Navigating Hong Kong’s New OTC Derivatives Regime: A Primer for Type 9 Asset Managers

Introduction

The Hong Kong’s Securities and Futures Commission (“SFC”) intends to implement a new regulatory framework for over-the-counter (“OTC”) derivatives (the “New Regime”) that will have a significant impact on existing Type 9 (asset management) regulated activity (“RA”) licence (“Type 9 Licence”) holders under the Securities and Futures Ordinance (Cap.571) (“SFO”).  The New Regime is still under public consultation at this stage and that process will officially close on 13 October 2025.  It is expected that the New Regime will come into effect after all the corresponding amendments to various related rules, codes and guidelines have been finalised.

Although proposed as early as 2011 in response to G20 commitments following the 2008 financial crisis, and legislated through the Securities and Futures (Amendment) Ordinance 2014, the New Regime has remained suspended for over a decade. This delay, in part, was to allow for extensive market consultations, development of subsidiary rules, and alignment with international standards to ensure market readiness. Recent developments, including the SFC's consultation conclusions in July 2025 on amendments to the Financial Resources Rules (“FRR”) and enhancements to mandatory reporting, have finally led to the regime’s potential activation in the near future.

This article, however, will focus on the New Regime’s impact on Type 9 Licence holders.  Beginning with an examination of the differences between the existing and expanded Type 9 Licence, we will then distil down the action steps for compliance, deadlines, and transitional arrangements for asset managers who are likely to be impacted by the New Regime.

Overview of the New OTC Derivatives Regime

The New Regime introduces two new RAs:

• Type 11: Dealing in or advising on OTC derivatives.
• Type 12: Providing client clearing services for OTC derivatives.

It also seeks to expand the existing Type 7 licence to cover providing automatic trading services (“ATS”) for OTC derivatives.

The existing Type 9 Licence, which governs asset management, has been broadened to explicitly include managing portfolios that contain OTC derivatives, such as swaps, forwards, or options.

The New Regime introduces mandatory transaction reporting to the Hong Kong Trade Repository (“HKTR”), which is confirmed to take effect on September 29, 2025, as well as enhanced capital requirements and risk management practices, which will take effect subject to the consultation conclusions. These measures have the stated aim of increasing transparency and reducing systemic risk in the OTC derivatives market.

The Expanded Type 9 Licence: Key Differences from the Existing Type 9

The existing Type 9 Licence allows asset managers to manage portfolios of securities (e.g., stocks and bonds) and futures contracts (e.g., commodity or index futures traded on exchanges). The expanded Type 9 Licence will explicitly include managing portfolios that contain an “OTC derivative product”.  This is defined in Schedule 1 to the SFO as being a “structured product” under section 1A of Part 1 of Schedule 1¹, subject to certain exemptions².

Key Differences Between Futures Contracts and OTC Derivatives

The following table compares futures contracts and OTC derivatives to clarify their differences:

Implications for Type 9 Managers

In practical terms, customised, privately negotiated derivates such as swaps, forwards, and options that are not standardised or exchange-traded will likely be caught by the definition of “OTC derivatives product”, and importantly, if a manager with a Type 9 Licence manages a portfolio containing these instruments, it will need to consider the expanded Type 9 Licence.

Additionally, if the Type 9 manager engages in activities beyond portfolio management such as dealing in OTC derivatives as a counterparty or providing standalone advice on them in circumstances where such dealing or advisory services are not wholly incidental to its portfolio management activities, a separate Type 11 licence may also be required.

Other Implications for Type 9 Managers

Beyond the expanded scope, the New Regime introduces additional requirements for Type 9 managers handling OTC derivatives:

Capital Requirements

For the expanded Type 9 Licence, the “fixed” minimum capital requirements remain the same as the existing Type 9 Licence.  If the Type 9 Licence is subject to a condition prohibiting the holding of client assets (which is usual), this amount remains at HK$100,000 in liquid capital (plus a 20% buffer – so HK$120,000 in total) with no paid-up requirement.

