Hong Kong and Singapore are seeking to snare a bigger share of the US$540 trillion global derivatives business, taking advantage of tough new UK and European banking rules and uncertainty created by Britain's plans to leave the European Union.
Over the past five months, regulators from the two Asian financial centers have been separately holding talks with the Asia Securities Industry and Financial Markets Association ("ASIFMA"), which represents global lenders in Asia, five people with direct knowledge of the matter told Reuters.
At the center of the discussions is what kind of regulatory changes would be needed in Hong Kong and Singapore to get more banks to book their derivatives business in one of the two places.
If the Hong Kong Monetary Authority ("HKMA") and the Monetary Authority of Singapore ("MAS") are successful, they could lure billions of dollars of banking business and eventually create what could amount to thousands of jobs in Asia.
These derivatives would include products such as interest rate swaps or foreign exchange derivatives, which allow companies and investors to hedge their exposure to interest rate rises and currency swings.
Asia has traditionally accounted for less than 10 percent of the global over-the-counter derivatives market, according to Bank for International Settlements data.
Global banks have typically held the majority of Asia-related trades on their European balance sheets, with London being a major booking center for such deals. This has allowed them to gain economies of scale by aggregating their capital and infrastructure in one or two locations, while London also has a deep talent pool of employees with expertise in managing and processing the trading book.
During the past three years, though, many banks have begun to review their Asia trade booking arrangements because of new UK and European rules that have made Britain less attractive as a global hub for Asian risk.
Brexit has made the situation more urgent by prompting many banks to move some of their operations, including trading books, out of London.
This has sparked broader internal discussions over whether more of the London book holding Asia trades should also be moved to Asian financial centres, the sources said.
Banks looking to book more trades in Asia include HSBC, Standard Chartered, UBS and Credit Suisse, one of the sources said.
In a statement, HSBC said it would support clients as they pursued opportunities in Asia: "Hong Kong is one of the world’s leading financial centres and continues to be at the heart of HSBC’s growth plans."
UBS, Standard Chartered and Credit Suisse declined to comment.
Booking derivatives trades in Hong Kong and Singapore is currently expensive for global banks because they are not yet allowed by the HKMA and the MAS to use their own internal risk-management models, which typically allow banks to hold less capital against such trades than standard models used by regulators.
Now, though, regulators are considering approving these internal capital calculation models.
For Hong Kong and Singapore, grabbing a much larger chunk 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, according to one of the sources.
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.
But it would also increase the overall level of financial risk, potentially leaving the authorities on the hook in the event a bank gets into trouble.
"The HKMA has been in discussion with ASIFMA and its member institutions to explain the HKMA's supervisory policies and processes with regard to the establishment of a derivatives hub in Hong Kong," a spokeswoman for the HKMA said in a statement.
Adding: "The HKMA welcomes banks to establish a derivatives hub in Hong Kong on the understanding that the risks associated with the activity will be properly managed."
The MAS said in a statement that banks were looking to book more financial activity in Singapore due to the rapid growth of Asian markets and client preferences, among other reasons.
"In order to meet MAS' validation standards for the use of more advanced approaches in capital computation, [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," the statement added.
A spokeswoman for ASIFMA declined to comment.
The MAS and HKMA are not working together on their separate initiatives.
The HKMA is increasing staff with the technical expertise necessary to handle the model approval process, and may also hire external professional advisors if necessary. It is also planning to issue some guidance to banks on the matter, according to two of the sources.
The regulator is also reviewing section 87 of the Hong Kong Banking Ordinance, which currently limits banks' ability to hold large amounts of equity derivatives exposure in the city.
Banks will have to demonstrate that they will not only book the trades in Hong Kong, but also have risk management and back office staff on the ground in the city too, the people added.