Source: Hong Kong Securities and Futures Commission official website, organized by Golden Finance

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

One of the circulars stated that the Securities and Futures Commission (SFC) permits platform operators to merge trading instructions with affiliated overseas virtual asset trading platforms into a shared order book. This move is the first step under Pillar A (Access) of the ASPIRe roadmap, aiming to attract global platforms, trading flows, and liquidity providers. Through seamless cross-platform matching and execution of trades, Hong Kong investors can expect to benefit from enhanced market liquidity and more competitive pricing, while also reducing additional risks under robust safeguards. The SFC's next step will be to explore the feasibility of allowing licensed brokerage firms to transfer client trading instructions to regulated overseas liquidity pools under the same group, and subsequently consider whether to further expand this arrangement.

In order to optimize the pillar P (Products) of the roadmap aimed at expanding new products and services, the Securities and Futures Commission (SFC) has allowed 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 in another circular. In addition, the connected entities of platform operators may provide custodial services for virtual assets or tokenized securities that are not traded on the relevant platform.

1. Licensed Virtual Asset Trading Platforms Sharing Liquidity

In the document “Circular on the Sharing of Liquidity by Virtual Asset Trading Platforms”, the Hong Kong Securities and Futures Commission has outlined 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 be merged into a consolidated liquidity pool to facilitate cross-platform matching and execution of trades (shared order book).

1.1 Background

The Hong Kong Securities and Futures Commission (SFC) stated that virtual asset trading is essentially borderless, and liquidity is dispersed across various trading platforms overseas. According to Pillar A (Access) of the ASPIRe roadmap, the SFC is committed to facilitating the integration of Hong Kong with overseas liquidity to promote the sustainable development of the local virtual asset ecosystem. Platform operators will be allowed to integrate liquidity within the group through a shared order book. This strategy aims to enhance market efficiency, provide deeper global liquidity for Hong Kong investors, 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” (“Virtual Asset Trading Platform Guidelines”), and transactions will be settled immediately by the platform operators.

The Hong Kong Securities and Futures Commission (SFC) stated that after the introduction of the shared order book, the trading instructions of platform operators' clients may match with those of overseas platform operators' clients who have already made prepayments outside of Hong Kong, thus creating settlement risks. The implementation of shared liquidity also makes market surveillance operations more complex; therefore, coordinated measures need to be taken to address potential market misconduct. The SFC mentioned 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 take the measures listed in the circular.

1.2 Regulatory Provisions

1.2.1 Qualified overseas platform operators and clients

The Hong Kong Securities and Futures Commission stated that the shared listing register 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 the Financial Action Task Force (FATF) or a regional organization that performs similar functions; and (b) have effective regulation that is generally in line with the recommendations of the FATF and the International Organization of Securities Commissions (IOSCO) regarding market misconduct and the protection of client assets as outlined in the “Policy Recommendations for Crypto and Digital Asset Markets.”

1.2.2 Transaction and Settlement Risks

The Hong Kong Securities and Futures Commission stated in a circular that when the trading instructions of a platform operator's clients are matched with the trading instructions of an overseas platform operator, and the assets required for settlement (settlement assets) are not held by a related entity of the platform operator, settlement risks may arise. Settlement may experience potential delays or failures due to operational difficulties or external factors (such as counterparty bankruptcy or cross-border asset transfers).

Trading Operations

The circular states that the shared order book should operate based on a comprehensive set of rules (Shared Order Book Rules), which must clearly define the procedures and operations for all participants (platform participants) using the shared order book both before and after transactions. These rules should cover pre-payment, issuing trade instructions, executing trades, responsibility changes (if applicable), settlement, and breach management. Furthermore, these rules should clearly outline the roles, rights, obligations, and responsibilities of all parties involved, including the platform operators acting as joint platform operators, overseas platform operators, platform participants, and designated custodians. The platform operators should ensure that the Shared Order Book Rules are binding and enforceable for overseas platform operators, platform participants, and designated custodians.

The shared listing book should only accept transactions that have been fully prepaid, and the settlement assets must be deposited in one or more custodians designated by the platform operator or overseas platform operator. The platform operator should implement an automated pre-trade verification mechanism to confirm that prepayment has been received and to ensure that there are sufficient assets for settlement.

The platform operator should ensure that the transactions on the shared listing book are fair and orderly; and that all participants on the platform have equal rights to access the data in the listing book.

