SFC Consults on Investor Identification Regime and OTC Securities Transactions Reporting Regime

Clinton MorrowPartner, Charltons

On 4 December 2020, the Hong Kong Securities and Futures Commission (SFC) launched a consultation on proposals to introduce (1) an investor identification regime for the securities market in Hong Kong at the trading level (the Proposed Investor Identification Regime) and (2) an OTC securities transactions reporting regime for shares listed on the Hong Kong Stock Exchange (the Proposed OTC Securities Transactions Reporting Regime) (the Consultation Paper).

The proposed investor identification regime would apply to the SFC-licensed corporations and registered institutions (Regulated Intermediaries) which submit for execution on-exchange orders, or which carry out off-exchange orders, which are required to be reported to the Hong Kong Stock Exchange (the HKEx) (OE Trade Reporting), subject to certain exclusions at the initial stage. Regulated Intermediaries would be required to ensure that a unique identification code has been assigned to each Relevant Client and included in the order information submitted to the HKEx for on-exchange orders as well as off-exchange orders for off-exchange trades reportable to the HKEx. This regime would be independent of the investor identification regime for northbound trading under Stock Connect, which was implemented in August 2018.

The SFC further proposes to introduce an OTC Securities Transactions Reporting Regime for shares listed on the HKEx, which will impose reporting obligations on Regulated Intermediaries when a Regulated Intermediary (whether as principal or agent) makes a transfer of shares that is effected by an OTC Securities Transaction (i.e. a transaction which is not recorded by the HKEx as an on-exchange order nor is required to be reported to the HKEx as an off-exchange trade) in respect of which stamp duty is chargeable in Hong Kong or when there is a deposit to or withdrawal from the Regulated Intermediary of physical certificates of shares.

The proposals aim to enhance Hong Kong’s market surveillance practices, which are currently limited, a fact which was recognised in the SFC’s 2018-2019 Annual Report. The proposals also intend to foster more timely and effective market surveillance and reduce compliance costs for Regulated Intermediaries.

If adopted, the SFC expects to implement the investor identification regime by Q1 2022 at the earliest and the OTC securities transactions reporting regime by around Q3 2022.

The consultation closes on 4 March 2021.

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