Source: Hong Kong Securities and Futures Commission Official Website

Compiled by: Golden Finance

On November 3, the Hong Kong Securities and Futures Commission (SFC) published two new regulatory guidance documents: the "Circular on the Sharing of Liquidity by Virtual Asset Trading Platforms" and the "Circular on the Expansion of Products and Services by Virtual Asset Trading Platforms". The documents outline the expected standards for licensed virtual asset trading platform operators (platform operators) and provide important guidance for promoting the connection of virtual asset trading platforms to global liquidity and expanding the range of products and services offered.

One of the circulars states that the SFC allows platform operators to merge trading instructions with associated overseas virtual asset trading platforms into a shared order book. This move is the first step under pillar A (Access) of the ASPIRe roadmap, aimed at attracting global platforms, trading traffic, and liquidity providers. Through seamless cross-platform matching and execution of trades, Hong Kong investors are expected to benefit from enhanced market liquidity and more competitive pricing, while reducing additional risks under robust safeguards. The SFC will next explore the feasibility of allowing licensed brokers to transfer client trading instructions to regulated overseas liquidity pools under the same group, and subsequently consider whether to further expand the relevant arrangements.

To optimize pillar P (Products) of the roadmap aimed at expanding new products and services, the SFC, in another circular, permits platform operators to sell virtual assets without a 12-month track record to professional investors and stablecoins licensed by the Hong Kong Monetary Authority, as well as to sell tokenized securities and investment products related to digital assets. Additionally, affiliated entities of platform operators may provide custody services for virtual assets or tokenized securities that are not traded on the relevant platform.

I. Licensed Virtual Asset Trading Platforms Sharing Liquidity

In the "Circular on the Sharing of Liquidity by Virtual Asset Trading Platforms," the Hong Kong SFC outlines the regulatory guidelines and expected standards for licensed virtual asset trading platform operators (platform operators) to integrate their order books with those of their global affiliated virtual asset trading platform operators (overseas platform operators). The circular states that trading instructions from different platforms will be allowed to merge into a comprehensive liquidity pool to facilitate cross-platform matching and execution of trades (shared order book).

1.1 Background

The Hong Kong SFC states that virtual asset trading is inherently borderless, with liquidity dispersed across various overseas trading platforms. Under pillar A (Access) of the ASPIRe roadmap, the SFC is committed to promoting the integration of Hong Kong with overseas liquidity to drive the sustainable development of the local virtual asset ecosystem. Platform operators will be permitted to integrate liquidity within the group through a shared order book. This strategy aims to enhance market efficiency, provide Hong Kong investors with deeper global liquidity, narrow price discrepancies, and optimize price discovery. Currently, the trading settlement risk for platform operators is relatively low, as all trading instructions have been pre-paid according to the SFC's "Guidelines for Virtual Asset Trading Platform Operators" (the "Virtual Asset Trading Platform Guidelines"), and matching trades are settled immediately by the platform operators.

The Hong Kong SFC indicates that with the introduction of the shared order book, trading instructions from platform operators' clients may be matched with those from overseas platform operators' clients that have been pre-paid outside of Hong Kong, potentially creating settlement risks. The implementation of shared liquidity also complicates market surveillance operations, necessitating coordinated measures to address potential market misconduct. The SFC states that the risks arising from the operation of the shared order book must be properly managed to protect client interests and maintain market integrity and stability. Therefore, platform operators providing a shared order book must implement the measures outlined in the circular.

1.2 Regulatory Requirements

1.2.1 Qualified Overseas Platform Operators and Clients

The Hong Kong SFC states that the shared order book should be jointly managed by platform operators and overseas platform operators licensed to conduct their activities in the relevant jurisdictions. The jurisdiction where the overseas platform operator operates should: (a) be a member of a Financial Action Task Force (FATF) or a regional organization performing similar functions; and (b) have effective regulation that is broadly consistent with the recommendations of the FATF and the International Organization of Securities Commissions (IOSCO) regarding market misconduct and client asset protection as outlined in the "Policy Recommendations for Crypto and Digital Asset Markets."

