HKMA Guidance on OTC Derivative Transactions Phase 2 Reporting Preparations

Our Ref: B9/135C
27 April 2017
The Chief Executive
All Authorized Institutions
Dear Sir/Madam,
OTC Derivative Transactions – Phase 2 Reporting As you are aware, mandatory reporting requirements under the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) (Amendment) Rules 2016 will take effect from 1 July 2017. In response to enquiries from the industry, we would like to clarify the expectations of the HKMA with regard to preparatory work, testing and contingency planning for compliance with the reporting requirements set out in the Rules, in particular with regard to those entities intending to report via an agent. This letter should be read in conjunction with the HKMA’s letter of 27 January 2017, which set out the training and testing requirements for the use of the electronic reporting system (copy attached). Reporting directly to the HKTR Regulated entities 1 that intend to report directly to the Hong Kong Trade Repository (HKTR), apart from fulfilling other requirements of the HKTR, these entities are required to complete a simulation test, including a scenario test and a product specific test if they have not already done so, on or before 31 May 2017 so that reporting of OTC derivative products as required under Phase 2 can be accepted. 1 A regulated entity means the following prescribed persons under the Reporting Rules:
(a) an authorized financial institution (AI), (b) an approved money brokers (AMB), (c) a licensed corporation (LC), (d) an RCH and (e) an ATS-CCP.

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  Reporting via an agent
  Entities intending to report via an agent are reminded that the reporting obligation rests with the regulated entity. AIs using an agent are expected to take all reasonable measures to ensure that such reporting meets the requirements under the Rules. In particular, AIs should:
  (a) make all necessary arrangements to provide all relevant information where applicable to the agent in the form required to enable the agent to report to the HKTR on the AI’s behalf, and ensure that such arrangements are effectively and comprehensively tested in good time for the commencement of reporting; (b) require the agent to make all necessary arrangements to report to the HKTR and conducts effective and comprehensive testing of such arrangements in compliance with all requirements of the HKTR and within the timeframe set by the HKTR; (c) conduct adequate due diligence on the agent’s business continuity and other back-up arrangements in case of any disruption to its reporting services arising from any cause; (d) establish a direct channel to the HKTR using the technical options available 2 . When an entity (whether reporting directly or via an agent) has signed up for the reporting service and fulfilled all the membership requirements of the HKTR, the entity will have a channel to the HKTR for (i) submission of trade events (User Interface upload), (ii) enquiries about details of trades and trade events; and (iii) accessing reports (e.g. uncertain unlink and discrepancy reports) and receiving notifications etc. Entities reporting via agents, may also use this channel to send transaction reports (conforming to the requirements of the HKTR) directly to the HKTR in case problems are encountered with reporting via the agent that cannot be addressed quickly under the agent’s business continuity or other arrangements; (e) complete a scenario test (i.e. part 1 of simulation test) with the HKTR if they have not already done so, on or before 31 May 2017. Entities that have already completed this test during Phase 1 reporting and/or Interim Reporting are not required to do it again; and (f) consider completing a product specific test (i.e. part 2 of simulation test). In particular, entities which have decided to perform direct reporting as a contingency plan in the event of any problem with reporting via their 2 HKTR will provide information on these options on request.

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  agents are highly encouraged to complete a product specific test on or before 31 May 2017. AIs that report via an agent will not be expected to have fully functioning arrangements to report directly in the event of difficulties occurring with reporting via the agent that could not be foreseen before commencement of reporting under the Rules. In other words, such AIs are not expected to duplicate entirely the systems and services that they have contracted with the agent to provide. However, in the event that such difficulties occur, the HKMA will consider whether the AI has taken reasonable steps to comply with the preparatory work, testing and due-diligence requirements set out above. Please contact the HKTR on (852) 8100 3115 or email to hktr@hkma.gov.hk for any enquiries about this letter. Yours faithfully, Trevor Keen Head (Financial Market Infrastructure Oversight and Licensing Division) Encl.