However, the "variable" part of the required liquid capital—which depends on the size, complexity, and risk of the OTC derivatives activities—may increase. This is because OTC derivatives can be riskier due to their customized nature and potential for market fluctuations or counterparty defaults. The increase helps protect against unexpected losses in volatile markets, aligning with international standards (Basel 2.5). It ensures that the manager has enough reserves to absorb shocks without disrupting operations or clients.

The SFC’s revised FRR use two main methods:

• Standardized Approach: Applies fixed risk weights to the OTC derivatives positions (e.g., based on notional amounts or exposure types, like interest rates or currencies). For example, a swap might be weighted by its duration or sensitivity to market changes.
• Internal Models Approach (“IMA”): If approved by the SFC, a manager can use its own models, such as Value-at-Risk (VaR) to estimate potential losses under normal and stressed conditions. This requires strong governance, validation, and stress testing, as outlined in the SFC’s guidelines.

These calculations must be done regularly at intervals that are commensurate with the Type 9 manager’s operational complexity, and the liquid capital must always exceed the total required amount. If it falls below 120% of the requirement, the Type 9 manager must notify the SFC immediately and in any event within 1 business day after the Type 9 manager becomes aware of it.  

For firms also holding a Type 11 licence, minimums are materially higher (e.g., HK$30 million paid-up and HK$15 million liquid for qualifying dealers), and using IMA may require up to HK$2 billion in tangible capital.

Risk Management

Enhanced risk mitigation practices are mandatory for managers under the expanded Type 9 Licence, to reduce counterparty and systemic risks. As noted above, a key difference between OTC derivative products and futures stems from the involvement of clearinghouses for futures, which handle margins automatically. The SFC's Risk Mitigation Requirements (“RMR”) apply to non-centrally cleared OTC derivatives, focusing on processes to minimise risks in trading, valuation, and settlement.

To meet the RMR, Type 9 managers should consider implementing the following action steps:

• Establish clear agreements with counterparties for trading terms (e.g., credit support arrangements) and dispute resolution processes.
• Confirm trades promptly (e.g., within one business day).
• Use objective methods to value derivatives and conduct independent reviews on the valuation model regularly.
• Reconcile portfolios with counterparties to regularly.
• Assess and engage in portfolio compression regularly.
• Set up procedures to resolve disputes quickly.
• Align risk policies across group affiliates if applicable.
• Validate models used for pricing and risk under SFC principles.
• Monitor risks like counterparty defaults, liquidity issues, and operational failures using integrated tools.
• Conduct stress tests for extreme market scenarios.
• Ensuring compliance with the margin requirements³ by implementing the following measures:
  • use software to calculate VM and IM;
  • track collateral (e.g., cash or securities); and
  • apply a HK$3.75 million minimum transfer threshold to avoid frequent small payments.

Reporting Obligations

Starting on September 29, 2025, all OTC derivative transactions must be reported to the HKTR. Reports must include UTIs and CDEs.  

Nevertheless, a Type 9 manager can be exempt from these reporting requirements if they meet the following conditions:

1. the total notional amounts of all of the manager’s outstanding OTC derivative transactions must not at any time exceed US$30 million, irrespective of the product class;
2. the manager must not have any transactions conducted in Hong Kong at any time; and
3. the manager must not have previously reported any OTC derivative transaction to the Hong Kong Monetary Authority (“HKMA”), nor should they have been required to report such transactions but failed to do so.

Action Steps for Type 9 Managers

Some key steps to take between now and 29 September 2025:

Update Compliance Systems

• Upgrade systems to meet HKTR reporting requirements, capturing UTIs and CDEs for OTC derivatives transactions. This is more complex than reporting for futures, which leverage existing exchange infrastructure.
• Enhance risk management systems to handle the bespoke nature of OTC derivatives, including margin and collateral processes to mitigate counterparty risk. Implement tools for valuation, reconciliation, and dispute management as part of RMR.