1.2.2 Trading and Settlement Risks

The Hong Kong SFC states in the circular that when a platform operator's client trading instructions are matched with those of an overseas platform operator, settlement risks may arise if the assets required for settlement (settlement assets) are not held by the platform operator's affiliated entities. Settlement may experience potential delays or failures due to operational difficulties or external factors (e.g., counterparty bankruptcy or cross-border asset transfers).

Trading Operations

The circular states that the shared order book should operate according to a comprehensive set of rules (shared order book rules), which must clearly define the pre-trade and post-trade procedures and operations applicable to all participants (platform participants). These rules should cover pre-payment, issuance of trading instructions, execution of trades, changes in liability (if applicable), settlement, and breach management. Furthermore, these rules should clearly outline the roles, rights, obligations, and responsibilities of all parties, including the platform operators as joint operators, overseas platform operators, platform participants, and designated custodians. Platform operators must ensure that the shared order book rules are binding and enforceable for overseas platform operators, platform participants, and designated custodians.

The shared order book should only accept trading instructions that have been fully pre-paid, and for which the settlement assets are held in custody by one or more custodians designated by the platform operator or overseas platform operator. Such platform operators should implement automated pre-trade verification mechanisms to confirm pre-payment and ensure sufficient assets are available for settlement.

Platform operators must ensure that (a) trades on the shared order book are fair and orderly; and (b) platform participants have equal rights to access the data in the order book.

Settlement Monitoring Measures

The circular indicates that the operation of shared liquidity may not always allow for immediate settlement, as settlement assets may be held in different locations, leading to delays between trade matching and settlement. Platform operators should design their operational processes to effectively reduce the risks of unsettled trades and related operational risks.

The focus is on a delivery-versus-payment (DVP) settlement mechanism to ensure that assets between platform operators and overseas platform operators can be exchanged simultaneously, thereby reducing the risk of non-delivery. Overseas platform operators are responsible for delivering the settlement assets related to the trading instructions from the overseas platform operator. The asset exchange process should account for actual time variables, including delays in transferring assets from cold wallets to hot wallets; potential interruptions due to blockchain network outages; and delays in fiat currency settlements due to bank holidays. The relevant processes should minimize delays and continuously adhere to DVP principles to protect client assets.

Platform operators should settle all trades with overseas platform operators at least once a day, and after settlement, client virtual assets should be held in custody by the platform operator's affiliated entities.

Additionally, given the volatility in trading volumes, platform operators should conduct intraday settlements to ensure that the risks of unsettled trades are limited to pre-set thresholds (unsettled trade limits). Platform operators should implement robust real-time monitoring measures to track unsettled trade risks.

Compensation Arrangements

The document mentions that platform operators providing a shared order book must demonstrate robust financial capacity to manage the shared order book and must assume full responsibility to their clients for trades executed through the shared order book, as if such trades were executed on the platform operator's own order book.

The circular stipulates that platform operators must establish a reserve fund in Hong Kong, held in trust by the platform operator, designated for client compensation, to cover client losses arising from settlement failures. The size of the reserve fund should not be less than the unsettled trade limit and should be adjusted according to expected unsettled trade risks.

According to paragraph 10.22 of the "Virtual Asset Trading Platform Guidelines," platform operators must have compensation arrangements to protect against potential losses of client virtual assets under custody. For settlement assets to be delivered, platform operators' clients should enjoy the same level of protection. Therefore, platform operators should purchase insurance or establish compensation arrangements to cover potential losses of settlement assets (e.g., losses due to theft, fraud, or misappropriation), with the amount not less than that required by the "Virtual Asset Trading Platform Guidelines."

