SFC to Narrow Scope of OTC Derivatives Licensing Regime

Source: Regulation Asia Manesh Samtani, Regulation Asia 2020-06-11

The OTC derivatives licensing regime will not capture corporate treasury activities of non-financial groups, portfolio compression services, and certain portfolio management activities.

Hong Kong’s SFC (Securities and Futures Commission) has published its consultation conclusions on the regulatory scope and competence requirements of its OTC derivatives licensing regime.

The consultation was launched December 2017, proposing refinements to the scope of regulated activities, requirements in relation to OTC derivative risk mitigation, client clearing, record-keeping and licensing matters, as well as proposed conduct requirements to address risks posed by group affiliates.

In December 2018, the SFC published conclusions on the proposed requirements in relation to client clearing for OTC derivative transactions, risk mitigation for non-centrally cleared OTC derivative transactions, and to address conduct risks posed by dealings with group affiliates and other connected persons.

The latest consultation conclusions paper covers the proposed refinements to the scope of regulated activities and the competence and continuous professional training requirements under the OTC derivatives licensing regime.

The SFC will narrow the scope of regulated activities (Type 3, 9, 11, 12 RAs) so that the OTC derivatives licensing regime does not capture:

corporate treasury activities of non-financial groups
bilateral and multilateral portfolio compression services provided by a CCP or client clearing services provider
overseas clearing members of overseas CCPs
activities which are only ancillary to the clearing and settlement process (e.g. custodians, settlement banks, ATS providers, agents of client clearing services providers, fund managers passing clearing instructions for funds)
portfolio management activities in respect of OTC derivative products carried out for wholly-owned group companies
professionals (ie, solicitors, counsel, CPAs and trust companies) who provide portfolio management in respect of OTC derivative products where the services are wholly incidental to discharging their professional roles
fund managers who deal in foreign exchange derivatives solely for the purpose of managing assets

“The refinements will focus our licensing framework on derivatives market intermediaries and avoid creating an unnecessary compliance burden for other market participants,” said SFC chief Ashley Alder.

The paper also says that existing competence and CPT (continuous professional training) requirements set out under existing guidelines should also apply to Type 11 RA (dealing in or advising on OTC derivative products) and Type 12 RA (providing client clearing services for OTC derivative transactions) licensees.

The SFC will work with the government to finalise the necessary legislative changes and introduce them into the Legislative Council.

Conclusions on the remaining rule changes proposed in 2017 will be published separately in due course.

The consultation conclusions paper is available here.

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SFC to Narrow Scope of OTC Derivatives Licensing Regime

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