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The SFC narrows the proposed scope of the OTC derivatives licensing regime

On 10 June 2020, the Securities and Futures Commission (the SFC) published its consultation conclusions providing its latest update on the OTC derivatives licensing regime (OTCR) with updated proposals on the scope of regulated activities to be covered and the competence requirements for licensed persons undertaking these regulated activities.

Whilst helpful to see the direction the SFC proposes to take, it may still be some time before we see the OTCR implemented here in Hong Kong. Prior to implementation of the OTCR, there are a number of steps to be completed including revisions to the implementing ordinance which the Legislative Council will need to prioritise as against other initiatives needed for Hong Kong. Maintaining momentum for the OTCR could well be a challenge with so many intervening factors.


In December 2017, the SFC issued a consultation paper on the OTCR proposing refinements to the scope of regulated activities (RAs), requirements in relation to risk mitigation, client clearing, record-keeping and licensing matters and proposed conduct requirements to address risks posed by group affiliates.

The SFC issued its first consultation conclusions in connection with this consultation in December 2018, which covers the proposed requirements in relation to risk mitigation and client clearing and conduct requirements to address risks posed by group affiliates and other connected persons.

This latest consultation conclusions paper is the second consultation conclusions paper that the SFC has issued in connection with this consultation, and it covers the proposed refinements to the scope of RAs and the competence and continuous professional training requirements under the OTCR.

The SFC will publish separately in due course consultation conclusions on the remaining proposals in this consultation including record keeping requirements.

Refinements to the scope of RAs under the OTC derivatives licensing regime

The SFC proposes to narrow the scope of the following RAs under the OTCR once implemented:

  • the new Type 11 (dealing in OTC derivative products or advising on OTC derivative products) regulated activity;
  • the new Type 12 (providing client clearing services for OTC derivative transactions) regulated activity;
  • the existing Type 9 (asset management) regulated activity which will be expanded to cover the management of portfolios of OTC derivative transactions; and
  • the existing Type 3 (leveraged foreign exchange trading) regulated activity.

These refinements will result in the OTCR no longer capturing the following activities (subject to certain criteria) many of which align with analogous provisions adopted in other OTCD jurisdictions (which the SFC has already deemed comparable):

  • corporate treasury activities of non-financial groups (i.e. a hedging exemption);
  • provision of post-trade multilateral portfolio compression services;
  • provision of bilateral and multilateral portfolio compression services provided by a CCP or client clearing services provider;
  • activities of overseas clearing members and their agents – key proviso here will be that the entity is regulated in a comparable jurisdiction for providing client clearing services and only marketing their services to persons in Hong Kong through an authorized institution or licensed corporation;
  • certain fund manager services and other services that are only ancillary to the clearing and settlement process;
  • portfolio management services carried out for wholly-owned group companies in respect of all OTC derivative products;
  • provision of incidental portfolio management services by professionals in respect of all OTC derivative products (i.e. incidental services provided by solicitors, accountants and trust companies); and
  • licensed fund managers who deal in foreign exchange derivatives solely for the purpose of managing assets.

Competence and continuous professional training requirements

In addition, the SFC’s latest consultation conclusions paper provides that the SFC is reviewing the existing competency framework covering both the competence and continuous professional training requirements and will review the proposed requirements for Types 11 and 12 RAs and the expanded Types 7 and 9 RAs. The SFC will consider consulting on its proposals for revamping the competency framework later this year. 

Next steps

The SFC is now working with the government on drafting the necessary legislative amendments and will publish these in the Government Gazette when ready before introducing them into the Legislative Council.

The SFC has also confirmed that the OTCR will not be implemented until the amendments to other relevant subsidiary legislation, including the Securities and Futures (Financial Resources) Rules, are completed.

Whilst no timetable has been set for these steps to be taken, it may be, based on current timings, that we do not see clarity on timing this side of 2021.

In the meantime, you should consider your licensing requirements under the OTCR in light of the new carve-outs to the Types 11 and 12 RAs, the expanded Type 9 RA, and the Type 3 RA and whether the latest round of proposals will impact the operation of your business once implemented.