ComplianceOne's Impact Analysis : Commencement of OTC Derivatives Licensing Regime (August 2026)

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Table of Contents

1..........Background

2..........Scope and Licensing Implications

3..........Proposed RA11 OTCD Dealer Licence Application Requirements

4..........Transitional Arrangements

5..........Key Takeaways and Next Steps for Industry

6..........How we can help

1. Background

The Securities and Futures Commission (“SFC”) is implementing the major component of OTC (“Over-the-Counter”) derivatives (“OTCD”) reforms by introducing:

Two new regulated activities – Type 11 (dealing in or advising on OTC derivative products) and Type 12 (providing client clearing services for OTC derivative transactions); and
Two expanded regulated activities – Type 7 (automated trading services) and Type 9 (asset management) extended to cover OTC derivative products.

The SFC estimates the new regime will become effective in the second half of 2027.

Licensed corporations (“LCs”) is highly encouraged to assess whether their existing or planned activities fall within the scope of these new or expanded regulated activities and take preparatory action well in advance of the commencement date.

2. Scope and Licensing Implications

LCs should carefully consider whether their proposed / existing business activities trigger licensing requirements:

Activity	Licensed Required?	Type of License Required
Dealing in OTC equity derivatives on agency basis (Note 1)	×	RA1
Dealing in OTC futures derivatives on agency basis	×	RA2
Dealing in OTC equity derivatives on principal basis	√	RA11
Dealing in interest rate derivatives, credit derivatives, commodity derivatives, etc.	√	RA11
Advising on OTCD products	√	RA11
Proprietary clearing of OTCD positions	×	RA12 license not required
Providing clearing services to third-party clients through a CCP	√	RA12
Operating an electronic trading platform for OTCD products	√	RA7 (Extended)
Providing execution-only ATS for OTCD products	√	RA7 (Extended)
Managing portfolios containing OTCD products for external clients	√	RA9 (Extended)
Managing OTCD portfolios for wholly-owned group companies	×	RA9

Note 1

Licensing Implications

Under the new OTC derivatives licensing regime, the SFC draws a clear line between acting as agent and acting as principal when dealing in OTC equity derivatives.

Agency basis

executes transactions on behalf of its clients, does not become a counterparty to the trade, and does not assume principal market or credit risk.
In this capacity, the activity falls outside the scope of the new Type 11 regulated activity and remains subject to the existing Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) licences

Principal basis

the firm enters into OTC equity derivative transactions as a direct counterparty to its clients, taking on proprietary risk and effectively “dealing” in those products on its own account.
This constitutes a dealing activity that squarely triggers the new Type 11 licensing requirement.

For non‑equity OTC derivatives (e.g. interest rate, credit, commodity derivatives), however, the agency / principal distinction is generally not the determining factor – any dealing or advising in such products will typically require a Type 11 licence, regardless of whether the firm acts as agent or principal, unless a specific exemption applies.

Firms should therefore carefully assess their business models and booking arrangements to determine whether they are acting as agent or principal, particularly for OTC equity derivative transactions, as this distinction directly affects their licensing obligations under the new regime.

3. Proposed RA11 Licence Application Requirement

Activity	Licensed Required?	Activity	Licensed Required?
Capital Requirement	Paid-Up Share Capital: HK$30 million Required Liquid Capital: HK$15 million	Paid-Up Share Capital: HK$60 million Required Liquid Capital: HK$30 million	Below specified thresholds[1] Tangible Capital: HK$500 million Required Liquid Capital: HK$78 million In any other case Tangible Capital: HK$1 billion Required Liquid Capital: HK$150 million
FRR Computation Approach	Basic approaches (BMRA / BOCCRA)		Standardized approaches (SMRA / SOCCRA)
Risk Management Resources	Low risk profile without taking principal position Less complex risk data aggregation and calculation		Require use of complex calculations and more advanced risk data Need to maintain sophisticated risk management systems
RO Competence	At least 3 years of relevant industry experience within the past 6 years Familiar with the risk management and capital standards for the OTCD regime

[1] HK$600 million of aggregate gross notional amount of OTCD transactions in 12 months

4. Transitional Arrangements

To avoid market disruption, the SFC has designed a 6-month transitional arrangement commencing in Jul 2027 (estimated) to enable existing qualified market participants to continue their activities before obtaining the full licence under the new regime.

Note 2	Applicable for LC, RO and LR with no licence for the new (Type 11 and 12) or expanded RA (Type 7 and 9)
Note 3	Applicable for LC, RO and LR with existing license for RA9 which managing portfolios containing OTCD products for external clients
Note 4	LC will be deemed as Qualified if: Has been carrying on the activity for at least 2 years immediately before the commencement date Has at least 2 eligible ROs RO will be deemed as eligible RO if: Has been carrying on the activity for at least 2 years immediately before the commencement date

5. Key Takeaways and Next Steps for Industry

Senior management should ensure the following five readiness steps are completed before H2 2027:

Complete a thorough review of whether current activities fall within Type 11, 12, or expanded Types 7 and 9.
Determine whether the firm qualifies for the deeming mechanism.
Review legal entity and booking arrangements and assess where risks are booked and managed.
Evaluate how the broader regulatory framework applies to the business.
Ensure governance, risk management, and internal controls are appropriate for a regulated environment.

6. How we can help

Our team consists of experienced professionals with deep expertise in compliance, risk management, and policy review and development. We can accurately identify gaps between the regulatory expectations outlined in the relevant circulars and your company’s existing policies and procedures.

With a thorough understanding of the complexities of regulatory requirements, we provide tailored solutions and analyses to meet your specific needs and address any material deficiencies. Our expertise ensures that your company maintains full compliance with regulatory standards while comprehensively elevating your compliance practices to a higher level.

If you have any questions, please feel free to contact our compliance support team at any time.

[End of ComplianceOne's Impact Analysis: Commencement of OTC Derivatives Licensing Regime – Augest 2026]

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