Some other steps to take between now and the implementation of the other parts of the New Regime:

Review Portfolio Activities

• Upgrade systems to meet HKTR reporting requirements, capturing UTIs and CDEs for OTC derivatives transactions. This is more complex than reporting for futures, which leverage existing exchange infrastructure.
• Enhance risk management systems to handle the bespoke nature of OTC derivatives, including margin and collateral processes to mitigate counterparty risk. Implement tools for valuation, reconciliation, and dispute management as part of RMR.

Assess Capital Adequacy

• Review liquid capital under the revised FRR, per the SFC’s draft guidelines (released July 14, 2025). Ensure reserves meet Basel 2.5 standards for OTC derivatives, which pose different risks than standardized futures. 

• Conduct quantitative impact studies to estimate variable liquid capital charges using standardized or internal models approaches. Speak to your current auditors or financial advisors to perform these calculations and confirm compliance with FRR requirements.

Staff Training

• Train portfolio managers and compliance teams on the differences between futures and OTC derivatives, focusing on the new regulatory requirements, risk management, and reporting obligations.

Engage with Legal and Compliance Advisors

• Work with legal counsel to confirm licensing needs, especially if activities overlap with Type 11. Audit systems to ensure compliance with the unique challenges of OTC derivatives compared to futures.

Deadlines and Transitional Arrangements

Reporting of UTIs and CDEs

The SFC and HKMA provide a transitional period of 6 months starting from the effective date, September 29, 2025, for reporting entities to migrate all long-dated legacy trades to the ISO standard.

Licensing requirements

In relation to the licensing requirements, the SFO provides deeming provisions for a transitional period of 6 months starting from the effective date of such requirements. During this period, existing Type 9 Licence holders that have been managing OTC derivate products can continue these activities without immediate disruption.

To benefit from the deeming provisions, firms must meet eligibility criteria (e.g., having conducted the activity for at least two years prior and employing qualified Responsible Officers with relevant experience) and file an application with the SFC within the first 3 months of the transitional period.

The application should include, among other things, a detailed business plan, internal controls, operational procedures, organisational structure, and confirmation of compliance with new requirements. Responsible Officers must also submit individual notices confirming their experience. If the application is taken up by the SFC, the Type 9 Licence holder is deemed licensed until the full application is processed. Failure to apply or meet criteria may require winding down OTC derivative activities. 

The SFC’s draft FRR and guidelines on market risk and model risk are open for comment until October 13, 2025. Managers should review these to understand capital impacts.

Conclusion

The expanded Type 9 Licence brings OTC derivatives under the asset management umbrella, requiring Type 9 managers to navigate a more complex regulatory landscape compared to managing standardised futures contracts. Unlike futures, OTC derivatives are bespoke, carry higher counterparty risk, and demand enhanced reporting and risk management. Type 9 managers should take action now to review their activities, update systems, assess capital needs, and train staff to comply with the applicable requirements. Those engaging in standalone OTC derivatives dealing or advisory services should also consider whether a separate Type 11 Licence is needed. 

¹  A “structured product” means

• an instrument under which some or all of the return or amount due (or both the return and the amount due) or the method of settlement is determined by reference to one or more of:

  • changes in the price, value or level (or a range within the price, value or level) or any type or combination of types of securities, commodity, index, property, interest rate, currency exchange rate or futures contract;

  • changes in the price, value or level (or a range within the price, value or level) of any basket of more than one type, or any combination of types, of securities, commodity, index, property, interest rate, currency exchange rate or futures contract; or 

  • the occurrence or non-occurrence of any specified event or events (excluding an event or events relating only to the issuer or guarantor of the instrument or to both the issuer and the guarantor);

• a regulated investment agreement; or
• any interests, rights or property prescribed under s392 SFO as structured products.

² An OTC derivate product does NOT include certain things, including (i) listed securities traded on a recognised stock market; (ii) futures contracts that are traded on a recognised futures market; (iii) securities or futures contracts that are cleared through a clearing house prescribed under s392A SFO; (iv) structured products offered to the public and that are authorised under s105(1) SFO; and (v) spot contracts…

³  The margin requirements include (1) reporting Variation Margin (“VM”) daily and (2) reporting Initial Margin (“IM”) at least every 10 business days.