1.2.3 Market Misconduct Risks

The circular states that according to paragraphs 8.1 to 8.4 of the "Virtual Asset Trading Platform Guidelines," platform operators should implement internal policies and monitoring measures for appropriate surveillance of trading activities on their platforms and adopt effective market surveillance systems. According to paragraphs 9.8 to 9.10 of the "Virtual Asset Trading Platform Guidelines," platform operators should reasonably believe the client who initially issued the instruction and the ultimate beneficiary.

When trading crosses jurisdictions with different regulatory standards, the risk of market misconduct may increase. Platform operators should jointly implement a unified market surveillance plan covering the shared order book with overseas platform operators, rather than conducting surveillance separately based on the jurisdiction where their clients are registered.

Platform operators should designate at least one responsible person or core function supervisor to oversee the joint market surveillance plan, ensuring compliance with SFC regulations, participating in decision-making processes and parameter selection for the surveillance system, supervising the handling of potential misconduct alerts, and regularly assessing the effectiveness of the plan.

The document states that platform operators should promptly provide the SFC with data related to the shared order book upon request, including all trading instructions and trading data, information about the individuals issuing trading instructions as specified in paragraph 9.8 of the "Virtual Asset Trading Platform Guidelines," and records of market surveillance.

1.3 Other Provisions

The Hong Kong SFC states in the document that platform operators must ensure that the operation of the shared order book complies with the provisions of the "Virtual Asset Trading Platform Guidelines" regarding trading on the platform, including the reliability and security of trading platforms under paragraphs 5.1(g), 7.22, and 7.27, as well as sections XII and XIV, comprehensive trading and operational rules, cybersecurity, and record-keeping. Platform operators must maintain sufficient records to demonstrate the design, development, testing, operation, and modifications of the shared order book.

Before providing trading services through a shared order book, platform operators should clearly disclose the main risks, allowing clients to make informed decisions. The disclosure should include potential conflicts of interest between the platform operator and overseas platform operators; the settlement mechanism; the parties responsible for settlement and associated risks; various scenarios that may lead to settlement failures and the parties involved; breach management; risk mitigation measures; the scope of client protection; and the rights and recourse available to clients.

Platform operators may only provide shared order book services to retail investors if (a) the additional risks associated with matching and settlement in overseas jurisdictions (including the possibility that client protection may be lower than in Hong Kong) are clearly explained, and (b) clients explicitly choose to participate.

The document concludes by stating that platform operators intending to operate a shared order book must obtain prior written approval from the Hong Kong SFC. The SFC will impose the provisions of the "Terms and Conditions Applicable to the Operation of Shared Order Books" on the licenses of platform operators.

II. Expansion of Products and Services for Licensed Virtual Asset Trading Platforms

In the "Circular on the Expansion of Products and Services by Virtual Asset Trading Platforms," the Hong Kong SFC states that the document aims to expand the types of products and services that can be offered by SFC-licensed virtual asset trading platforms, as part of a plan to promote the sustainable and robust development of Hong Kong's digital asset ecosystem.

2.1 Background

The circular indicates that under pillar P (Products) of the ASPIRe roadmap issued by the Hong Kong SFC on February 19, 2025, the SFC anticipates reviewing the types of digital asset products and services in the regulated market in Hong Kong to meet the diverse needs of different categories of investors. The proposed policies aim to promote the continuous development of the market while implementing robust safeguards to protect retail investors.

The document also notes that the Hong Kong SFC is expanding the products and services that can be offered by SFC-licensed virtual asset trading platforms through the following methods: (i) modifying token inclusion requirements; (ii) clarifying the existing regulatory requirements applicable to the distribution of tokenized securities and digital asset-related investment products on virtual asset trading platforms; and (iii) updating the regulations applicable to virtual asset trading platforms providing custody services for digital assets that clients may not trade on the platform.

2.2 Definition of Terms

The circular states that the term "digital assets" includes virtual assets, tokenized securities (a category within digital securities), and stablecoins. "Digital asset-related products" refer to investment products related to digital assets.

