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SFC concludes consultation on OTC derivatives and conduct risks


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The Securities and Futures Commission (SFC) today released consultation conclusions on proposals (Note 1) to enhance the over-the-counter (OTC) derivatives regime and to address conduct risks posed by dealings with group affiliates and other connected persons (Note 2).

Under the proposals, which the SFC will implement, licensed corporations that are contracting parties to non-centrally cleared OTC derivative transactions or are licensed for Type 9 (asset management) regulated activity (Note 3) will be subject to risk mitigation requirements (Note 4). Licensed corporations providing client clearing services for OTC derivative transactions will be subject to segregation, portability (Note 5) and disclosure requirements.

In addition, licensed corporations which have dealings with group affiliates and other connected persons will be subject to conduct requirements to ensure that risks are properly managed, they act in clients’ best interest and appropriate risk disclosure is provided.

“These requirements enhance Hong Kong’s regulatory regime for OTC derivatives activities by protecting investors and strengthening the management of conduct and financial risks in dealings with related parties,” said Mr Ashley Alder, the SFC’s Chief Executive Officer.

The amendments to the Code of Conduct will be gazetted on 14 December 2018. The risk mitigation requirements will become effective on 1 September 2019, while the client clearing requirements will become effective when the new Types 11 and 12 regulated activities take effect. The conduct requirements to address risks posed by group affiliates and other connected persons will become effective six months after the gazettal of the Code of Conduct amendments (Note 6).



  1. On 20 December 2017, the SFC launched a Consultation on (1) the OTC derivatives regime for Hong Kong – Proposed refinements to the scope of regulated activities, requirements in relation to OTC derivative risk mitigation, client clearing, record-keeping and licensing matters; and (2) Proposed conduct requirements to address risks posed by group affiliates, which ended on 20 February 2018. The SFC received written submissions from industry associations, asset management firms, professional services firms, market participants and other stakeholders. Respondents generally agreed with the proposed requirements.
  2. The consultation conclusions published today only cover the proposed requirements under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). The consultation conclusions on amendments to the Securities and Futures Ordinance and subsidiary legislation with respect to the new Types 11 and 12 regulated activities will be published separately.
  3. This refers to Type 9 licensed corporations which execute non-centrally cleared OTC derivative transactions on behalf of any collective investment schemes (CIS) managed by them (except when the measures required are handled by the governing body of the CIS or its delegate).
  4. The risk mitigation requirements cover trading relationship documentation, trade confirmation, valuation, portfolio reconciliation, portfolio compression and dispute resolution.
  5. See the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions’ Principles for financial market infrastructures.
  6. Licensed persons will be required to ensure that client-facing affiliates introduced by them to enter into OTC derivative transactions with clients are licensed corporations, authorised financial institutions or corporations similarly regulated as an OTC derivative dealer or a bank in a jurisdiction which has implemented a regulatory framework for OTC derivatives dealing activities comparable to Hong Kong’s (collectively referred to as regulated persons). In this regard, a further transitional period will be provided in respect of existing client-facing affiliates which are not regulated persons until the date immediately after the end of the transitional period for Type 11 regulated activity.

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Regulator Information

Abbreviation: SFC
Jurisdiction: Hong Kong

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