By Philippa Allen, Managing Director, Regulatory Compliance, Asia
On 14 July 2025, the Hong Kong Securities and Futures Commission (SFC) released a consultation paper proposing significant updates to the Financial Resources Rules (FRR), along with new guidelines on the internal models approach (IMA) and model risk management (MRM). The proposed reforms aim to align Hong Kong’s capital and risk framework with international standards, particularly Basel III, while enhancing governance expectations and market access for licensed corporations (LCs), especially those involved in over-the-counter derivatives (OTCD).
To help you navigate the proposed changes, we’ve outlined the key highlights and their practical implications below.
1. Fine-tuning and updates to the framework
2a. Standardised market risk approach (SMRA)
2b. Standardised OTCD counterparty credit risk approach (SOCCRA)
3. Internal models approach (IMA) guidelines
4. General principles for model risk management (MRM)
5. New proposals to support market development
Key considerations for regulated entities
Navigating regulatory change can be complex, especially when impacts vary across different business models and licensing set-ups. These proposals may affect capital planning, governance processes and operational readiness for fund managers, broker-dealers, virtual asset service providers, and risk and compliance teams across regulated entities.
Below are key areas to consider as you assess how the changes could apply to your organisation.
Capital requirements
- LCs will need to reassess their capital adequacy under the new tiered framework
- Those qualifying as inter-dealer brokers or asset management group central OTCD dealers may benefit from reduced capital thresholds
- LCs using internal models or advanced Basel standards must meet higher capital and liquidity requirements
Compliance and operational readiness
- LCs must prepare for:
- Enhanced documentation and governance obligations
- Independent model validation and stress testing
- Annual compliance attestations
- Smaller firms may face resource constraints in meeting these new standards
Market access and product expansion
- Broader recognition of exchanges and products may facilitate:
- Greater access to emerging markets
- Expansion into VA derivatives and commodity trading
- Benefit from more favourable capital treatment for centrally cleared repos and VA-based instruments
Strategic considerations
- Firms may need to:
- Re-evaluate their business models to optimise capital efficiency
- Consider transitioning to basic approaches if internal model compliance is too burdensome
- Engage with the SFC early for model approval or clarification on classification
Looking ahead
The SFC’s proposed reforms represent a significant evolution in Hong Kong’s regulatory landscape. By aligning with global standards and introducing a more risk-sensitive framework, the changes aim to strengthen financial stability and enhance market competitiveness. At the same time, they introduce new compliance, capital and operational challenges for LCs and their stakeholders. Firms are encouraged to review the proposals in detail and submit feedback by the consultation deadline.
How we can help
At IQ-EQ, we help licensed corporations navigate the practical complexities of evolving capital and risk frameworks. Whether you’re interpreting technical requirements, strengthening governance structures, or preparing for regulatory engagement, our team is here to guide you.
Our regulatory specialists can assist with:
- Assessing the impact of the proposed FRR amendments
- Preparing for compliance with the IMA and MRM frameworks
- Optimising capital strategies with practical, tailored solutions
- Reviewing internal classifications and model governance readiness ahead of SFC engagement
The consultation remains open until 13 October 2025 and now is a good time to explore your options. Please reach out to your IQ-EQ representative or contact us here for tailored guidance and implementation support.
