Hong Kong to introduce new (i) investor identification regime and (ii) OTC securities transactions reporting regime

On 10 August 2021, the Securities and Futures Commission (SFC) issued its consultation conclusions (Consultation Conclusions) on its proposals to introduce an investor identification regime in Hong Kong for the securities market (HKIDR) and require the reporting of over-the-counter (OTC) securities transactions for shares listed on the Stock Exchange of Hong Kong (SEHK).

The HKIDR's purpose is to facilitate the SFC’s surveillance of transactions, and is broadly in line with the approach adopted in other jurisdictions, such as the U.S., the EU and Singapore. Currently, trade level information is generally only known to the SFC following issuance of a notice under section 181 of the Securities and Futures Ordinance (SFO).

New investor identification regime 

Under the HKIDR, a unique identification code (referred to as the “Broker-to-Client Assigned Number” (BCAN)) will be assigned by regulated intermediaries to certain clients who have placed or propose to place (i) an on-exchange order; or (ii) an off-exchange order reportable to the SEHK under the SEHK’s rules (together “reportable order”), in securities listed or traded on the SEHK’s trading system. The BCAN will be submitted by the regulated intermediary to an SEHK-maintained data repository at the time of such reportable order.

In addition, regulated intermediaries are also required to submit client identification information (CID information) along with the client’s BCAN to the SEHK’s data repository and ensure that such CID information is kept up-to-date on an ongoing basis. Whilst a client will have a different BCAN from each of its brokers, the CID information will ensure all BCANs can be linked for surveillance purposes.

Scope of application 

In terms of scope, the SFC has clarified that: 

• The HKIDR applies to SFC-licensed corporations or registered institutions who (i) carry out proprietary trading; or (ii) provide securities brokerage services to a person in respect of orders processed for such person (Relevant Regulated Intermediary).
• In general, the HKIDR applies in respect of a client who has placed or proposes to place a securities order through a securities trading account with a Relevant Regulated Intermediary. The SFC has, however, also clarified that: (i) where an order is a proprietary trade of the Relevant Regulated Intermediary, the “client”, in this context, would refer to the Relevant Regulated Intermediary itself; (ii) where an order is routed through an intermediating chain of brokers, the “client” would be the first person in the chain who is not a Relevant Regulated Intermediary (Relevant Client). The key concession made by the SFC removed the requirement to disclose the underlying client of an overseas affiliate of the Relevant Regulated Intermediary however, this will remain under review.
• At the initial of stage of the HKIDR, products covered under the HKIDR will include securities traded on the trading system of the SEHK, but not derivatives traded on the trading system of the Hong Kong Futures Exchange (HKFE). In other words, derivatives products in the form of securities such as SEHK traded callable bull/bear contracts, derivative warrants and inline warrants will fall within the scope of the HKIDR, but stock options and futures traded on the Hong Kong Futures Automated Trading System will not.

New regime for reporting of OTC securities transactions

Under the new OTC reporting regime (OTCR), Relevant Regulated Intermediaries will need to report to the SFC securities transactions for shares and real estate investment trusts (collectively referred to as “shares”) under the following circumstances within three Hong Kong trading days:

• where the Relevant Regulated Intermediary, whether as principal or agent, makes a transfer of shares that is effected by an OTC securities transaction in respect of which stamp duty is chargeable in Hong Kong; or
• where there is a deposit to or withdrawal from the Relevant Regulated Intermediary, whether as principal or agent, of physical certificates of shares.

For share transfers, information to be reported to the SFC under the OTCR include the stock name, stock code, quantity of shares, relevant date, price of the shares and CID Information of the transferor/transferee (as applicable).

Scope of application 

In terms of scope, the SFC has clarified that: 

• the OTCR only applies to Relevant Regulated Intermediaries.
• the OTCR does not cover OTC transactions where (i) stamp duty relief, whether in full or in part, is granted by 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.

Personal data of clients that are individuals 

As personal data of clients that are individuals may be collected for the purposes of the HKIDR and OTCR, there are additional data privacy considerations. The SFC considers that the transfer of CID information and the BCAN to the SEHK will likely constitute a new purpose for the use of personal data under the Personal Data (Privacy) Ordinance (PDPO), and therefore Relevant Regulated Intermediaries should, as a matter of prudence, obtain prescribed consent from their clients for such new purpose.

In connection with the above, the SFC clarified in its Consultation Conclusions that:

• Relevant Regulated Intermediaries will be required to obtain express consent from their clients that are individuals for the use of their personal data under the HKIDR and OTCR, unless they have already done so previously.
• Client consent must expressly cover the purposes specified in a circular to be published by the SFC (Consent Circular), which is expected to cover the following purposes:
• disclosing and transferring personal data to the SEHK and/or the SFC;
• allowing the SEHK and the SFC to (i) collect, store, process and use their personal data for surveillance, monitoring and enforcement purposes; and (ii) disclose and transfer such information to other authorities in Hong Kong; and
• allowing the SEHK to use such information for conducting analysis for market oversight.
• Alternatively, Relevant Regulatory Intermediaries may obtain express consent from their clients using a form to be prescribed by the SFC in a forthcoming circular (Consent Circular).

Implementation timeframe 

Subject to completion of system testing and market rehearsals, the SFC is planning to implement the HKIDR in the second half of 2022 and the OTCR in the first half of 2023 by amending the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. The SFC will be publishing additional guidance materials in connection with the implementation of the HKIDR and OTCR, including an implementation circular and the Consent Circular in September 2021.

In addition, the Hong Kong Exchanges and Clearing Limited has also recently issued an information paper and other technical specifications in relation to the HKIDR.

Implications of the new regimes 

While the HKIDR and OTCR are not yet in effect, Relevant Regulated Intermediaries should start preparing themselves for the new regimes as the SFC has previously indicated that it expects CID information of existing clients to be submitted within a specified period before the implementation date of the HKIDR. SFC regulated persons should therefore start considering:

• whether their activities fall within the scope of the HKIDR and OTCR and whom their Relevant Clients are;
• updating client-facing documentation for new clients to include the necessary consent and determining the best approach for obtaining consent from existing clients – which may require further engagement with the SFC to ensure deemed consent can be applied;  and
• updating systems, policies and procedures to reflect the requirement of the new regimes, including onboarding and record keeping processes.