SFC’s implementation of the Investor Identification Regime and OTC Securities Transaction Reporting Regime
The Securities and Futures Commission (the “SFC”) has taken steps to enhance its surveillance and enforcement functions in respect of the securities market in Hong Kong. In August 2021, the SFC issued consultation conclusions on its proposals to introduce an investor identification regime (“HKIDR”) and an over-the-counter securities transaction reporting regime (“OTCR”) for shares listed on the Stock Exchange of Hong Kong Limited (the “Stock Exchange”), in order to let the SFC to identify investors who make suspicious orders or trades and enhance its surveillance function. It is expected that HKIDR and OTCR will be launched in March 2023 and the second quarter of 2023, respectively.
Requirements of the HKIDR
The HKIDR requirements apply to listed securities (including listed derivatives) traded on the Stock Exchange at the trading-level (but not the holding-level). The HKIDR requirements do not apply to derivatives traded on the Hong Kong Futures Exchange or unlisted structured products (such as equity-linked instruments, equity-linked notes, etc.), nor the delivery of Stock Exchange-listed securities in accordance with the terms of these unlisted structured products.
Pursuant to the requirements of the HKIDR, Relevant Regulated Intermediaries (including licensed corporations and registered institutions) (“RRI(s)”) are required to assign a unique Broker-to-Client Assigned Number (“BCAN”) to direct clients who have placed or proposes to place an order through a securities account registered with the RRI.
The BCAN should identify a specific client of the RRI, but should not bear any obvious link to a client’s identity and must remain confidential. RRIs would be expected to put in place automated order management systems to ensure correct and valid BCANs are tagged to the relevant securities orders.
An RRI will also be required to ensure that up-to-date client identification data has been collected from each direct client and that it is submitted together with the client’s BCAN to a data repository maintained by the Stock Exchange by a prescribed time. The relevant client’s BCAN should be included in the order information for each on-exchange order as well as off-exchange orders.
Requirements of the OTCR
Under the OTCR, RRIs, whether acting as principal or agent, are required to report the following two types of share-related activities to the SFC via a designated portal within three trading dates after the transaction day:
the transfer of ordinary shares and
interests in real estate investment trusts that are (a) listed on the Stock
Exchange; (b) made in connection with an OTC securities transaction; and (c)
transactions under which stamp duty is chargeable in Hong Kong; and
2. deposit or withdrawal of physical share certificates.
consent from individual clients
under the HKIDR and OTCR
Pursuant to both HKIDR and OTCR, consents must be obtained from individual clients before transferring any personal data to the Stock Exchange and/or the SFC, providing that the personal data shall not be used for a new purpose. This applies to both new and existing clients. Consents must be obtained in relation to the following matters:
1. disclosure and transfer of personal data to the Stock Exchange and/or the SFC;
allowing the Stock Exchange to:
store, process and use their personal data for market surveillance and
monitoring purposes and enforcement of the Listing Rules;
b. disclose and transfer such information to the relevant regulators and law enforcement agencies in Hong Kong so as to facilitate the performance of their statutory functions with respect to the Hong Kong financial markets; and
c. use such information for conducting analysis for the purposes of market oversight.
allowing the SFC to:
process and use their personal data for the performance of its statutory functions
including monitoring, surveillance and enforcement functions with respect to
the Hong Kong financial markets; and
b. disclose and transfer such information to the relevant regulators and law enforcement agencies in Hong Kong in accordance with applicable laws or regulatory requirements.
Individual clients who have not provided their consent will only be able to sell their securities but will not be able to purchase securities until they provide their consent.
Purpose of implementing the HKIDR and OTCR
The purpose of implementing the HKIDR and OTCR is to enhance the market surveillance function of the SFC, which can in turn help maintaining market integrity and strengthen investors protection as the SFC can efficiently obtain information about the identity of investors who placed orders. However, compliance with the HKIDR and OTCR will involve the collection, use and transfer of personal data. Therefore, the SFC has reminded the RRIs to comply with certain requirements relating to the collection, use, storage, disclosure and transfer of personal data of individual clients.
It is recommended that RRIs should (i) ensure the current systems in place are compatible with the reporting requirements as stipulated by the SFC; (ii) revamp the internal policies and procedures in order to comply with the HKIDR and OTCR regimes; (iii) assess the existing client documentation to check whether the client consents in respect of personal data usage have sufficiently covered the requirements under the HKIDR and OTCR; and (iv) enhance internal control system to ensure that the confidential personal information obtained is protected from unauthorized or inappropriate access.
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2022