OTC Derivatives trading in Hong Kong

OTC Derivatives trading in Hong Kong

Frequently Asked Questions

What is an LEI?

The Legal Entity Identifier (LEI) is a unique global identifier of legal entities involved in financial transactions. These can be either companies or government entities that take part in financial transactions. The identifier is used in reporting to financial regulators. All financial companies and funds are required to have an LEI.

The identifier is formatted as a 20-character, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). It connects to key reference information that enables clear and unique identification of legal entities involved in financial transactions. Each LEI contains information about an entity’s ownership structure and thus answers the questions of ‘who is who’ and ‘who owns whom’. Simply put, the publicly available LEI data pool can be regarded as a global directory of participants in the financial market.

Are LEIs or company incorporation number mandatory?

Having an LEI (first priority) or a company incorporation number (second priority) is a requirement for the Hong Kong Monetary Authority (HKMA) and Hong Kong Trade Repository (HKTR) in Hong Kong for OTC transaction reporting. If you have not applied for an LEI yet, we encourage you to do so as soon as possible and to provide us with your LEI once you have it.

For clients who do not have LEIs, the HKMA expects reporting entities like Banque Pictet & Cie SA, Hong Kong Branch (“the Bank”), to have a process in place to inform clients about the necessity to obtain an LEI and encourage or assist them to obtain one. Reporting entities should also ensure that the LEIs they obtain pertain to the entities concerned and are included in the Global LEI System.

The Bank, by being a branch of Banque Pictet & Cie SA, which is subject to FMIA laws in Switzerland, must obtain LEIs (first priority) or company incorporation number (second priority) from its clients before providing services that would trigger reporting obligations in respect of transactions carried out for those clients and use this information in its transaction reports. This requirement applies to all types of mandates.

Consequently, not providing an LEI or the incorporation number to the Bank within the stipulated timeframe will mean that no further transactions in any financial instruments will be allowed. This, in turn, may result in financial consequences.

In other words, no LEI / Incorporation number means no trade.

For what purposes are LEIs or company incorporation number required worldwide?

Currently, LEIs are used in Hong Kong for reporting OTC derivative to the HKTR operated by the HKMA. LEIs may also be required for other regulatory purposes such as FMIA.

Are LEIs confidential?

No. LEIs are not confidential. There is an international database of LEIs and related companies accessible on the internet: https://www.gleif.org/en/.

Where can I get an LEI?

There are a number of LEI issuers around the world that issue and maintain the identifiers and act as primary interfaces to the global directory. These are, typically, financial exchanges or financial data vendors, who are accredited by the Global Legal Entity Identifier Foundation (GLEIF) to issue LEIs.

LEI issuers authorized by Depository Trust & Clearing Corporation (DTCC) include:

In Asia

Outside Asia

Please note that there is also an upfront and annual cost for registering and maintaining an LEI.

The Bank does not recommend any LEI issuer specifically; the list above is merely indicative. 

Clients may select their preferred LEI issuers to register for an LEI. However, Relationship Managers may help clients to register for LEIs. Registering an LEI is a straightforward process requiring questions to be answered online.

What is a legal entity and who needs an LEI?

An LEI enables clear and unique identification of legal entities (natural persons excluded) who participate in financial transactions issued under the Global LEI System. All unique parties that are legally or financially responsible for the performance of financial transactions or that have the legal right in their jurisdiction to enter independently into legal contracts are required to obtain LEIs, regardless of whether they are incorporated or constituted in some other way (e.g. trust, partnership, contractual). Therefore, even if an offshore company does not, for example, engage in any operations at all, if they are entering into a financial transaction and are legally bound by it, they should apply for an LEI.

Is an LEI requiered for trust entity that is a contract rather than an entity?

Yes, except if the trust of legal arrangement is registered and can provide a company’s incorporation number. All unique parties that are legally or financially responsible for the performance of financial transactions or have the legal right in their jurisdiction to enter independently into legal contracts are required to obtain LEIs, regardless of whether they are constituted in some other way (e.g. trust, partnership, contract). As per Switzerland rules, the trustee must be identified rather than the trust itself, for reporting purposes. The trustee can be either an individual or a company, for the latter identified with LEI or company incorporation number. This is the preferred solution. The Bank may also accept that an LEI for the trust itself is provided, especially if this already exists. In such a case, this must be mentioned in the onboarding form (i.e. the LEI identifies the trust itself and not the trustee).

