Source: Hong Kong Securities and Futures Commission (SFC) website, compiled by: Jinse Finance
On November 3, the Hong Kong Securities and Futures Commission (SFC) published two new regulatory guidance documents: "Circular on Shared Liquidity of Virtual Asset Trading Platforms" and "Circular on Expanding Products and Services of Virtual Asset Trading Platforms." The document outlines expected standards for SFC-licensed virtual asset trading platform operators (Platform Operators), providing important guidance for facilitating global liquidity access and expanding the range of products and services offered by virtual asset trading platforms. One circular states that the SFC allows Platform Operators to merge trading orders with those of affiliated overseas virtual asset trading platforms into a shared listing register. This move is the first step taken by the SFC under Pillar A (Access) of the ASPIRe roadmap to attract global platforms, trading volume, and liquidity providers. Through tight and seamless cross-platform matching and execution, Hong Kong investors can expect to benefit from increased market liquidity and more competitive pricing, while mitigating additional risks under robust safeguards. The SFC will next explore the feasibility of allowing licensed brokerages to transfer client trading instructions to regulated overseas liquidity pools within the same group, and then consider whether to further expand the arrangement. To optimize the P (Products) pillar of the roadmap, which aims to expand new products and services, the SFC, in another circular, permitted platform operators to offer 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 digital asset-related investment products. Furthermore, connected entities of platform operators can provide custody services for virtual assets or tokenized securities not traded on the platform. I. Shared Liquidity by Licensed Virtual Asset Trading Platforms In the "Circular on Shared Liquidity by Virtual Asset Trading Platforms," the Hong Kong Securities and Futures Commission (SFC) outlined its regulatory approach and expected standards for licensed virtual asset trading platform operators (Platform Operators) to integrate their listings with those of their globally affiliated virtual asset trading platform operators (Overseas Platform Operators). The circular states that trading instructions from different platforms will be permitted to be merged into a single integrated liquidity pool to enable cross-platform matching and execution of trades (shared listings). 1.1 Background The SFC stated that virtual asset trading is inherently borderless, while liquidity is dispersed across trading platforms worldwide. In accordance with Pillar A (Access) of the ASPIRe Roadmap, the SFC is committed to facilitating the integration of Hong Kong's liquidity with overseas markets to promote the sustainable development of the local virtual asset ecosystem. Platform operators will be permitted to integrate with intra-group liquidity through a shared listing book. This strategy aims to improve market efficiency, provide Hong Kong investors with deeper global liquidity, narrow price discrepancies, and optimize price discovery. Currently, the transaction settlement risk for platform operators is already low because, according to the SFC's "Guidance Applicable to Virtual Asset Trading Platform Operators" (the "Virtual Asset Trading Platform Guidelines"), all trading orders are pre-paid, and matched transactions are settled immediately by the platform operator. The Hong Kong SFC stated that with the introduction of a shared listing book, trading orders from platform operator clients may be matched with those from overseas platform operator clients who have pre-paid their orders outside Hong Kong, thus creating settlement risk. The implementation of shared liquidity also complicates market surveillance operations, necessitating coordinated measures to address potential market misconduct. The SFC stated that the increased risks arising from the operation of the shared listing book must be properly managed to protect client interests and maintain the integrity and soundness of the market. Therefore, platform operators providing shared listing books must implement the measures outlined in the circular.
1.2 Regulatory Requirements
1.2.1 Qualified Overseas Platform Operators and Clients
The Hong Kong Securities and Futures Commission (SFC) stated that the shared listing register should be jointly managed by the platform operator and the overseas platform operator licensed in the relevant jurisdiction to conduct its activities. The jurisdiction in which the overseas platform operator operates should: (a) be a member of a Financial Action Special Organization (FAS) or a regional organization performing a function similar to that of the FAS; and (b) have effective regulation that is substantially consistent with the FAS recommendations and the International Organization of Securities Commissions (IOSCO) Policy Recommendations for Crypto and Digital Asset Markets regarding market misconduct and client asset protection.
