SFC and HKMA issue circular on intermediaries’ VA-related activities

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Following the launch of the new Virtual Assets Trading Platform licensing regime, the SFC and HKMA have issued a joint circular to set out how they will regulate the virtual assets related activities carried out by intermediaries. The circular covers different VA-related activites providing detailed requirements intended to raise additional investor protection measures for retail clients. If you have been engaging in any activities in relation to virtual assets, you should review your regulatory set up to make sure you are meeting the up-to-date standards.  

The joint circular on intermidiaries’ virtual asset-related activities was issued by SFC and HKMA on 20th October 2023. The updated policy covers: the distributing of virtual asset (VA) related products, providing VA dealing services, providing VA asset management services, and providing VA advisory services. The Joint Circular supersedes the joint circular released on 28 January 2022.

Distribution of VA-related products

The SFC has specified additional measures on the distribution of VA-related products.  First, except those traded on regulated exchanges specified by the SFC, intermediaries should only offer the VA-related products to professional investors – or PIs – due to its complex and high risk nature.

Second, except for institutional PIs and qualified corporate PIs, intermediaries should assess whether clients have knowledge of investing in VA-related products prior to effecting a transaction in VA-related products on their behalf. Where necessary, the intermediaries should provide adequate training to the client on the nature and risk of VAs. The SFC is of the veiw that VAs are very likely to be considered complex products and it has emphasised the importance of suitability. It reminds the intermediaries of the complex product regime and suitability obligations as supplemented by the Suitability FAQs.

In addition, given the high risk nature of VAs, intermediaries should assure that the client has the financial capacity to meet the obligations arising from leveraged or margin trading in VA-related products.

Provision of VA-deailng services and VA-advisory services

The SFC also expressed concern around overseas Virtual Asset Trading Platforms (VATPs) which are not subject to reguatory standards comparable to those under its regulatory framework, potentially resulting in difficulties recovering assets from, or pursuing claims against, platforms located overseas. As such, the SFC and HKMA considers it appropriate and necessary to require intermediaries to partner only with SFC-licensed VATPs for the provision of VA-dealing services, whether by way of introducing clients to the platforms for direct trading or establishing an omnibus account with the platforms.

The SFC will impose licensing conditions to the intermediaries that provide VA-dealing services or VA-advisory services, and require them to comply with the prescribed terms and conditions. The SFC highlights the requirements on assessing clients’ knowledge on VAs and their risk tolerance level, requiring intermediaries setting clients’ exposure limits in trading of VAs in applicable situations.

Provision of asset management services in respect of VAs

For asset management in respect of VAs, the SFC has also revised the proforma terms and conditions detailing the requirements for fund management and discretionary account management. Fund managers need to satisfy the de minimis threshold in order to qualify as a VA fund manager. There are also additional requirements on financial resources, custody of fund assets and other operational requirements.

The SFC also clarified that where a Type 1 intermediary is authorised by its clients to provide VA-dealing services on a discretionary basis as an ancillary service, the intermediary should only invest less than 10% of the gross asset value of the client’s portfolio in VAs.

What you should do

If you have been engaging in any activities in relation to VAs, you should review your policies and procedures to ensure you meet the regulatory standards. It is also wise to closely assess your resources, systems and controls. This is particularly important for those intermediaries currently providing VA-dealing services, who will be given a three-month transition period to make sure that they have sufficient measures in place to ensure client’s assets and interests are protected.

If you are looking to provide services in relation to VAs in future, keep in mind it may be seen by the regulators as a significant change to your current business activities, and so will trigger the notification requirement. In this scenario it may be prudent to seek external professional advice to make sure you don’t miss any important regulatory considerations.

How we can help

At Bovill, our team of experienced consultants can provide companies with tailored solutions and expert advice on VATP licensing process and ongoing compliance support and internal controls for VA-related activities.

If you are currently providing VA-related services or planning to expand your service scope covering VA-related products or starting your business in VA-related activities in Hong Kong, contact us to learn more about how we can help your firm apply for the relevant licences and how to stay compliant with latest regulatory requirements.