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Given its renowned Court of Final Appeal incorporating expertise from other common law jurisdictions, Hong Kong has been fast developing into an international dispute resolution center. However, as an international dispute resolution center it must always be open to influence from and alert to foreign extra-territorial trends and changes. In the last few years, we had no shortage of litigations or arbitrations of an international dimension. The trend is growing fast. It may soon prove that at least part of the London litigation market and its expertise will gradually shift to Hong Kong. The Hong Kong legal professions should be ready to align themselves to this challenge and the opportunities associated with it. One such aspect is the recent development in the regulation of derivatives.

Last week it was reported that the European regulators have clashed with the US over the timing of reforms to the $633 trillion derivatives market. EU regulators in a strongly worded letter urged further delays to guidelines that would extend the reach of US regulators overseas.

There has always been a tension over the application of national laws overseas. The spectrum of regimes is rather complicated. It depends on whether or not we are talking about enforcement of court judgment, arbitral awards or regulatory disciplines.

Enforcement of court judgments appears to be the most difficult one. First of all, there can be bilateral treaties for mutual enforcement of judgments. The format may be extended to multi-jurisdictions, such as mutual enforcement in the European Union. Secondly, in the common-law world a party sought to enforce a foreign judgment in his favor may sue on the judgment he had obtained, although there may be no direct enforcement. Penal laws such as tax law and criminal law are normally not enforceable. The civil-law system emphasizing sovereignty seems to be more difficult. No foreign judgment may be directly enforced unless there are treaties. It may be that criticisms against China in the enforcement of foreign laws will not be justified because you would not normally expect a US judgment to be directly enforced in France or Germany.

Enforcement of arbitral awards seems to be much easier. So long as a state is a member of the New York Convention, it is enforceable in any party state. Notwithstanding this advantage, the types of disputes which may be arbitrable and thus enforced in a foreign state seem to focus on commercial disputes.

Enforcement of regulatory disciplines is a matter between governments. In the financial and economic arena there seems to be a lot of cooperation in the form of international treaties across all economic disciplines: trade, investment and intellectual property. The process tends to be far more complicated.

In the case of the derivatives market, we are constantly seeing the strain over how different countries should split the job of overseeing the global derivatives market. It is understandable that the US, after it suffered in its 2008 bailout of AIG after losses at its London derivatives arm, is now seeking wide authority to police foreign trading that puts its domestic taxpayers at risk. However, now at issue is the cross-border guideline of the US Commodities Futures Trading Commission (CFTC) which represents a hard line approach that has caused government concerns in the EU and Asia. The proposed CFTC cross-border guidance requires foreign banks trading with US companies to comply with US transaction rules. Overseas branches of US banks will be covered, as would US-based hedge funds incorporated abroad.

Should Hong Kong follow those guidelines? The problem is obviously that the Hong Kong Monetary Authority (regulating the banks) and the Securities and Futures Commission (regulating the rest of everything) will have to navigate overlapping but contradictory rules in the US and the European Union.

How would Hong Kong's dispute-resolution system cope with such problems? There will soon be tabs on banks and hedge funds whose international swap trading could have a direct impact on the US economy. Hong Kong cannot escape the impact.

At present the CFTC is trying to finalize the guidance before an exemption for foreign market participants expires on July 12, thus imposing the rules more widely. Perhaps this is not the first time that we have seen unilaterally imposing rules overseas that would have an impact on our economy.

There is however the other side of the coin. In the US, as early as May 16 it was reported that US Federal regulators approved new rules but they also softened a crucial aspect of the plan in the face of lobbying pressure from the nation's biggest banks. It was said in the fine print, that the CFTC also effectively allowed a handful of select banks to continue controlling the $700 trillion derivatives market. It was said that just five banks hold more than 90 percent of all derivatives contracts, which allow companies to either speculate in the markets or protect against risk.

While the European Union has warned that an approach in which jurisdictions require that their own domestic regulatory rules be applied to their companies' derivatives transactions taking place in broadly equivalent regulatory regimes abroad is not sustainable, and that the EU will certainly refuse to follow the US rules as presently drafted, it is doubtful whether Hong Kong's legal professions should now adopt a wait and see attitude. It may soon come that the existing rules of our regulatory regimes at the regulatory front, and our conflict of laws rules in private litigation or arbitrations will be tested soon again.

The author is a Hong Kong barrister and chairman of the Hong Kong Bar's Special Committee on Planning and Policy.

(HK Edition 06/05/2013 page1)