1.2 Regulatory Requirements
1.2.1 Qualified Overseas Platform Operators and Clients
1.2.2 Transaction and Settlement Risks The Hong Kong Securities and Futures Commission (SFC) stated in its circular that settlement risks may arise when a platform operator's client trading instructions are matched with those of an overseas platform operator, and the assets required for settlement (settlement assets) are not held by an affiliated entity of the platform operator. Settlement may be delayed or fail due to operational difficulties or external factors (such as counterparty bankruptcy or cross-border asset transfers). The circular further stated that the shared listing register should operate under a comprehensive set of rules (the Shared Listing Register Rules), which must clearly define the pre- and post-trade procedures and operations applicable to all participants (platform participants) using the shared listing register. These rules should cover prepayment, issuing trading instructions, executing trades, changes in liability (if applicable), settlement, and breach of contract management. Furthermore, these rules should clearly define the roles, rights, obligations, and responsibilities of all parties, including the platform operator as a joint platform operator, overseas platform operators, platform participants, and designated custodians. Platform operators should ensure that the shared listing rules are binding and enforceable on overseas platform operators, platform participants, and designated custodians. The shared listing should only accept transaction instructions that have received full prepayment and whose settlement assets have been deposited with one or more custodians designated by the platform operator or overseas platform operator. These platform operators should implement automated pre-transaction verification mechanisms to confirm prepayment and ensure sufficient assets for settlement. Platform operators should ensure that (a) transactions on the shared listing are fair and orderly; and (b) all platform participants have equal rights to access the listing data. The circular states that shared liquidity operations may not always be settled immediately, as settlement assets may be stored in different locations, resulting in a time lag between transaction matching and settlement. Platform operators should design their operational processes to effectively reduce the risk of unsettled transactions and related operational risks. A key focus is the 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 settlement assets related to their transaction instructions. Asset swap procedures should handle practical time variables, including delays in transferring assets from cold wallets to hot wallets; potential disruptions due to blockchain network outages; and fiat currency settlement delays due to bank holidays. The process should minimize delays and continuously adhere to the DVP (Demand-Voucher) principle to protect customer assets. Platform operators should settle all transactions with overseas platform operators at least once a day. After settlement, customer virtual assets should be held in custody by a connected entity of the platform operator. Furthermore, given the volatility of trading volume, platform operators should conduct intraday settlements to ensure that the risk of unsettled transactions is limited to a pre-set limit (unsettled transaction cap). Platform operators should implement robust real-time monitoring measures to track unsettled transaction risks. The document states that platform operators providing shared listings should demonstrate sound financial capabilities to manage the shared listings and should assume full responsibility to their customers for transactions executed through the shared listings as if such transactions were executed on the platform operator's own listings. The circular stipulates that platform operators must establish a reserve fund in Hong Kong, held in trust by the platform operator, and designated for customer compensation to cover customer losses arising from settlement failures. The size of the reserve fund should not be less than the unsettled transaction limit and should be adjusted according to the anticipated risks of unsettled transactions. According to paragraph 10.22 of the "Guidelines for Virtual Asset Trading Platforms," platform operators must have compensation arrangements to protect against potential losses of escrowed customer virtual assets. The platform operator's customers should have the same level of protection for settlement assets to be delivered. Therefore, platform operators should purchase insurance or establish compensation arrangements to protect against potential losses of settlement assets (such as losses due to theft, fraud, or misappropriation), with the amount not less than the amount required by the "Guidelines for Virtual Asset Trading Platforms." 1.2.3 Market Misconduct Risk The circular states that, according to paragraphs 8.1 to 8.4 of the "Guidelines for Virtual Asset Trading Platforms," platform operators should implement internal policies and monitoring measures to appropriately monitor trading activities on their trading platforms and adopt an effective market surveillance system. According to paragraphs 9.8 to 9.10 of the "Guidelines for Virtual Asset Trading Platforms," platform operators should be reasonably satisfied with the client and ultimate beneficiary who initially issued the instruction. The risk of market misconduct may increase when trading crosses jurisdictions with different regulatory standards. Platform operators should implement a unified market surveillance program covering shared listings jointly with overseas platform operators, rather than conducting surveillance separately based on the jurisdiction where their clients' accounts are opened. Platform operators should designate at least one responsible person or core functional manager to oversee the joint market surveillance program, ensure compliance with the SFC's regulations, participate in the decision-making process and parameter selection within the surveillance system, monitor the handling of warnings regarding potential misconduct, and periodically evaluate the program's effectiveness. The document states that platform operators should immediately provide the SFC with data from the shared listing register upon request, including all trading instructions and data, information on individuals issuing trading instructions as specified in paragraph 9.8 of the "Virtual Asset Trading Platform Guidelines," and market surveillance records. 