Introduction

On 10 August 2021, the Securities and Futures Commission (the “SFC”) issued the consultation conclusions (the “Consultation Conclusions”) on proposals to (i) implement an investor identification regime at trading level for the local securities market (the “IDR Regime”) and (ii) introduce an over-the-counter securities transactions reporting regime for shares listed on the Stock Exchange of Hong Kong (the “OTCR Regime”) (the “Proposals”). The respondents broadly agreed with the Proposals and the SFC will proceed with the implementation of the IDR Regime and the OTCR Regime, which are expected to be launched in the second half of 2022 and the first half of 2023, respectively.

Scope of IDR Regime

Pursuant to the Proposals and the Consultation Conclusions, the relevant licensed corporations (the “LCs”) and registered institutions (the “RIs”) (collectively, the “Relevant Regulated Intermediaries”) are required to:

1. assign a unique identification code, namely the “Broker-to-Client Assigned Number” (the “BCAN”) to relevant clients (the “Relevant Clients”) who are direct clients of a RI and have placed or proposed to place (i) an on-exchange order or (ii) an off-exchange order reportable to the Stock Exchange of Hong Kong (the “SEHK”) in listed securities or securities on the SEHK’s trading system;
   
2. ensure that up-to-date client identification data (the “CID”) and the BCAN are collected from each of the Relevant Clients and submitted to the SEHK within a prescribed time. The BCAN under an order should be the BCAN of the person or entity whose securities trading account is used for the placement of the order, whereas the BCAN of an account manager should be used if the securities trading account used for the placement of the order is under the name of that account manager;
   
3. ensure that the BCAN is included in the order details for each on-exchange and off-exchange orders. Whilst prior approval of the SEHK is not warranted for a change of a BCAN, if a revision to a BCAN is needed after the order has been placed but before it is executed, the order should be cancelled and re-inputted with the correct BCAN. On the other hand, if a revision to a BCAN is needed after the order has been executed, the RI should notify the SEHK as soon as possible; and
   
4. implement data privacy and security measures to ensure that the collection, transmission and storage of data comply with data privacy laws. 

It is notable that under the Consultation Conclusions, the SFC has clarified that the Relevant Regulated Intermediaries only refer to the LCs and RIs which (i) carry out proprietary trading; or (ii) provide securities brokerage services regarding orders placed through an account opened and maintained. Given that the IDR Regime aims to enhance market regulation and market confidence through identifying the legal person who controls and is responsible for the particular order, a BCAN under the order should be the BCAN of the person whose securities trading account is used to place the order.

Scope of OTCR Regime

Under the proposed OTCR regime, the Relevant Regulated Intermediaries are required to report to the SFC the following dealings in ordinary shares and real estate investment trusts listed on the SEHK (collectively referred to as “Shares”):

1. the transfer of Shares by a Relevant Regulated Intermediary (whether as principal or agent) that is effected by a transaction not recorded as an on-exchange order by the SEHK or required to be reported to the SEHK as an off-exchange trade, in respect of which stamp duty is chargeable in Hong Kong; or
   
2. a deposit to or withdrawal of physical certificates of Shares from the Relevant Regulated Intermediary (whether as principal or agent). 

The Relevant Regulated Intermediaries need to report within three Hong Kong trading days after the day of transfer, deposit or withdrawal, both the delivering and receiving of Shares in connection with the abovementioned dealings. The transfer of Shares involved in off-exchange trade is exempted from reporting if it is (i) granted stamp duty relief from the Inland Revenue Department or (ii) made in accordance with the terms of a structured product or a derivative, or for the conversion into Shares of a depository receipt (or vice versa).

Express client consent required

Under both IDR Regime and OTCR Regime, the Relevant Regulated Intermediaries must obtain express consent from individual Relevant Clients. There will be no standard form of client consent to be used, but it should expressly cover the purposes of use of personal data specified by the SFC. A SFC circular containing how client consent may be obtained and the requirements to be observed will be issued by September 2021.

Implementation date and transition preparation

The SFC expects to implement the IDR Regime in the second half of 2022 and the OTCR Regime in the first half of 2023, subject to the completion of the system and market rehearsals.

To help the industry prepare for the implementation of the regimes, the SEHK has issued an information paper in August to provide technical guidance and related materials for submitting information to the SEHK under the IDR Regime, while the SFC will issue an information paper with technical details for submissions under the OTCR Regime by the end of 2021. In addition, trainings will be provided by the SFC and the SEHK to industry participants and an implementation circular containing practical guidelines will be issued by the SFC by September 2021. The Code of Conduct for persons licensed by or registered with the SFC will also be revised to align with the rules under the new regimes. 

Conclusion

The adoption of the IDR Regime and OTCR Regime is expected to enhance market surveillance by the regulatory authorities against market misconduct, to promote market integrity and investor confidence in the financial industry in Hong Kong. Market participants are advised to familiarise themselves with the compliance requirements under the new regimes, with the aid of guidelines and trainings to be provided by the SEHK and the SFC.