Hong Kong OTC derivatives licensing regime moves closer to implementation

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:

1. A corporation that manages OTC derivatives portfolios only for its affiliates, where the corporation and its affiliates are not members of a financial group (the non-financial group exemption). For this purpose, “financial group” means a group of companies that is primarily carrying on business that (for business carried on in Hong Kong) constitutes or (for business carried on elsewhere), if carried on in Hong Kong, would constitute one or more of the following: (a) a business in a regulated activity (as defined in the SFO), (b) banking business as defined in the Banking Ordinance, or (c) a business that is required to be carried on under an authorization or licence as defined in the Insurance Ordinance.
2. A corporation that manages OTC derivatives portfolios only for its wholly owned subsidiaries, its holding company that holds all its issued shares, or other wholly owned subsidiaries of that holding company (the wholly owned group exemption). Similar exclusions are already contained in the SFO for managing portfolios of securities and futures contracts, as well as for advising on securities and futures contracts.
3. Solicitors, counsel, certified public accountants and trust companies that manage OTC derivative portfolios where such management is wholly incidental to their practice as solicitors, counsel or certified public accountants or to the discharge of their duties as trust companies (the wholly incidental exemption).

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:

1. A corporation that gives advice on OTC derivative products only to its affiliates, where the corporation and its affiliates are not members of a financial group, will not need to be licensed for RA 11; and
2. A corporation that only enters into OTC derivative transactions with its affiliates or induces its affiliates to enter into OTC derivative transactions, where the corporation and its affiliates are not members of a financial group, will not need to be licensed for RA 11.

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.

Other exemptions

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.

主要负责人

Scott Carnachan (康文杰)

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