By Philippa Allen, Managing Director, Regulatory Compliance, Asia and John Kinney, Senior Associate, Regulatory Compliance
The Securities and Futures Commission (SFC) is currently implementing an updated regulatory framework for over-the-counter derivatives (OTCD), which will significantly affect Type 9 (asset management) licensees in Hong Kong. This follows extensive developments in this area over the past decade in response to the 2008 financial crisis, with Hong Kong now aligning its framework with other major financial markets. Components of the new regime have been coming into force, most recently the requirement for mandatory reporting to the Hong Kong Trade Repository (HKTR), effective September 2025. However, the SFC is still finalising other parts of the OTCD regime, including the July 2025 consultation on proposed amendments to the Financial Resources Rules (FRR).
Through this regulatory update, the SFC is:
- Implementing mandatory reporting of all OTCD transactions to the HKTR from September 2025, with limited exemptions for smaller managers
- Introducing an expanded Type 9 licence for managers handling OTCD products incidentally to asset management activities
- Consulting on Financial Resources Rules amendments to establish capital requirements for market and counterparty credit risks
- Requiring enhanced operational standards including updated business plans, specialised record keeping and experienced responsible officers for OTCD activities
Licensing requirements
The amending legislation creates an ‘expanded’ Type 9 licence for managers who provide portfolio management services of OTCD products for another person, provided it is wholly incidental to their asset management activities. If activities involving OTCD are not wholly incidental to the main activity of asset management, managers may need to consider applying for the more stringent OTC regulated activity- specific licence, Type 11 (dealing in or advising on OTCD). This matches the current requirement for fund managers to apply for Type 1 (dealing in securities) or Type 2 (trading in futures) licences when outside the incidental exemption. Type 2 licence holders may still need to add a Type 11 licence if they trade derivatives other than futures.
Licensed corporations (LCs) that manage portfolios containing OTCD will be subject to additional requirements, as set out below.
Reporting obligations
Effective 29 September 2025, all OTCD transactions must be reported to the HKTR, including those entered by an LC as a discretionary account manager or on behalf of a client. These mandatory reports must include specific data such as unique transaction identifiers (UTIs) and critical data elements (CDEs) and must be reported within two days of the transaction date (T+2) in an ISO20022 XML format.
A manager is exempt from the reporting requirement only if it fully qualifies for the exemption listed under question 5 of the OTC Derivative Transactions – Reporting and Record Keeping Obligations Rules FAQs.
The conditions for exemption are:
- The sum of the notional amounts of all the LCs’ outstanding OTCD transactions must not at any time exceed US$30 million. This is no longer calculated on a product class basis
- The LC must not have conducted any transactions in Hong Kong. This is defined under question 20 of the same FAQs as:
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- One of the individuals who made the decision to enter into the transaction was a trader who was employed or engaged by the LC to perform their duties predominantly in Hong Kong
- The transaction was:
- conducted on behalf of an affiliate of the LC; or
- conducted by the Hong Kong branch of an overseas incorporated authorised institution on behalf of its head office or its overseas branches and was booked in such head office or overseas branch
- The LC must not have reported, or been required to report but had not done so, any OTCD transaction to the Hong Kong Monetary Authority before.
It is our view that asset managers would not be exempt from this reporting requirement unless they meet the above exemption, and will therefore need to apply to report their trades with the HKTR.
LCs can appoint an agent to report on their behalf however, the FAQs make it clear that in-scope fund managers must also become members of the HKTR, so that they can monitor the reporting of the agent since the obligation to report ultimately lies with the manager.
Financial Resources Rules considerations
The changes to the FRR to account for the OTCD regime haven’t altered the current requirement that a Type 9 LC that does not hold client assets is required to hold a statutory minimum of HK$100,000 or 5% of its liabilities, whichever is greater. However, for LCs managing portfolios with OTCD products, the variable 5% of liabilities could fluctuate significantly due to OTCD markets volatility. As such, LCs will be expected to absorb any issues without it affecting their operations.
The proposed amendments to the FRR, currently under public consultation, include provisions for minimum capital requirements for LCs engaging in OTCD activities, a set of both basic and standardised market risk and counterparty credit risk capital requirements to help LCs manage the impact these transactions will have on their FRR. Additionally, if approved by the SFC, certain LCs will be able to use an internal models approach to calculate the financial resilience of the company.
The notification requirements, such as the need to report a drop below 120% of the liquid capital within one business day of the company becoming aware, remain in place.
Risk management
Type 9 managers considering or currently managing portfolios with exposure to OTCD products must carefully analyse the associated risks and apply relevant requirements, such as the SFC’s risk management requirements, to properly mitigate risks arising from managing portfolios exposed to OTCD.
As part of risk management, the SFC will expect to see updated business plans and organisation charts that clearly document the OTCD products which managers intend to invest in, identify who will be responsible for these investments, and outline the internal controls that managers have put in place in relation to this activity.
Record keeping
The proposed rules set out the records that are mandated to be stored in relation to OTCD transactions. Importantly, these records must be stored differently from the requirements under Cap571O – Keeping of Records Rules.
Personnel requirements
The SFC will expect that, if you apply to carry on the expanded Type 9 activity to manage portfolios containing OTCD products, you’ll need to have at least one responsible officer who has recently acquired over two years’ experience in managing OTCD products.
How we can help
If you’re concerned that you currently fall within scope, or may do so in the future, IQ-EQ can support you by reviewing your current activities and advising on the necessary next steps to ensure full compliance with applicable requirements, including assistance with registering with HKTR and making applications to the SFC for extended Type 9 licence applications.
Please reach out to your IQ-EQ representative or get in touch for tailored guidance and implementation support.
