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Introduction
In 2023, the Securities and Futures Commission ("SFC") launched the implementation of Hong Kong investor identification regime for the securities market. Drawing on its success, SFC also seeks to extend the investor identification measures to exchange-traded derivatives market. The Hong Kong investor identification regime for the derivatives market ("HKIDR-DM") proposed by SFC covers the identification of futures contract, options contract and stock options (collectively, "Futures and Options Contracts") traded on the trading system ("HKFE Trading System") of Hong Kong Futures Exchange Limited ("HKFE"). Through this regime, SFC aims to enhance regulatory monitoring, detect market misconduct in the exchange-traded derivatives market effectively and align Hong Kong with international standards and global best practices.
Proposed scope and benefits
HKIDR-DM proposed to cover (a) order submissions for all Futures and Options Contracts trade on the HKFE Trading System apart from OTC derivatives products; and (b) designated Relevant Regulated Intermediaries ("RRIs")1 which includes licensed corporations ("LCs") and registered institutions ("RIs") that trade Future and Options Contracts either for themselves or their clients on the HKFE Trading System.
Relevant clients' identity must be disclosed ("Relevant Client") under the proposed HKIDR-DM. The Relevant Client is generally the direct client of an RRI who places or intends to place an order for a Futures and Options Contract through a trading account with the RRI, a table of Relevant Client is summarized in different scenarios is illustrated below:
| Scenarios | Relevant Client under HKIDR-DM |
|---|---|
| RRI placed a proprietary order by itself | The RRI |
| An order is routed through an intermediating chain of brokers | The direct client of the last RRI in the chain |
| Discretionary accounts | The legal entity that opens the trading account with the RRI |
| Investment funds (collective investment schemes or CIS) |
Depends on which entity is the account holder of the trading account through which order is placed:
|
It is expected that HKIDR-DM would enhance the SFC's ability to identify investors, monitor suspicious trading behaviours, and detect potential misconduct. Further, HKIDR-DM holds participants of exchange-traded derivatives market accountable and identifiable, thus deterring fraudulent and manipulative practices.
Proposed operation model
Under the proposed HKIDR-DM, RRIs will be required to:
- ensure that a Broker-to-Client Assigned Number ("BCAN"), which is a unique identification code, is assigned to the Relevant Client who places or intends to place an order for a Futures and Options Contract on the HKFE Trading System;
- ensure up-to-date client identification date ("CID") is collected from each Relevant Client and submitted along with the client's BCAN in a BCAN-CID Mapping File to a central data repository to be maintained by HKEX;
- ensure that the Relevant Client's BCAN is included in the order information for each order on the HKFE Trading system; and
- implement appropriate data privacy and security measures to safeguard the collection, transmission and storage of data, including obtaining express consent from Relevant Clients for the collection and handling of their personal data in compliance with the applicable data privacy laws.
Timeline for implementation and prospects
To align with the launch of HKFE's Orion Derivatives Platform ("ODP"), SFC proposes to release HKIDR-DM in the first quarter of 2028. The aligned approach by SFC aims to minimise operational disruptions, eliminate the necessity for multiple system upgrades, and optimise the implementation of the HKIDR-DM process once the ODP becomes operational.
HKIDR-DM procedures are designed to provide effective regulatory oversight and transparency, while protecting client privacy and minimising administrative hassle for participants in Hong Kong's derivatives markets. Further, the regimes are expected to enhance the efficiency in detecting and responding to market misconduct, thereby upholding market integrity and strengthening investor confidence. The consultation will remain open until 22 December 2025.
Footnote
1. An RRI refers to an LC or RI that either (i) is licensed or registered for Type 1 regulated activity (in relation to stock options) or Type 2 regulated activity (in relation to futures contracts or other options contracts) and engages in proprietary trading in Futures and Options Contracts, or (ii) provides brokerage services in Futures and Options Contracts for another person (a client) in respect of orders placed through an account opened and maintained for the client.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