Settlement Monitoring Measures

The circular document指出 that the operation of shared liquidity may not always settle immediately, as the settlement assets may be stored in different locations, leading to delays between the trading pair and settlement. Platform operators should design their operating processes to effectively reduce the risks of unsettled transactions and related operational risks.

The key point is the delivery-versus-payment (DVP) settlement mechanism, which ensures that assets between platform operators and overseas platform operators can be exchanged simultaneously, thereby reducing the risk of non-delivery. Overseas platform operators shall be responsible for the delivery of settlement assets related to transaction instructions from overseas platform operators. The asset exchange procedure should account for actual time variables, including delays in transferring assets from cold wallets to hot wallets; potential interruptions caused by blockchain network outages; and delays in fiat currency settlement due to bank holidays. The relevant processes should minimize delays and continuously adhere to DVP principles to protect customer assets.

Platform operators should settle all transactions with overseas platform operators at least once a day, and after settlement, the customer's virtual assets should be held in custody by an affiliated entity of the platform operator.

In addition, given the volatility in trading volume, platform operators should conduct intraday settlements to ensure that the risk of unsettled trades is limited to a pre-set cap (unsettled trade limit). Platform operators should implement robust real-time monitoring measures to track unsettled trade risks.

Compensation Arrangement

The document mentions that the operators of the platform providing a shared listing book should demonstrate robust financial capability to manage the shared listing book and should assume full responsibility to their clients for transactions executed through the shared listing book, just as if such transactions were executed on the operators' own listing book.

The circular document stipulates that platform operators must establish a reserve fund in Hong Kong, which must be held in trust by the platform operators and designated for customer compensation, to cover losses incurred due to settlement failures. The size of the reserve fund should not be less than the limit of unsettled transactions and should be adjusted according to the expected risks of unsettled transactions.

According to paragraph 10.22 of the “Guidelines for Virtual Asset Trading Platforms”, platform operators must have a compensation arrangement in place to provide protection against potential losses of client virtual assets under custody. For settlement assets to be delivered, platform operators' clients should enjoy equivalent levels of protection. Therefore, platform operators should purchase insurance or establish compensation arrangements to protect against potential losses of settlement assets (for example, losses arising from theft, fraud, or misappropriation), with the amount not less than that 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 for appropriate supervision of trading activities on their trading platforms, as well as adopt effective market surveillance systems. According to paragraphs 9.8 to 9.10 of the “Guidelines for Virtual Asset Trading Platforms”, platform operators should reasonably believe the customer 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 implement a unified market surveillance program covering shared order books in collaboration with overseas platform operators, rather than conducting surveillance separately based on the jurisdiction where their clients open accounts.

The platform operator should designate at least one responsible person or core function supervisor to oversee the joint market surveillance program, ensure compliance with the regulations of the Securities and Futures Commission, participate in the decision-making process and parameter selection on the surveillance system, supervise the handling of alerts for potential misconduct, and regularly assess the effectiveness of the program.

The document states that platform operators shall promptly provide the Securities Regulatory Commission with data from the shared order book upon request, including all trading instructions and trading data, the information of the persons who issued trading instructions as specified in Section 9.8 of the “Guidelines for Virtual Asset Trading Platforms,” and records of market surveillance.

1.3 Other Provisions

The Hong Kong Securities and Futures Commission stated in the document that platform operators should ensure that the operation of the shared order book complies with the regulations regarding trading on the platform as outlined in the “Guidelines for Virtual Asset Trading Platforms,” including sections 5.1)g(, 7.22 and 7.27, as well as the reliability and security of trading platforms under Parts XII and XIV, comprehensive trading and operational rules, network security, and record-keeping. Platform operators must maintain sufficient records to explain the design, development, testing, operation, and modifications of the shared order book.

Before providing trading services through the shared listing book, platform operators should clearly disclose the main risks, allowing clients to make informed decisions. The disclosures should include potential conflicts of interest of platform operators and overseas platform operators; settlement mechanisms; the parties responsible for settlement and the associated risks; various scenarios of settlement failure and the parties involved; liability management; risk mitigation measures; the scope of customer protection; and the rights and claims that customers should have.

Platform operators may only provide the service of sharing order books to retail investors if they have clearly explained the additional risks related to overseas jurisdictions, including that the level of protection for customers may be lower than in Hong Kong, and if customers explicitly choose to participate.

The document concludes by stating that operators of platforms intending to operate a shared order book must obtain prior written approval from the Hong Kong Securities and Futures Commission. The Commission will impose provisions of the “Terms and Conditions Applicable to the Operation of a Shared Order Book” on the licenses of platform operators.

