Regulatory Oversight Committee of the Global Legal Entity Identifier Foundation in 2021 and 2023. Finally, firms must adopt the ISO 20022 XML message standard for reporting to the Hong Kong Trade Repository (HKTR).

Key technical challenges

The big bang approach to the implementation of the 4 new mandates is a mammoth undertaking for firms that are obligated to report.

Currently, some reporting firms prepare their files manually, while others use reporting systems. They are allowed to submit their reports in a csv format. In the next few months, however, firms will need to make significant operational changes to:

• automate the ingestion of data from different front office systems or data warehouses,
• enforce stringent data quality checks,
• validate and marry the data according to the prescribed schema format,
• report, reconcile with the trade repository response, and then resubmit, if necessary, on a T+2 basis, and
• adopt any changes to the validations and reporting schema in a timely manner.

Best practices

The HKMA Rewrite will have significant implications for reporting firms because it will transform Hong Kong’s financial regulatory landscape. That said, adhering to a few best practices can help make the transition go as smoothly as possible.

• Prepare for the expanded reporting scope. Given the fact that firms will need to report UTIs, UPIs and additional attributes as part of the CDE, start capturing more detailed data across a broader spectrum of transactions.
• Understand the intricate data requirements. The enhanced validations, reconciliation and quality checks necessitate a more robust data management strategy. Ensure that data is accurate but also timely and aligned with the new reporting standards.
• Monitor evolving regulatory reporting standards. The reporting schema and validation under the HKMA Rewrite may continue to evolve post-implementation, as were  in other jurisdictions. It makes sense to maintain and update reporting systems regularly to ensure timely compliance.
• Aim for multi-regime compliance: Firms operating across multiple jurisdictions must consider how the HKMA’s new rules dovetail with other global regulatory frameworks. While the frameworks in Singapore (MAS), Australia (ASIC), Japan (JSFA), Europe (EMIR),  and elsewhere have elements in common, each has its own nuances and requirements.

Ultimately, the governance, transparency and auditability of OTC derivatives trade data will be critical to HKMA Rewrite compliance. As such, another best practice is to deploy a comprehensive, holistic system for data governance and management.

The system ought to be able to ingest data from various upstream systems in different formats. It should have a robust data dictionary to store information about data elements within the system, including their definitions, formats, relationships to other data and usage guidelines. Keep in mind, data lineage is extremely important to support HKMA Rewrite compliance efforts. To this end, the system must be capable of tracking the journey of data from its source to its final form, including any transformations or changes along the way. The system needs to be able to notify firms automatically when a transaction must be reported or when any inconsistencies or inaccuracies arise in the data. Finally, it has to be able to submit and reconcile reports to the HKTR.

Regulatory changes are coming to Hong Kong very soon. But proactive firms that understand the requirements and immediately allocate resources to update their systems will not only be ready on time, but they will also emerge as leaders in strengthening the world’s financial system.