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~l HOI~~ KON r MONETARY 1~LJTI~ORIT~' ti ~~~~~~ 27 January 2017 The Chief Executive All Regulated Entities Dear Sir/Madam, OTC Derivatives Trade Repository of the HKMA Training and Testing for the use of the electronic reporting system Further to my letter of 8 April 2016 advising on the training and testing
schedule of the over-the-counter (OTC) derivatives trade repository of the
HKMA (HKTR) for the second half of 2016, I am writing to advise on the
schedule for the first half of 2017.
You may be aware that the Securities and Futures Commission (SFC) and the HKMA had jointly announced on 15 July 2016 that the phase 2 mandatory reporting requirements under the OTC derivatives regime would take effect from 1 July 2017. As compared to the phase 1 mandatory reporting requirements which came into effect on 10 July 2015, the phase 2 mandatory reporting requirements will cover transactions in ALL 5 major asset classes of OTC derivatives products as well as reporting of valuation information. Regulated entities subject to the mandatory reporting requirements (i.e. Authorized Institutions, Approved Money Brokers, Licensed Corporations and Central Counterparties operating in Hong Kong) are required to sign up for the reporting service of the HKTR and complete a scenario test and a product specific test (simulation test —part 1 and part 2) (including entities which intend to report via an agent) on or before 31 May 2017 before they will be accepted for reporting. For those regulated entities which had previously signed up for the reporting service and completed a scenario test for reporting under the Interim Reporting Requirements (applicable only to Licensed Banks) or phase 1 mandatory reporting requirements are also required to complete a product specific test (simulation test —part 2) on or before 31 May 2017, in order to be accepted by the HKTR for reporting additional OTC derivatives products under 55th Floor, Two International Finance Centre, ~ Y~'~' ~ ~ ~ ~(~!8 °sf,~ ~ ~ ~ '~' ~L~2 ~ 55 8 Finance Street, Central, Hong Kong ~ f1~ : www.hkma.gov.hk Website: www.hkma.gov.hk

the Phase 2 mandatory reporting requirements. The schedule and details for the training sessions and simulation tests of the HKTR in the first half of 2017 is set out in the enrolment forms attached to this letter. For regulated entities intending to report through an agent, they must make sure that their agents will meet all technical requirements specified by the HKTR in time and they must test the trade submission process with their agents prior to reporting. A declaration form on the readiness of reporting via an agent is required to be filed with the HKTR before the agent will be accepted for reporting for an entity. Please also note that reporting via an agent by an Authori1zed Institution may constitute an outsourcing arrangement requiring prior approval of the HKMA. Authorized Institutions may check with their usual supervisory contacts at the HKMA on the approval arrangement. If you have any enquiries, please contact the HKTR at (852) 8100 3115 or e-mail to hktr@hkma.gov.hk. Yours faithfully, Head, Payment Systems Operation Division Financial Infrastructure Department

Enrolment form for User Training of the HKTR Reporting Service Name of institution: ____________________________________________________ TR Member code (if applicable): __________________________________________ Training sessions for the first half year of 2017 (Please tick the applicable session) Date Time Language# Venue Enrolment cut-off 22-Feb-2017 14:30 – 18:00 English HKMA Office* 15-Feb-2017 4-May-2017 14:30 – 18:00 English 25-Apr-2017 #Video demonstration (English and Cantonese) on the use of the Reporting Service can be downloaded from the website of the HKTR *Venue: HKMA office, 55/F Two International Finance Centre, Central, Hong Kong My institution would like to nominate the following officers to attend the training session selected above:
Name Telephone Email
Note: Priority will be given to institutions that have signed the Reporting Service Agreement. If the number of enrolled participants exceeds the capacity of the session, additional sessions may be arranged, and the enrolled participants will be advised accordingly. (Please complete and return this form to the HKTR by fax to (852)2878-1679 or by e-mail to hktr@hkma.gov.hk on or before the respective enrolment cut-off dates)

Enrolment form for Simulation Test of the HKTR Reporting Service Name of institution: ____________________________________________________ TR Member code (if applicable): __________________________________________ The Simulation Test is composed of two parts: (i) Scenario Test and (ii) Product Specific Test. New members must complete both Scenario Test and Product Specific Test in order to complete the Simulation Test. For existing members who have previously completed Scenario Test and prepare to report additional products, they are only required to complete the Product Specific Test. The Simulation Test package can be downloaded in the HKTR Info Page at https://hktr.hkma.gov.hk/ (i) Scenario Test Schedule for the first half year of 2017 Participant selects one asset class and follows the schedule set by the HKMA to complete the Scenario Test. (Please tick the applicable period and one applicable asset class) Scenario Test Sessions Enrolment cut-off 13-Mar-2017 to 17-Mar-2017 3-Mar-2017 Foreign Exchange Derivatives Equity Derivatives 22-May-2017 to 26-May-2017 12-May-2017 Foreign Exchange Derivatives Interest Rate Derivatives Equity Derivatives My institution will participate in the scenario test in above selected period. Please contact the following officers of our institution for system and logistical arrangements:
Name Telephone Email
(ii) Product Specific Test for additional products Participant can conduct the Product Specific Test for products which are applicable and notify HKTR to verify the result. Product Specific Test MUST be completed by participant and notify the HKTR on or before 31 May 2017. (Please complete and return this form to the HKTR by fax to (852)2878-1679 or by e-mail to hktr@hkma.gov.hk on or before the respective enrolment cut-off dates)