Can a company have more than one LEI?

No. In general, a legal entity shall have only one LEI.

What happens if a legal entity does not provide the bank with an LEI or its incorporation number?

HKMA issued a circular on 19 February 2019 to communicate the first phase ordering the use of LEIs to take effect on 1 April 2019. Pursuant to the Joint Consultation Conclusions Paper on Enhancements to the OTC Derivatives Regime for Hong Kong published in June 2018, the first phase applies only to a reporting entity’s side of a transaction, in which all reporting entities are required to use an LEI to identify themselves when reporting to the HKTR effective from 1 April 2019.

In addition, HKMA reminded all reporting entities (including the Bank in this case) to put in place a process to request LEIs from clients after 1 April 2019. For clients who do not already have LEIs, this process includes informing clients about the necessity to obtain an LEI and to encourage or assist them to obtain it.

As a branch of a Swiss financial institution, the Bank should comply with Swiss legislation (such as FMIA). Therefore, transactions on the securities covered by these transactions will be blocked for entities that do not have a valid LEI or the entities’ incorporation number.

What about ‘no LEI equals no trade’ in Hong Kong?

The Bank must obtain LEIs or Incorporation number from its clients before providing services that would trigger reporting obligations in respect of transactions carried out for those clients and use this information in its transaction reports.

Consequently, not providing an LEI or Incorporation number to the Bank within the stipulated timeframe will mean that no transactions in any financial instruments are allowed. This, in turn, may result in financial consequences.

In other words, no LEI or Incorporation number means no trade

Who does the bank report OTC transaction to?

The Bank reports its transactions to the HKTR, operated by the HKMA.

As the HKTR is a centralized registry that maintains an electronic database of records of OTC derivatives transactions. By collecting and providing OTC derivatives transaction information to regulatory authorities, the HKTR plays a vital role in helping authorities to carry out their market surveillance responsibilities.

This will help maintain the stability of the financial systems. It also helps increase transparency in the market, promotes standardisation and provides a level of consistency in the0 quality and availability of transaction data.

As a branch of Banque Pictet & Cie SA, the Bank is subject to the Swiss legislation FMIA. Therefore, when it is counterparty to a transaction that falls within the scope of the regulations, it triggers FMIA reporting obligations.

For further information governing FMIA reporting obligation, please refer to the FAQs online at www.pictet.com/market-regulations

How does derivatives reporting work in Switzerland and Honk Kong?

All openings, daily valuation, modifications and closures of OTC derivatives trades within the scope of Swiss or Hong Kong OTC regulations need to be reported to a Swiss trade repository and a Honk Kong Trade repository by the end of the day after the execution (or maximum two days after the execution to the HKTR).

This includes the conclusion, modification and termination of any derivative contract within the scope with any counterparty (including individuals and third-country entities). The transmitted data include both transaction and counterparty data. The report must indicate the other counterparty of the trade. This is done via the Legal Entity Identifier (LEI) or company incorporation number.

For natural persons an internal code number (anonymised) will be used both in Switzerland and in Hong Kong.

The Bank will perform this reporting on the entity behalf both in Hong Kong and Switzerland.

What do OTC Derivate transactions cover?

Over-the-counter (‘OTC”) derivatives cover the followings:

  • Any interest rate derivatives contracts (e.g. interest rate swaps)
  • Any credit derivatives contracts (e.g. credit derivatives swaps or index)
  • Any foreign exchange derivatives contracts (e.g. forwards, swaps, options, non- deliverable forwards (NDF), non-deliverable options (NDO), accumulator/ decumulator (ACDC))
  • Any commodity derivatives contracts (e.g. ACDC, pivots, forwards, options)
  • Any equity derivatives contracts (e.g. options, ACDC)

Options may consist of vanilla options or exotic options such as single/double options.

The following are not considered as OTC derivatives under HKMA rules:

  • Dual currency investments (DCI), dual currency deposits (DCD) and dual currency deposit notes (DCN) fall under the definition of structured deposits rather than derivatives contracts.
  • Structured products or notes, FX spots, securitised products and certificates.
  • The Bank is not authorized to trade exchange-traded derivatives, i.e. futures and options.

What is meant by ‘securities’?

FMIA Securities are standardised certificated and uncertificated securities, derivatives and intermediated securities, which are suitable for mass trading.

