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Refinements to Hong Kong OTC derivatives licensing framework

The Securities and Futures Commission (SFC) issued its Consultation Conclusions on the OTC derivatives regime for Hong Kong – Proposed refinements to the scope of regulated activities and competence requirements under the OTC derivatives licensing regime (Conclusions) on 10 June 2020.


The Securities and Futures Ordinance (SFO) was amended in 2014 to introduce a licensing regime for participants in the Hong Kong OTC derivatives market, although the commencement date of the licensing regime has been delayed and it is not yet in effect. In December 2017, the SFC issued a consultation paper that proposed refinements to the OTC derivatives licensing regime.

The Conclusions set out changes to the scope of regulated activities under the licensing regime, which will be reflected in amendments to the SFO and subsidiary legislation.

Clarifications on scope of regulated activities affecting fund managers

Persons who carry on a business of managing OTC derivatives portfolios will need to be licensed for expanded type 9 (asset management) regulated activity (Expanded RA 9) under the SFO.

The Conclusions confirm the intention of the SFC to implement a number of changes to the licensing regime that are beneficial to asset managers:

  • The scope of Expanded RA 9 will be refined to exclude the management of OTC derivatives products for wholly-owned group companies.
  • It will be made clear that an asset manager that deals in forex derivatives as part of its asset management strategies will not need to be licensed for type 3 regulated activity (leveraged foreign exchange trading) if it (i) is licenced for Expanded RA 9; (ii) is permitted by its licence to manage portfolios of OTC derivatives products for another person; (iii) deals in forex derivatives solely for the purposes of managing OTC derivative products; and (iv) such dealing constitutes an OTC derivatives dealing act.
  • The provision of client clearing services by an asset manager for the funds it manages will be carved-out from type 12 regulated activity (providing client clearing services for OTC derivative transaction) (New RA 12). In addition, the definition of New RA 12 will be amended to clarify that providing ancillary services to facilitate client clearing will not fall within New RA 12. However, if an asset manager is a clearing member or a client of a clearing member, and provides clearing services to its clients, it will need to be licensed for New RA 12.

Asset managers should note that they will need to be licensed for type 11 regulated activity (dealing in OTC derivative products or advising on OTC derivative products) (New RA 11) if they operate a central dealing desk in Hong Kong for their group’s OTC derivative trading activities.

An additional exemption from the need to be licensed for Expanded RA 9 will be added for professionals where the services in managing OTC derivative products are wholly incidental to discharging their professional roles (i.e., solicitors, counsel, certified public accountants and trust companies registered under Part 8 of the Trustee Ordinance).

Other exclusions from scope of regulated activities

The Conclusions also state that the following activities will be excluded from the scope of regulated activities for the purposes of the OTC derivatives licensing regime: 


Corporate treasury activities of non-financial groups

Non-financial groups conducting corporate treasury activities will not need to be licensed for the Expanded RA 9, New RA 11 or New RA 12. The meaning of “financial group” will include groups of companies primarily engaging in regulated activities, banking business or insurance business in Hong Kong or elsewhere.

Where a non-financial group of companies includes a client entity of a clearing service provider, the group’s corporate treasury activities will be excluded from RA 12 provided that the clearing and settlement services are provided by the group to its affiliates only. The exclusion will not extend to the corporate treasury activities of financial groups and their intra-group hedging activities.


Post-trade multilateral portfolio compression services

The SFO will be amended so that providers of algorithmic calculations for the termination, modification and placing of OTC derivative transactions which facilitate risk reduction will not need to be licensed for New RA 11. Consequential amendments will also be made to the Securities and Futures (OTC Derivative Transactions – Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules. However, the SFC noted that, if a multilateral portfolio compression service provider provides, in addition to algorithmic calculations, an automated trading system which allows termination or modification of trades for OTC derivative products, the provider will be subject to other licensing or authorisation requirements.


Client clearing services by eligible overseas participants

The scope of New RA 12 will be refined so that, subject to certain prerequisites, clearing members of overseas central counterparties who market their services in Hong Kong will not need to be licensed for New RA 12.

Competence requirements for individual licensed representatives

The SFC will introduce new examination and continuous professional training requirements for the new regulated activities and will provide grandfathering arrangements for existing market participants. The SFC will announce details of the grandfathering arrangements and new competence requirements in due course and will incorporate these requirements into its Licensing Handbook.

When will the licensing regime come into effect?

The SFC has not announced a date on which the OTC derivatives licensing regime will come into effect, as it will be dependent on the amendments to the SFO and subsidiary legislation. However, the SFC has confirmed that it will implement the new OTC derivatives licensing regime only after amendments to other relevant subsidiary legislation, including the Securities and Futures (Financial Resources) Rules, are completed. Intermediaries should continue to monitor SFC announcements.

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