Finality Orders in the Clearing System and OTC Derivatives Regulation in Hong Kong

This paper argues that the Central Counterparty (CCP) clearing system will be able to provide an effective platform in dealing with counterparty risk and insolvency risk in OTC derivative transactions. First, this paper assesses how authorized institutions can enter an OTC derivative contract in Hong Kong (HK). Second, it illustrates the issues in the context of the ISDA Master Agreement in the global financial crisis and why a new regulatory method is required. Third, the paper explains the principal functions of the designated clearing and settlement system. The paper concludes that the proposed CCP clearing system aimed at minimizing the counterparty risk, and which arose from insolvency, shows a shift in regulatory policy (welfare policy) in OTC derivatives to the regulatory policy (systemic stability) of finality orders in a clearing system. In theoretical terms, it is important to understand the shift of policy in which derivative contracts are regulated in HK. In practical terms, the understanding of regulatory policies guides the understanding of the relationship between the derivative regulation and economic stability alignment with the governmental objective