2.3 Token Inclusion Requirements

The circular indicates that to expand the variety of products, the Hong Kong SFC will no longer require virtual assets (including stablecoins) sold to professional investors on virtual asset trading platforms to have a 12-month track record. Additionally, stablecoins issued by licensed stablecoin issuers are also exempt from the 12-month track record requirement and may be sold to retail investors. However, the 12-month track record requirement still applies to other virtual asset products offered to retail investors.

The document also states that although the 12-month track record requirement for products offered to professional investors has been removed, the SFC refers to paragraph 7.6 of the "Guidelines for Virtual Asset Trading Platform Operators" (the "Virtual Asset Trading Platform Guidelines") and reiterates:

a) Virtual asset trading platforms should conduct all reasonable due diligence on any virtual assets (including stablecoins) before including them for trading and ensure they continue to meet all inclusion criteria set by the Token Inclusion and Review Committee; and

b) If a virtual asset trading platform offers virtual assets (including stablecoins) with a track record of less than 12 months to professional investors on its platform, it should make adequate disclosures.

The Hong Kong SFC states that to avoid doubt, the 12-month track record requirement does not apply to tokenized securities or other digital securities according to the "Virtual Asset Trading Platform Guidelines."

2.4 Virtual Asset Trading Platforms Distributing Digital Asset-Related Products and Tokenized Securities

The circular notes that currently, under standard licensing conditions, licensed virtual asset trading platforms can operate centralized virtual asset trading platforms for digital asset trading and conduct digital asset trading business outside the platform. To enable licensed virtual asset trading platforms to offer a wider range of services and products, the SFC recommends amending the standard licensing conditions to explicitly permit:

a) Virtual asset trading platforms to issue digital asset-related products and tokenized securities in accordance with the laws, codes, guidelines, and regulatory requirements of the Financial Secretary; and

b) Virtual asset trading platforms to open trust accounts or client accounts with custodians of certain digital asset-related products or tokenized securities for the purpose of holding these products or securities on behalf of their clients, in accordance with distribution arrangements.

The Hong Kong SFC also encourages virtual asset trading platforms willing to comply with the amended licensing application standards to submit approval applications to the SFC.

2.5 Custody of Tokens Not Traded on Virtual Asset Trading Platforms

The circular states that the Hong Kong SFC has noted that some virtual asset trading platforms may wish to provide custody services for digital assets not traded on the virtual asset trading platform through their affiliated entities. This is not permitted under the current licensing conditions. However, to promote more diversified development of digital asset custody services, the SFC now allows virtual asset trading platforms seeking to provide such services to apply for amendments to the relevant licensing conditions.

The Hong Kong SFC states in the circular that when virtual asset trading platforms provide such custody services to clients through their affiliated entities, they must comply with the existing "Virtual Asset Trading Platform Guidelines" and tokenization circular, particularly the provisions related to custody.

Virtual asset trading platforms should continuously assess and monitor developments related to all digital assets for which they intend to provide custody services, such as technological changes, the robustness of distributed ledger technology networks, and emerging security threats. Virtual asset trading platforms must also ensure that their internal monitoring measures, technological infrastructure, and anti-money laundering monitoring and market surveillance tools effectively manage any specific risks associated with these digital assets.

The circular further states that the Hong Kong SFC may, on a case-by-case basis, allow virtual asset trading platforms that have not completed the second-stage assessment to custody tokenized securities. When the SFC evaluates the relevant application, the virtual asset trading platform must demonstrate that it has implemented effective measures to safeguard client assets, such as management monitoring measures for transfer restrictions, establishing a whitelist for client wallet addresses or withdrawal wallet addresses, especially when tokenized securities are on a public non-permissioned network. However, the relevant virtual asset trading platform must complete the second-stage assessment before applying to the SFC for custody services for digital assets other than tokenized securities not offered for trading.

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