12 - Central Clearing Counterparties and Derivatives

Summary

During the 2008–9 global financial crisis, credit default swaps created conduits in the financial system which facilitated the transmission of systemic risk. In response, the Financial Stability Board recommended over-the-counter derivative clearing through a central clearing counterparty. Although the Securities and Futures Commission is the designated supervisor and resolution authority for Hong Kong’s central clearing counterparty, OTC Clear, its supervisory ambit, capacity, and powers are insufficient to mitigate systemic risk and manage financial stability. This chapter argues that a securities supervisor is not the optimal supervisor or resolution authority for OTC Clear. Central clearing counterparties require credit and liquidity risk management which aligns more with banking supervision and central banking. This is supported by the dominance of foreign exchange and interest rate derivatives being traded in Hong Kong. The optimal resolution authority for OTC Clear is the Hong Kong Monetary Authority, being the resolution authority for systemically important banks, having monetary authority expertise that aligns with foreign exchange and interest rate risks, experience in mitigating credit and liquidity risks, and being designed to manage financial stability.