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SFC consultation on investor identification and reporting regime

On 4 December 2020, Hong Kong’s Securities and Futures Commission (SFC) published its Consultation on proposals to (1) implement an investor identification regime at trading level for the securities market in Hong Kong and (2) introduce an over-the-counter securities transactions reporting regime for shares listed on the Stock Exchange of Hong Kong (Consultation). The Consultation paper is available here.

The proposed investor identification regime seeks to enhance trading transparency and the effectiveness of the SFC’s market surveillance function. Currently, only the information relating to an Exchange Participant that inputs securities orders is captured by the Stock Exchange of Hong Kong (SEHK). If the SFC requires further information about such orders, it needs to obtain this information from the relevant Exchange Participants. The proposed investor identification regime means the SFC will have close to real time information on the identity of investors trading in Hong Kong listed securities and will enhance the ability of the SFC to identify suspicious trading activities.

The Consultation notes that introduction of the regime is in line with developments in major jurisdictions, including those in the United States, Europe, Australia, Singapore and Mainland China.

The deadline for submissions on the Consultation is 4 March 2021.

Proposed investor identification regime

The first section of the Consultation proposes new requirements for licensed corporations and registered institutions to provide a client’s name and identification information to SEHK when submitting on-exchange orders for execution or reporting off-exchange trades in listed securities to SEHK.

Under the proposed arrangements, licensed corporations and registered institutions will need to submit a data file, namely “BCAN-CID Mapping File”, which contains the client’s Broker-to-Client Assigned Number (BCAN) as well as Client Identification Data (CID) to SEHK (either directly or indirectly) in connection with such orders. Where an order is carried out through a chain of regulated intermediaries, the obligations for collecting the CID, assigning the BCAN as well as submitting the mapping file rest with the last regulated entities in the chain whose direct client is not a regulated entity.

For orders placed by or on behalf of investment funds, the client whose name and identification information needs to be collected and reported to SEHK will be the relevant fund (where it is a legal entity) or the manager (where the fund is not itself a legal entity, for example a unit trust).

For orders placed by an investment manager for a discretionary account client, the client whose name and identification information needs to be collected and reported to SEHK will be the legal entity that has opened the trading account with the regulated entity (i.e. the discretionary account client).

A single order placed on behalf of multiple clients will need to be tagged as an aggregated order and information on each underlying order relating to each relevant client will need to be submitted to SEHK subsequently.

Implementation of the proposed investor identification regime means that regulated intermediaries will need to enhance their client take-on procedures. Regulated entities will also need to comply with the Personal Data (Privacy) Ordinance and obtain written or other express consent from individual clients on or before the collection of CID as required under the regime.

Proposed OTC securities transactions reporting regime

The second section of the Consultation proposes a “complementary initiative” to the investor identification regime, and covers reporting requirements in relation to transactions which are not recorded by SEHK as on-exchange orders nor required to be reported to SEHK as off-exchange trades (OTC Securities Transactions). Under the proposed reporting regime, licensed corporations and registered institutions that have made a transfer of shares that is effected by an OTC Securities Transaction in respect of which stamp duty is chargeable in Hong Kong will be required to report specified details to the SFC by one trading day after the date of transfer / deposit / withdrawal.

Implementation timeline

Subject to the outcome of the Consultation, the investor identification regime is expected to be implemented by Q1 of 2022 at the earliest whereas the OTC Securities Transactions Reporting Regime is expected to be launched around Q3 of 2022 at the earliest.

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