Hong Kong to Align OTC Crypto Derivatives Market with EU Reporting Standards

Hong Kong to Align OTC Crypto Derivatives Market with EU Reporting Standards

Hong Kong's financial regulators are set to implement global reporting standards for over-the-counter (OTC) crypto derivatives, mirroring the European Union’s framework. The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) announced their plans on September 26, 2024, aiming to enhance the region's OTC derivatives reporting regime.

The new regulations will introduce Digital Token Identifiers (DTIs) and other international identifiers, aligning with standards established by the European Securities and Markets Authority (ESMA). These updates are anticipated to take effect by September 29, 2025.

This initiative follows a consultation process initiated in March 2024, where the HKMA and SFC sought feedback from financial institutions and stakeholders. Participants highlighted the necessity of adopting international standards to facilitate smoother cross-border transactions and compliance with regulations.

One significant concern raised during the consultation was the classification of crypto OTC derivatives, which do not fit neatly into the traditional asset categories of interest rates, foreign exchange, credit, commodities, and equities. Stakeholders advocated for the use of DTIs, which have already been incorporated into European reporting standards since October 2023.

In their joint statement, the HKMA and SFC confirmed their intention to utilize DTIs for crypto asset underliers in the OTC derivatives market. They also recognized the importance of the Unique Product Identifier (UPI), which is already required in other jurisdictions, as a key element of Hong Kong's revised reporting system.

By aligning with global standards, the HKMA and SFC aim to enhance transparency and consistency in the classification and identification of digital assets within the region. They plan to mandate the reporting of Unique Transaction Identifiers (UTIs), UPIs, and Critical Data Elements (CDEs) to promote international standardization and harmonization of data across OTC derivatives markets.

This decision reflects the increasing global demand for improved transparency and compliance in the crypto derivatives sector, as more nations move to regulate digital assets. The updated framework is expected to enhance regulators' capacity to monitor financial markets effectively, identify fraudulent activities, and mitigate systemic risks.

The standardization of DTIs and UPIs will enable authorities to collect precise data on OTC derivatives transactions, ensuring compliance with both local and international regulations. This timeline allows financial institutions sufficient time to adapt to the new requirements and develop the necessary technological infrastructure.

Additionally, this regulatory update coincides with Hong Kong's ongoing exploration of central bank digital currencies (CBDCs). In September 2024, the HKMA launched the second phase of its digital Hong Kong dollar pilot, known as Project e-HKD+, which focuses on settlement for tokenized assets and enhancing payment programmability.