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Hong Kong and Singapore are vying for a greater share of the USD 540 trillion global derivatives market,¹ taking advantage of an expected movement of money amid stricter banking rules in the United Kingdom (UK) and the European Union (EU) and uncertainty caused by Brexit.

Key insights

Hong Kong and Singapore are looking to grow their share of the USD 540 trillion global derivatives market and gain greater influence in the international finance sector
Regulators in Hong Kong and Singapore are working to introduce the regulatory changes required to attract additional banking activity to their jurisdictions
Asian financial centres are receptive to banks establishing derivatives hubs in their regions, provided that risks will be properly managed

Regulators from the two Asian financial centres have reportedly held separate talks with the Asia Securities Industry and Financial Markets Association (ASIFMA), which represents global lenders in the region, to boost their global derivatives businesses.² The products include interest rate swaps or foreign exchange derivatives that allow investors to hedge their exposure to rising interest rates and take advantage of volatility in currencies. Asia represents less than 10 percent of the global over-the-counter derivatives market, according to Reuters, citing Bank for International Settlements data.³

The Hong Kong Monetary Authority (HKMA), the Monetary Authority of Singapore (MAS) and the Securities and Futures Commission (SFC) may be taking advantage of uncertainty caused by tougher new banking rules in Europe and the UK, which have made Britain appear less attractive as a global hub for Asian risk. The UK's plans to leave the EU also creates an opportunity for the Asian financial centres as large banks look to move some of their operations out of London.

New business would promote financial centre status

For the two Asian financial centres, a larger derivatives business would bring additional revenues and jobs boosting their position in the international finance sector

“For Hong Kong and Singapore, acquiring a much larger section of the global derivatives market would promote their status as global financial centres by helping them diversify away from asset management and offering them other benefits," Reuters reported.⁴ "These would include boosting demand for consultancy and IT services, and potentially boosting fees for local clearing houses that sit in between trades to guarantee payment.”

According to Bloomberg, HSBC Holdings Plc and Standard Chartered Plc, two of Europe's largest banks, have already started shifting some of their derivatives business to Hong Kong.⁵

Financial industry recruiters also expect more banking jobs to be created in Singapore and Hong Kong if derivatives work shifts to those locations. Those roles could include sales and trading positions as well as those involved in booking trades. Former derivatives trader Matt Hoyle, who now runs a Hong Kong search firm, noted that, “It could well be hundreds of extra jobs in the actual banks, but when you add third-party consultants and contractors, then more than 1,000 positions isn't unthinkable."⁶

Advanced risk models required

In preparation, regulators are working to enhance their risk models

According to reports, discussions between ASIFMA and regulators in both Hong Kong and Singapore are focused on the required regulatory changes, including ensuring robust risk management, to encourage more banks to book their derivatives business in one of the two centres.

“More firms are likely to move parts of their derivatives books to Hong Kong if the city tweaks its rules to allow so-called advanced risk models, which would reduce capital requirements,” Bloomberg reported.⁷

The HKMA said it is open to banks setting up a derivatives hub in Hong Kong provided that the risks associated with the activity will be appropriately managed including sufficient capital and strong risk management systems and processes.⁸

In Hong Kong, the SFC is planning a revamp of its derivatives rules and is expected to hold a public consultation on over-the-counter derivatives covering topics from valuation to record keeping.⁹ The goal is to help firms to more easily book trades in Hong Kong.

According to Terry Yang, a partner in the financial services practice at Clifford Chance LLP, the SFC consultation “could have a positive impact for Hong Kong as a major derivatives booking hub.”¹⁰

In Singapore, the MAS cited “growth of Asian markets, client preferences and the ability to manage risks where trades originate as some of the reasons why financial institutions carry out such activities in Singapore."¹¹

To meet the MAS standards, the regulator said in a statement that financial institutions must "demonstrate that they have robust risk management systems and processes to measure and validate the accuracy and consistency of all relevant risk components."¹²

Projecting confidence and caution

With Brexit and new banking rules set to complicate transactions in Europe, some Asian financial centres see this as an opportunity to attract new business. Hong Kong and Singapore are looking to capitalize on this potential shift while being careful to ensure that appropriate risk management systems are in place to instill investor confidence.

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