Hong Kong OTC derivatives regulation – Amending legislation introduced

Applying for the expanded type 9 regulated activity

If an asset manager does not (and does not intend to) include OTC derivative products in the portfolios it manages, it does not need to apply for the expanded type 9 RA. If an asset manager does not apply for the expanded type 9 RA within the specified application period of 6 months from the commencement date for the expanded type 9 RA, its licence will be deemed subject to a condition that the asset manager must not carry on OTC derivative products management.

The definition of “OTC derivative product” is broad and includes non-deliverable currency forwards, interest rate swaps, credit default swaps and total return swaps.

If an asset manager wishes to apply for the expanded type 9 RA, it must:

1. notify the SFC in writing that it is carrying on the expanded type 9 RA within 3 months from the commencement date of the expanded type 9 RA, and
2. provide the following to the SFC:

• a full description of the nature of the business carried on or to be carried on and the types of services provided or to be provided by the asset manager
• information relating to the human and technical resources, operational procedures and organizational structure of the asset manager showing that it is capable of carrying on the expanded type 9 RA competently;
• a full description of any business history of the asset manager and a business plan covering internal controls, organizational structure, contingency plans and related matters; and
• a confirmation covering the following:
  

  i.	at least one of its responsible officers has been carrying on in Hong Kong or elsewhere an expanded type 9 RA for at least 2 yearswithin the 6 years immediately before the commencement date of the expanded type 9 RA; and
  ii.	the asset manager is in compliance, or has arrangements in place to ensure compliance, with the relevant provisions in the SFO and the applicable SFC guidelines and codes of conduct.

Effect of being subject to a “no OTC derivative products management” condition

If an asset manager has applied for the expanded type 9 RA and the SFC subsequently determines to impose a “no OTC derivative products management” condition of its licence, the asset manager can continue to provide a service of managing a portfolio of OTC derivative products for up to 3 months, but solely for the purpose of winding down its clients’ OTC derivative positions. The asset manager can apply to the SFC for an extension of this period.

Applying for the new type 11 regulated activity

There is a transitional period of 6 months from the commencement date of type 11 RA during which persons that are not licensed for type 11 RA will not be construed as having contravened the licensing requirement under the SFO.

An asset manager licensed for type 9 regulated activity will not need to apply to be licensed for type 11 RA if:

If an asset manager provides a discrete service of advising on OTC derivatives or dealing in OTC derivatives (such as providing a central dealing desk for group companies), it may need to apply to be licensed for type 11 RA.

An application for type 11 RA must be made to the SFC within 3 months from the commencement date of type 11 RA and must meet certain conditions. A person that applies and that meets the conditions is deemed to be licensed for type 11 RA from the end of the transitional period of 6 months from the commencement date of type 11 RA until the date of the first to happen of the following:

• the application is withdrawn;
• the license is granted / varied by adding type 11 RA; or
• the application is refused.

In addition to making an application to the SFC, the following conditions must be met in order to be deemed licensed for type 11 RA:

• an application seeking the SFC’s approval in respect of the suitability of premises for record keeping must be lodged unless the applicant is already licensed by the SFC or the premises proposed to be used for record keeping are the subject of an existing SFC application for approval;
• not less than 2 individuals, at least one of whom is an executive director, must apply to be approved as responsible officers in relation to type 11 RA, and at least 2 of them, including at least 1 executive director of the applicant, must not have been issued a no-deeming notice before the applicant is deemed;
• every executive director who is an individual must apply to be approved as a responsible officer in relation to type 11 RA and none of them must have been issued a no-deeming notice before the applicant is deemed;
• the applicant must not have been issued a no-deeming notice before the end of the transitional period of 6 months from the commencement date of type 11 RA;
• the applicant must submit a confirmation that:
1. it has been carrying on type 11 RA activities in Hong Kong for at least 2 years before the commencement date of type 11 RA; and
2. not less than 2 individuals, at least one of whom is an executive director, have applied to be approved as responsible officers in relation to Type 11 RA

An applicant is deemed to be licensed for type 11 RA from end of the transitional period. Such deeming ends on the earliest date on which one of the following events happens:

• the application is withdrawn;
• the license is granted/ varied by adding the type 11 RA; or
• the application is refused.

Effect of SFC refusal of application for type 11 RA

If an asset manager is deemed licensed for the new type 11 RA and the SFC subsequently refuses the asset manager’s application, the asset manager can continue to provide type 11 RA services for up to 3 months, but solely for the purpose of winding down its business of advising on or dealing in OTC derivatives. The asset manager can apply to the SFC for an extension of this period.