How does securities reporting work in Switzerland?

CBPSA in Geneva, as a participant admitted to a Swiss trading venue (mainly SIX exchange in Zürich) shall report all transactions they execute involving securities admitted to trading on a Swiss trading venue.

The Bank, as a foreign branch of Swiss securities dealers (BPSA) will fulfil its reporting obligation under the membership of their Swiss parent company BPSA.

In particular, the following must be reported: the name and number of purchased or sold securities, the volume, date and time of the transaction; the price; the details necessary to identify the beneficial owner.

The reporting duty also applies to transactions in derivatives whose underlying instruments are securities admitted to trading on a Swiss trading venue. 

The reporting duty applies not only to transactions on own account, but also to transactions executed on behalf of a client.

BPSA will perform this reporting on behalf of the Bank in Switzerland.

What is meant by ‘centrally cleared OTCS’?

Central clearing is currently a requirement mostly applicable to large financial institutions. As a client of the Bank, you are not concerned by central clearing.

What are the initial and variation margins requirements?

In some cases (depending on the client’s classification), OTC derivative trading regulations require the bilateral exchange of margining or collateral to cover market and credit risk.

Determining the client’s classification and potential need for margining requirements is covered by section 4 of the OTC client onboarding form.

Variation margin is aimed at protecting the Bank against market movements while initial margin seeks to protect the Bank against default by the counterparty.

Margining requirements will be dealt with directly by the Bank without your being involved.

The Bank seeks your acknowledgment to collect the above information and to inform us in due course should there be a change in circumstance, such as a change in threshold for margining. This applies to all types of mandates.

What are covered entity or foreign covered entities in the context of margining?

Covered Entity (CE) means a financial counterparty, a significant non-financial counterparty, or another entity designated by the HKMA, but excludes a sovereign (i.e. central government of a country), central bank, public-sector entity, multilateral development bank and the Bank for International Settlements.

Financial counterparty refers to any entity for a one-year period from 1 September each year to 31 August of the following year, if the entity itself or the group to which it belongs has an average aggregate notional amount of non-centrally cleared derivatives exceeding HKD 15 billion. For significant non-financial counterparties, an aggregate notional amount of non centrally cleared derivatives exceeding HKD 60 billion is used to assess the need for margining using the same phase-in period defined for financial counterparty.

The margin provisions apply to the Bank only when it enters into transactions with a CE that are booked in the Bank’s book. However, the Bank will be subject to initial margin (IM) requirements if (i) the counterparty is a covered entity and (ii) both the Bank and the covered entity have an average aggregate notional amount of noncentrally cleared OTCD exceeding the threshold stipulated in the phase-in schedule.

Foreign Covered Entity (FCE) refers to an entity operating outside of Hong Kong which, if operating in Hong Kong, would be classified as a Covered Entity.

Some information is quoted from Source: https://en.wikipedia.org/wiki/Legal_Entity_Identifier.

Non official translation – If there is any inconsistency or ambiguity between the English version and the Chinese version, the English version shall prevail.

Disclaimer

The information, tools and material presented in this document are provided for information purposes only and are not to be used or considered as an offer, an invitation to offer or solicitation to buy, sell or subscribe for any securities, commodities, derivatives, (in respect of Singapore only) futures, or other financial instruments (collectively referred to as “Investments”) or to enter into any legal relations, nor as advice or recommendation with respect to any Investments. This document is intended for general circulation and it is not directed at any particular person. This document does not have regard to the specific investment objectives, financial situation and/or the particular needs of any recipient of this document. Investors should seek independent financial advice regarding the appropriateness of investing in any Investment or adopting any strategies discussed in this document, taking into account the specific investment objectives, financial situation or particular needs of the investor, before making a commitment to invest.Bank Pictet & Cie (Asia) Ltd (“BPCAL”)/ Banque Pictet & Cie SA, Hong Kong Branch (“Pictet HK Branch”) has not taken any steps to ensure that the Investments referred to in this document are suitable for any particular investor, and accepts no fiduciary duties to any investor in this regard, except as required by applicable laws and regulations. Furthermore, BPCAL/Pictet HK Branch makes no representations and gives no advice concerning the appropriate accounting treatment or possible tax consequences of any Investment. Any investor interested in buying or making any Investment should conduct its own investigation and analysis of the Investment and consult with its own professional adviser(s) as to any Investment including the risks involved.

