Remote Participation of Hong Kong-Based Markets

Some people asked me such a question before: If financial firms located overseas place agency orders to trade securities / futures through SEHK / HKFE, are they required to be licensed by SFC? I would say if the firms place such orders to a local broker (of course licensed by SFC) for execution, then they are exempt from licensing. However, if they want to become direct exchange participants of SEHK / HKFE, they must be licensed.

Recent SFC published a consultation paper to address the issue of remote participation of Hong Kong-based markets (mainly SEHK and HKFE). SFC understands that globalization and advances in technology has made it possible for market players to access a market from a remote location without local presence. The current definitions of "dealing in securities" and "dealing in futures contracts" under SFO are wide enough to catch the dealing activities of all participants (including remote participants) of a Hong Kong-based market. However, SFC is unable to grant licences to participants unless they have a place of business in Hong Kong, which is not feasible.

To facilitate remote access to the local futures market and enlarge its investor base, SFC is proposing to amend the definition of "dealing in futures contracts" such that participants of a Hong Kong-based futures market do not need to be licensed by SFC if the following requirements are met:

• the market is operated by either an exchange company recognized by SFC or an automated trading services provider authorized by SFC;
• the participant must be a remote participant;
• the participant must not establish a place of business in Hong Kong, conduct any dealing activities in Hong Kong, serve Hong Kong clients, nor market their services to Hong Kong public; and
• the remote participant must be regulated, or be a participant of an overseas futures market which is regulated, in their home jurisdiction by a recognized regulator.

However, this time SFC is not introducing corresponding amendments to the definition of "dealing in securities" because SFC proposes to take a gradual approach to introducing remote participation in Hong Kong-based markets.

I think even such remote participants are not licensed by SFC, they would be indirectly regulated by SFC through the exchange rules and SFO provisions, especially for market integrity issues.