1.3 Other Provisions The Hong Kong Securities and Futures Commission (SFC) stated in the document that platform operators should ensure that the operation of the shared listing book complies with the requirements for trading on the platform under the "Guidelines for Virtual Asset Trading Platforms," including the reliability and security of the trading platform, comprehensive trading and operating rules, cybersecurity, and record keeping under paragraphs 5.1(g), 7.22, and 7.27 and Parts XII and XIV of the "Guidelines for Virtual Asset Trading Platforms." Platform operators must maintain records sufficient to illustrate the design, development, testing, operation, and modifications of the shared listing book. Before providing trading services through the shared listing book, platform operators should clearly disclose the key risks so that clients can make informed decisions. The disclosures should include potential conflicts of interest for the platform operator and overseas platform operators; the settlement mechanism; the parties responsible for settlement and related risks; different scenarios of settlement failure and the parties involved; liability management; risk mitigation measures; the scope of customer protection; and the rights and recourse of customers. Platform operators may only offer shared listing services to retail investors if (a) the additional risks involved in matching and settlement in overseas jurisdictions (including the possibility that customer protection may be lower than in Hong Kong) have been clearly explained, and (b) the customer has explicitly chosen to participate. The document concludes by stating that platform operators intending to operate shared listings must obtain prior written approval from the Hong Kong Securities and Futures Commission (SFC). The SFC will impose the "Terms and Conditions Applicable to Operating Shared Listings" on the platform operator's license. II. Expanding Products and Services of Licensed Virtual Asset Trading Platforms In the "Circular on Expanding Products and Services of Virtual Asset Trading Platforms," the Hong Kong Securities and Futures Commission (SFC) stated 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 continued and robust development of Hong Kong's digital asset ecosystem. 2.1 Background The circular states that under Pillar P (Products) of the ASPIRe Roadmap issued by the SFC on February 19, 2025, the SFC anticipates reviewing the types of digital asset products and services in Hong Kong's regulated markets to meet the diverse needs of different types of investors. The proposed policies aim to promote the continued development of the market while implementing robust safeguards to protect retail investors. The document also states that the Hong Kong Securities and Futures Commission (SFC) has expanded the products and services that can be offered by SFC-licensed virtual asset trading platforms through the following methods in this circular: (i) amending the token inclusion requirements; (ii) clarifying the existing regulatory requirements applicable to the distribution of tokenized securities and investment products related to digital assets on virtual asset trading platforms; and (iii) updating the requirements applicable to virtual asset trading platforms providing custody services for digital assets that clients may not necessarily buy or sell on the platform. 2.2 Definitions The circular states that the term “digital asset” includes virtual assets, tokenized securities (a category of digital securities), and stablecoins. “Digital asset-related products” refers to investment products related to digital assets. 2.3 Token Inclusion Requirements The circular states that, to expand product categories, the Hong Kong Securities and Futures Commission (SFC) will no longer require virtual assets (including stablecoins) offered to professional investors on virtual asset trading platforms to have a 12-month track record. Furthermore, stablecoins issued by licensed stablecoin issuers are also exempt from the 12-month track record requirement and can be offered to retail investors. However, the 12-month track record requirement still applies to other virtual asset products offered to retail investors. The document also points out that although the 12-month track record requirement applicable to products offered to professional investors has been abolished, the SFC refers to paragraph 7.6 of the Guidance Applicable to Operators of Virtual Asset Trading Platforms (the “Virtual Asset Trading Platform Guidance”) and reiterates that: a) Virtual asset trading platforms should conduct all reasonable due diligence on any virtual assets (including stablecoins) before including them for trading, and ensure that they continue to comply with all inclusion criteria established by the Token Inclusion and Review Committee; and b) Virtual asset trading platforms should make full disclosure if they offer virtual assets (including stablecoins) with a track record of less than 12 months to professional investors on their platforms. The SFC states that, for the avoidance of doubt, the 12-month track record requirement does not apply to tokenized securities or other digital securities under the Virtual Asset Trading Platform Guidance. 2.4 Distribution of Digital Asset-Related Products and Tokenized Securities by Virtual Asset Trading Platforms The circular states that, currently, under the standard licensing conditions, licensed virtual asset trading platforms can operate centralized virtual asset trading platforms for digital asset trading, as well as conduct digital asset trading business outside of their platforms. To enable licensed virtual asset trading platforms to offer a wider range of services and products, the SFC proposes revising 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 Financial Secretary's laws, codes, guidelines and regulatory provisions; and b) Virtual asset trading platforms, in accordance with distribution arrangements, to open trust accounts or client accounts with custodians of certain digital asset-related products or tokenized securities for the purpose of holding them on behalf of their clients. The Hong Kong Securities and Futures Commission (SFC) also stated that it encourages virtual asset trading platforms willing to comply with the revised 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 SFC notes that some virtual asset trading platforms may wish to provide custody services for digital assets not traded on their platforms through their affiliated entities. This is not permitted under current licensing conditions. However, to promote greater diversification of the digital asset custody business, the SFC now allows virtual asset trading platforms seeking to provide such services to apply for amendments to the relevant licensing conditions. The SFC stated in the circular that virtual asset trading platforms, when providing such custody services to clients through their affiliated entities, should comply with the existing "Virtual Asset Trading Platforms Guidelines" and the 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 shifts, the robustness of distributed ledger networks, and the emergence of security threats. Virtual asset trading platforms must also ensure that their internal controls, technological infrastructure, and anti-money laundering monitoring and market surveillance tools effectively manage any specific risks associated with such digital assets. The circular also states that the Hong Kong Securities and Futures Commission (SFC) may, on a case-by-case basis, allow virtual asset trading platforms that have not yet completed the second phase of assessment to custody tokenized securities. When the SFC assesses such applications, virtual asset trading platforms must demonstrate that they have implemented effective measures to protect customer assets, such as implementing management and monitoring measures to restrict transfers, and establishing a licensed list of customer wallet addresses or wallet addresses used for deposits, particularly when tokenized securities are on public permissionless networks. However, virtual asset trading platforms must complete the second phase of assessment before applying to the SFC to provide custody services for digital assets other than tokenized securities not intended for trading.
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