This document is not to be relied upon in substitution for the exercise of independent judgment. The value and income of any Investment mentioned in this document may fall as well rise. The market value may be affected by, amongst other things, changes in economic, financial, political factors, time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Furthermore, foreign currency rates of exchange may have a positive or adverse effect on the value, price or income of any Investment mentioned in this document. Accordingly, investors must be willing and able to assume all risks and may receive back less than originally invested.Past performance should not be taken as an indication or guarantee of future performance and no representation or warranty, expressed or implied, is made by BPCAL/Pictet HK Branch regarding future performance.

This document does not constitute the investment policy of BPCAL/Pictet HK Branch, or an investment recommendation, and merely contains the different assumptions, views and analytical methods of the analysts who prepared them. Furthermore, the information, opinions and estimates expressed herein reflect a judgment at its original date of publication and are subject to change without notice and without any obligation on BPCAL/Pictet HK Branch to update any of them. BPCAL/Pictet HK Branch may have issued or distributed other reports or documents that are inconsistent with, and reach different conclusions from, the information presented in this document.

While the information and opinions presented herein are from sources believed to be reliable, BPCAL/Pictet HK Branch is not able to, and does not make any representation or warranty as to its accuracy or completeness. Accordingly, BPCAL/Pictet HK Branch accepts no liability for loss arising from the use of or reliance on this document. BPCAL/Pictet HK Branch reserves the right to act upon or use any of the information in this document at any time, including before its publication herein.BPCAL/Pictet HK Branch and its affiliates (or employees thereof) may or may not have long or short positions in, and buy or sell, or otherwise have interest in, any of the Investments mentioned herein, and may or may not have relationships with the issuers of or entities connected with Investments mentioned in this document. BPCAL/Pictet HK Branch and their affiliates (or employees thereof) may act inconsistently with the information and/or opinions presented in this document.

The information used to prepare this document and/or any part of such information, may have been provided or circulated to employees and/or one or more clients of BPCAL/Pictet HK Branch before this document was received by you and such information may have been acted upon by such recipients or by BPCAL/Pictet HK Branch.

This document is provided solely for the information of the intended recipient only and should not be reproduced, published, circulated or disclosed in whole or in part to any other person without the prior written consent of BPCAL/Pictet HK Branch.

Singapore: This document is not directed to, or intended for distribution, publication to or use by, persons who are not accredited investors, expert investors or institutional investors as defined in section 4A of the Securities and Futures Act (Cap. 289 of Singapore) (“SFA”) or any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject BPCAL and any of its affiliates or related corporations to any prospectus or registration requirements.BPCAL is a wholesale bank regulated by the Monetary Authority of Singapore (“MAS”) under the Banking Act Cap. 50 of Singapore, an exempt financial adviser under the Financial Advisers Act Cap. 110 of Singapore (“FAA”) and an exempt capital markets license holder under the SFA.

Hong Kong: This document is not directed to, or intended for distribution, publication to or use by, persons who are not “professional investors” within the meaning of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules made thereunder (the “SFO”) or any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject Pictet HK Branch and any of its affiliates or related corporations to any prospectus or registration requirements. If you do not want Pictet HK Branch to use your personal information for marketing purposes, you can request Pictet HK Branch to stop doing so without incurring any charge to you.In distributing investment products as agents for third party service providers, Pictet HK Branch is an agent of the third party service provider and the product is a product of the third party service provider but not Pictet HK Branch. In respect of an eligible dispute (as defined in the Terms of Reference for the Financial Dispute Resolution Centre in relation to the Financial Dispute Resolution Scheme) arising between Pictet HK Branch and you out of the selling process or processing of the related transaction, Pictet HK Branch is required to enter into a Financial Dispute Resolution Scheme process with you; however any dispute over the contractual terms of the product should be resolved between directly the third party service provider and you.Banque Pictet & Cie SA is a limited liability company incorporated in Switzerland . It is an authorized institution within the meaning of the Banking Ordinance and a registered institution (CE No.: BMG891) under the SFO carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities. The registered address of Pictet HK Branch is 9/F., Chater House, 8 Connaught Road Central, Hong Kong.

Warning: The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. Please contact Pictet HK Branch in Hong Kong in respect of any matters arising from, or in connection with this document.For information about personal data protection, please refer to the Pictet Group’s Privacy Notice available at https://www.pictet.com/privacynotice.

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