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The Securities and Futures Commission (SFC) previously consulted on amendments to the statutory framework for Hong Kong’s over-the-counter (OTC) derivatives licensing regime to refine the scope of regulated activities under the regime. The SFC published its consultation conclusions in June 2020. These amendments have now been introduced to the Legislative Council as part of the Securities and Futures and Companies Legislation (Amendment) Bill 2021 (the Bill). Our earlier article on the SFC’s consultation conclusions is available here.
Refinements to scope of regulated activities
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 Securities and Futures Ordinance (SFO), subject to exceptions. Equally, persons who carry on a business of advising on OTC derivative products or dealing in OTC derivative products will need to be licensed for type 11 regulated activity (RA 11) under the SFO, subject to exceptions. Asset managers should note that they will need to be licensed for RA 11 if they operate a central dealing desk in Hong Kong for their group’s OTC derivative trading activities.
New exemptions for asset managers licensed for Expanded RA 9
The Bill amends the definition of “leveraged foreign exchange trading” (type 3 regulated activity) (RA 3) to make it clear that an asset manager licensed for Expanded RA 9 will not need to be licensed for RA 3 if it deals in foreign exchange derivatives solely for the purpose of providing asset management services to its clients.
The Bill also provides that an asset manager licensed for Expanded RA 9 will not need to be licensed for type 12 regulated activity (providing client clearing services for OTC derivative transactions) (RA 12) if it engages in such activity solely for the purpose of providing asset management services to its clients.
New exemptions from Expanded RA 9
The Bill narrows the scope of Expanded RA 9. As a result, the following persons will not need to be licensed for Expanded RA 9:
The non-financial group exemption only applies to the management of OTC derivatives portfolios. If a corporation carries on a business of managing a portfolio for its affiliates that includes securities and futures contracts, in addition to OTC derivatives, either the corporation will need to be licensed for type 9 regulated activity or the corporation and its affiliates will need to fall within the wholly owned group exemption.
New exemptions from RA 11
The Bill also applies the non-financial group exemption to RA 11. As a result:
Note that, in contrast to the non-financial group exemption, the wholly owned group exemption and the wholly incidental exemption apply to advising on OTC derivative products only. These exemptions are not available for dealing in OTC derivative products.
The Bill adds a number of other exemptions from the need to be licensed for RA 11 and RA 12, including for providers of multilateral portfolio compression services. The Bill also adds power to make rules specifying additional classes of persons as exempt from the need to be licenced for either Expanded RA 9 or RA 12 (a similar power already exists in relation to RA 11).
Licensing fees for RA 11 and RA 12
The Financial Services and Treasury Bureau has confirmed that the licensing fees for RA 11 and RA 12 will be the same as for other licence types (except RA 3). These fees are set out in item 3 of Schedule 3 to the Securities and Futures (Fees) Rules.
When will the licensing regime come into effect?
The Bill was gazetted on 19 March 2021 and had its first reading in the Legislative Council on 24 March 2021. The date on which the OTC derivatives licensing regime will come into effect has not been fixed, but with the introduction of the Bill it draws nearer. The SFC has previously 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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