The Securities and Futures Commission published a circular on 22 October 2015 to update the market on the implementation of the over-the-counter (OTC) derivatives regulatory regime (OTC Regime) in Hong Kong.

The OTC Regime constitutes a new framework for introducing, reporting, clearing and trading requirements through subsidiary legislation and also: ­

  • brings certain activities relating to OTC derivatives within the scope of the licensing regime of the Securities and Futures Ordinance (SFO)
  • introduces a framework for regulating systemically important participants (SIPs) – persons who are not regulated by the SFC or the Hong Kong Monetary Authority but whose activities in OTC derivatives may raise concerns of systemic risk
  • amends the licensing regime by introducing new and expanded regulated activities.

The first phase of the Regulatory Regime introduced mandatory reporting in respect of certain interest rate swaps (IRS) and non-deliverable forwards and came into effect on 10 July 2015 (see previous blog entry). Other aspects of the OTC Regime will be implemented in phases in the future.

The second phase focuses on:

  • requiring central clearing of certain standardised IRS entered by major dealers
  • expanding the mandatory reporting regime to cover all OTC derivative transactions and to widen the scope of information to be reported.

As set out in the consultation paper issued jointly by the SFC and the HKMA on 30 September 2015, the proposed expanded reporting regime will require reporting of:

  • all OTC derivative transactions, including transactions in standardised and non-standardised rates, foreign exchange derivatives, equity derivatives, credit derivatives and commodity derivatives
  • a wider range of transaction-related information including daily valuations, new transactions, certain historical transactions and certain subsequent events relating to transactions.

Licensed corporations (LCs) and authorised institutions that carry on regulated activities (registered institutions) (RIs) that are generally inactive in OTC derivatives may be exempted from reporting requirements if they qualify under the criteria for “exempt person” relief.

The expanded definition of “automated trading services” under the SFO will be implemented as part of the proposed mandatory clearing regime.

New regulated activities


Under the Securities and Futures (Amendment) Ordinance 2014 (Amendment Ordinance) (which has been gazetted and is yet to come into force), two new regulated activities will be introduced:

  • Type 11 (dealing or advising on OTC derivative products) regulated activity
  • Type 12 (providing client clearing services for OTC derivative transactions) regulated activity.

Two existing regulated activities will also be expanded to cover OTC derivative transactions or products:

  • Type 7 (providing automated trading services) regulated activity
  • Type 9 ((discretionary) asset management) regulated activity.

The new and expanded regulated activities will requiring licensing or registration unless exemptions apply.

Transitional arrangements

The SFC highlighted the transitional arrangements under the Amendment Ordinance:

  • a six-month grace period (Transition Period) from the commencement date of the OTC derivatives licensing regime, during which LCs and RIs may continue their activities that fall within the new or expanded regulated activities without the relevant licenses or registrations
  • following an initial screening by the SFC or the HKMA, deemed licensing and registration for LCs and RIs that meet “specified criteria” and apply for a licence or registration for the new or expanded regulated activities during the first 3 months of the Transition Period. Thereafter,  the SFC or the HKMA will process their applications and the deemed licences will continue until the application is accepted or rejected.

The “specified criteria” includes an experience requirement whereby corporate applicants should have been carrying on a business in an activity that would have constituted the new or expanded regulated activity in Hong Kong for at least two years immediately before the commencement date of the OTC derivatives licensing regime. The applicant will be required to submit in a prescribed form confirmations, including that it: satisfies the experience requirements; has at least two proposed responsible officers (RO) (applicable to LCs) /executive officers (EO) (applicable to RIs) for each new or expanded regulated activity who satisfy the “specified criteria”; and complies with the applicable requirements of the SFO/Banking Ordinance and regulatory requirements applicable to OTC derivative activities.

Expanded Type 9 regulated activity – Notification requirement

There will be a notification requirement for certain Type 9 licence-holders in respect of the expanded regulated activity. This will not apply to Type 7 regulated activity.

Existing Type 9-licensed LCs or RIs which will continue activities within the scope of the expanded Type 9 regulated activity (management of a portfolio of OTC derivative products) will need to file a notification in a prescribed form within the first 3 months of the Transition Period, including a detailed business plan and internal controls and confirmation that they have at least one suitably-experienced RO/EO who will have oversight of and responsibility for the regulated activity.

What next?

The SFC and HKMA will engage in further public consultation on aspects of the OTC Regime over the coming months and will publish updates as and when appropriate.

The SFC circular is available here.