On 10 August 2021, Hong Kong’s Securities and Futures Commission (SFC) published consultation conclusions on its proposals to (1) implement an investor identification regime at the trading level for the securities market in Hong Kong and (2) introduce an over-the-counter securities transactions reporting regime for shares listed on the Stock Exchange of Hong Kong (Conclusions). The original consultation paper is available here and the Conclusions are available here. Our earlier article on the consultation paper is available here.

The Conclusions note that most respondents broadly agreed with implementation of both the investor identification regime and the over-the-counter (OTC) securities transactions reporting regime. Accordingly, the SFC intends to implement both regimes, with various refinements as described in the Conclusions.

When will the regimes come into effect?

The SFC intends to implement the investor identification regime in the second half of 2022.

The SFC intends to implement the OTC securities transactions reporting regime in the first half of 2023.

Implementation is subject to the completion of system testing and market rehearsals.

Who is affected?

“Relevant Regulated Intermediaries” will need to comply with the investor identification and reporting regimes. A “Relevant Regulated Intermediary” is a licensed corporation or registered institution which (i) carries out proprietary trading; or (ii) provides securities brokerage services for another person in respect of orders placed through an account opened and maintained for that person.

An asset manager will not be a “Relevant Regulated Intermediary” where it carries out discretionary asset management activities under its type 9 licence. However, an asset manager will be a “Relevant Regulated Intermediary” to the extent that (i) it carries out proprietary trading, or (ii) it is also licensed for type 1 regulated activity and operates a central dealing desk that executes relevant securities transactions for its affiliates.

What needs to be done?

Relevant Regulated Intermediaries will need to:

  • Become familiar with the rules for the investor identification and reporting regimes;
  • Enhance their systems to enable collection and reporting of relevant information about their clients in the form and manner required by the SFC and the Stock Exchange of Hong Kong (SEHK);
  • Review their client take-on procedures and update them as necessary to reflect the requirements of the regimes;
  • Determine whether the existing consents obtained from individual clients are sufficient to cover the collection and use of personal data in connection with the regimes; if not, Relevant Regulated Entities will need to obtain written or other express consent from existing and new individual clients to such collection and use of personal data, in a manner that complies with the Personal Data (Privacy) Ordinance;
  • Implement processes to review information about clients and ensure any changes in this information are reported in accordance with the requirements of the regimes.

It will likely take a material amount of time for Relevant Regulated Intermediaries to enhance their systems and obtain necessary consents from individual clients, so Relevant Regulated Intermediaries should commence the work necessary to implement the regimes as soon as possible.

Where can I find the rules for the regimes?

A new paragraph 5.6 will be added to the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) setting out the rules for the investor identification regime. A new paragraph 5.7 will be added to the Code of Conduct setting out the rules for the OTC securities transactions reporting regime. The final drafts of paragraphs 5.6 and 5.7 are attached as Appendix C to the Conclusions. The revised Code of Conduct, incorporating the new paragraphs 5.6 and 5.7, will be gazetted at a future date.

In addition:

  • The SFC will publish a circular on its website setting out the purposes for which personal data may be used under the regimes, how Relevant Regulated Intermediaries may obtain consent from their clients to the sharing of personal data and the requirements Relevant Regulated Intermediaries need to comply with in relation to such consents;
  • The SEHK will publish an information paper providing detailed information about the operational logistics of the investor identification regime;
  • The SFC will publish an information paper providing technical details including file specifications, reporting templates and submission channels for the OTC securities transactions reporting submission portal by the end of 2021; and
  • The SFC intends to publish FAQs to address questions it receives about the regimes; for this purpose, the SFC has set up dedicated mailboxes to receive questions - “[email protected]” for the investor identification regime and “[email protected]” for the OTC securities transactions reporting regime.

The SFC has said it will work with the SEHK to provide a system testing period and organise training sessions for the industry (including service vendors) before the system testing period begins.

Overview of investor identification regime

The investor identification regime seeks to enhance trading transparency and the effectiveness of the SFC’s market surveillance function. Currently, only the information relating to an Exchange Participant that inputs securities orders is captured by the SEHK. If the SFC requires further information about such orders, it needs to obtain this information from the relevant Exchange Participants. The investor identification regime (once implemented) means the SFC will have close to real time information on the identity of investors trading in Hong Kong listed securities and will enhance the ability of the SFC to identify potentially suspicious trading activities (such as, for example, a single investor trading through multiple accounts with different brokers).

Under the investor identification regime, Relevant Regulated Intermediaries will need to provide a client’s name and identification information to SEHK when submitting on-exchange orders for execution or reporting off-exchange trades in listed securities to SEHK. Relevant Regulated Intermediaries will need to submit a data file, namely “BCAN-CID Mapping File”, which contains the client’s Broker-to-Client Assigned Number (BCAN) as well as Client Identification Data (CID) to SEHK (either directly or indirectly) in connection with such orders. Where an order is carried out through a chain of regulated intermediaries, the obligations for collecting the CID, assigning the BCAN as well as submitting the mapping file rest with the last regulated entity in the chain whose direct client is not a regulated entity.

For orders placed by or on behalf of investment funds, the client whose name and identification information needs to be collected and reported to SEHK will be the relevant fund (where it is a legal entity) or the manager (where the fund is not itself a legal entity, for example a unit trust).

For orders placed by an investment manager for a discretionary account client, the client whose name and identification information needs to be collected and reported to SEHK will be the legal entity that has opened the trading account with the regulated entity (either the investment manager or the discretionary account client).

A single order placed on behalf of multiple clients will need to be tagged as an aggregated order and information on each underlying order relating to each relevant client will need to be submitted to SEHK subsequently.

Appendix B to the Conclusions sets out various different scenarios to show which entity will be responsible for assigning BCANs.

Changes from original proposals

The Conclusions include the following changes and clarifications to the investor identification regime:

  1. Clarification that the regime only applies to Relevant Regulated Intermediaries, rather than all licensed corporations and registered institutions;
  2. Removal of the requirement for overseas affiliates of an Exchange Participant to assign BCANs and submit CID for the clients of such overseas affiliates (accordingly, the BCAN submitted with a transaction will be the BCAN assigned by the Exchange Participant to its overseas affiliate);
  3. Removal of the requirement for prior approval from the SEHK for any changes to a BCAN; and
  4. Clarification that voluntary reporting of BCANs for trading of odd lots will be permitted.

Overview of OTC securities transactions reporting regime

Under the OTC securities transactions reporting regime, Relevant Regulated Intermediaries will be required to submit reports to the SFC in relation to transactions which are not recorded by SEHK as on-exchange orders nor required to be reported to SEHK as off-exchange trades (OTC Securities Transactions). Relevant Regulated Intermediaries that have made a transfer of shares that is effected by an OTC Securities Transaction in respect of which stamp duty is chargeable in Hong Kong will be required to report specified details to the SFC by three trading days after the date of transfer / deposit / withdrawal.

Changes from original proposals

The Conclusions include the following changes and clarifications to the OTC securities transactions reporting regime:

  1. Clarification that the regime only applies to Relevant Regulated Intermediaries, rather than all licensed corporations and registered institutions;
  2. The time to report is extended from one trading day to within three trading days after the day of transfer / deposit / withdrawal; and
  3. Clarification that a transfer of shares in connection with an OTC Securities Transaction in respect of which stamp duty is chargeable in Hong Kong will not be reportable if:

(i)

the transaction is granted stamp duty relief (whether in full or in part) from the Inland Revenue Department; or

(ii)

the transfer of shares is made in accordance with the terms of a structured product or a derivative, or for the conversion of a depository receipt into shares or vice versa.