On 20 November 2015, the Securities and Futures Commission (SFC) published a Consultation on Proposed Amendments to the ‘Guidelines for the Regulation of Automated Trading Services’ (the Amended Guidelines).
It is proposed that the Amended Guidelines will replace the existing automated trading services (ATS) guidelines (the ATS Guidelines) which supplement the regime applicable to type 7 regulated activity (ATS) under the Securities and Futures Ordinance (SFO). The ATS Guidelines have not been amended since they were introduced in 2003 and the Amended Guidelines reflect the SFC’s experience in regulating ATS and regulatory developments since then.
The key changes proposed in the Amended Guidelines are:
Implementation of the mandatory clearing and trading obligations for OTC derivative transactions in Hong Kong
The Securities and Futures (Amendment) Ordinance 2014 was introduced in March 2014 to provide a regulatory framework for the over-the-counter (OTC) derivatives market in Hong Kong. In doing so, it expanded the definition of ATS to cover the trading or clearing of OTC derivatives and introduced a mandatory clearing obligation whereby certain standardised OTC products will have to be cleared through a designated central counterparty (CCPs) that are either a recognised clearing house or a licenced or registered ATS provider under the SFO.
The Amended Guidelines provide specific guidance for persons seeking CCP designation for the purposes of the mandatory clearing obligations, as well as application requirements and procedural guidance for CCPs offering clearing services for OTC derivative transactions.
Better alignment with international standards and practices
To bring the Hong Kong ATS regime more in line with international standards, the Amended Guidelines stipulate that overseas CCPs are required to comply with the principles for financial market infrastructures recommended by the International Organisation of Securities Commissions (IOSCO) and the Committee on Payments and Market Infrastructures (CPMI). The SFC has revised and developed the core practice standards to better align them with these international standards, including in relation to:
- financial resources
- risk management
- system integrity
- governance
- access and participation
- transparency
- surveillance
- record keeping
- reporting.
Codification of practices
In the Amended Guidelines, through the codification of the practices developed over the last 12 years, the SFC:
- expands its guidance as to when the ATS regime will apply rather than the regimes applicable to exchanges and clearing houses in circumstances where the provision of ATS may overlap with both regimes
- clarifies the key differences between the regulatory requirements applicable to a recognised exchange company and an authorised ATS provider
- expects ATS providers to take all necessary measures to ensure that neither they nor their members are in breach of the SFO provisions on the offering of investments.
Next steps
The closing date for submission of comments on the Amended Guidelines is 31 December 2015. It is proposed that the Amended Guidelines will be finalised by the end of March 2016 and implemented in mid-2016.
