Uncertificated securities market regime
On 11 June 2021, the Hong Kong Government gazetted the Securities and Futures and Companies Legislation (Amendment) Ordinance 2021 (SFCA Ordinance), marking a significant milestone in moving Hong Kong towards an uncertificated securities market (USM) where investors will have the option of holding securities in their own names and without paper documents. This comes after a 3-month consultation in early 2019 conducted by the Securities and Futures Commission (SFC), Hong Kong Exchanges and Clearing Limited (HKEX) and the Federation of Share Registrars Limited on a revised operational model for implementing the USM regime, following market concerns that the original operational model, proposed in 2010, could compromise settlement efficiencies.
The revised operational model is intended to provide an investor the option of holding legal title to securities in uncertificated form through either: (i) a new feature provided within the clearing and settlement system of HKEX and managed by a sponsoring clearing or custodian participant; or (ii) a new feature offered by the relevant issuer’s share registrar. Share registrars are expected to operate the systems for evidencing and effecting transfers of legal title to securities without paper documents. Given this, the SFCA Ordinance also establishes a new regulatory framework under the Securities and Futures Ordinance (SFO) for the SFC to approve and regulate share registrars. The USM regime is expected to be introduced in phases commencing in late 2022.
Refinements to the OTC derivative licensing regime
The SFCA Ordinance also amends Schedule 5 to the SFO and certain provisions in the Securities and Futures (Amendment) Ordinance 2014, principally to carve out activities that are not intended to be covered by the OTC derivative licensing regime (for example, corporate treasury activities of non-financial groups) and to refine the scope of certain regulated activities relating to OTC derivative transactions.
For more on the underlying consultation relating to the legislative changes on the refinements to the OTC derivative licensing regime, read our previous blog here.
The SFC will make subsidiary legislation to prescribe detailed rules and the implementation timetable for the USM regime and the OTC derivative licensing regime. The SFC will consult the market on the relevant subsidiary legislation in due course.