2. Expanding Licensed Virtual Asset Trading Platform Products and Services

In the document titled “Circular Regarding Products and Services of Extended Virtual Asset Trading Platforms,” the Hong Kong Securities and Futures Commission stated that the document aims to expand the types of products and services that can be provided by licensed virtual asset trading platforms under the Commission, as part of a plan to promote the sustained 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 Securities and Futures Commission on February 19, 2025, the SFC anticipates reviewing the types of digital asset products and services in the regulated market of Hong Kong to meet the diverse needs of different categories of investors. The proposed policy aims to promote the continued development of the market while implementing robust safeguards to protect retail investors.

The document also points out that the Hong Kong Securities and Futures Commission expands the products and services that can be provided by licensed virtual asset trading platforms through the following methods in this circular: ) i ### amending the regulations on the inclusion of modified tokens; ( ii ) clarifying the existing regulatory provisions applicable to the distribution of tokenized securities and investment products related to digital assets on virtual asset trading platforms; and ( iii ) updating the regulations applicable to the custody services for digital assets that customers may not buy and sell on the platform provided by virtual asset trading platforms.

2.2 Vocabulary Definition

The circular points out that the term “digital assets” includes virtual assets, tokenized securities (which are a category within digital securities), and stablecoins. “Digital asset-related products” refer to investment products related to digital assets.

2.3 Token Inclusion Regulations

The circular indicates that in order to expand the variety of products, the Hong Kong Securities and Futures Commission no longer requires virtual assets (including stablecoins) sold to professional investors on virtual asset trading platforms to have a track record of 12 months. Additionally, stablecoins issued by licensed stablecoin issuers are also not required to comply with the 12-month track record requirement and can be sold to retail investors. Nevertheless, 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 requirement for a 12-month track record applicable to products offered to professional investors has been removed, the Securities and Futures Commission 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 incorporating them for buying and selling, and ensure that they continue to meet all the incorporation criteria established by the Token Incorporation and Review Committee; and

b) Virtual asset trading platforms that provide virtual assets (including stablecoins) with a track record of less than 12 months to professional investors on their platform should make adequate disclosures.

The Hong Kong Securities and Futures Commission stated that to avoid doubts, the requirement for a 12-month track record under the “Guidelines for Virtual Asset Trading Platforms” does not apply to tokenized securities or other digital securities.

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

The circular points out that currently, under the standard licensing conditions, licensed virtual asset trading platforms may operate centralized virtual asset trading platforms for digital asset trading, as well as engage in digital asset trading business conducted outside the platform. To enable licensed virtual asset trading platforms to provide a wider range of services and products, the Securities and Futures Commission recommends amending the set of standard licensing conditions to clearly permit:

a( Virtual Asset Trading Platform issues digital asset-related products and tokenized securities according to the laws, codes, guidelines, and regulatory rules of the Financial Secretary; and

The virtual asset trading platform b), in accordance with the requirements of the distribution arrangement, agrees to open trust accounts or client accounts with certain custodians of digital asset-related products or tokenized securities for the purpose of holding digital asset-related products or tokenized securities on behalf of its clients.

The Hong Kong Securities and Futures Commission also stated that it encourages virtual asset trading platforms that are willing to comply with the revised licensing application standards to submit approval applications to the Commission.

2.5 Custody of Tokens Not Bought or Sold on Virtual Asset Trading Platforms

The circular states that the Hong Kong Securities and Futures Commission (SFC) has noted that certain virtual asset trading platforms may wish to provide custody services for digital assets that are not traded on their platforms through their affiliated entities. This is not allowed under the current licensing conditions. However, to promote a more diversified development of digital asset custody services, the SFC now allows virtual asset trading platforms seeking to provide such services to apply for modifications to the relevant licensing conditions.

The Hong Kong Securities and Futures Commission stated in a circular document that virtual asset trading platforms should comply with the existing “Guidelines for Virtual Asset Trading Platforms” and the tokenization circular when providing such custody services to clients through their affiliated entities, particularly the provisions related to custody.

Virtual asset trading platforms should continuously assess and monitor the developments related to all digital assets for which they intend to provide custodial services, such as technological changes, the robustness of distributed ledger technology networks, and the emergence of 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 can effectively manage any specific risks associated with such digital assets.

The circular document also points out that the Hong Kong Securities and Futures Commission may, on a case-by-case basis, allow virtual asset trading platforms that have not completed the second phase of assessment to custody tokenized securities. When the SFC assesses the relevant applications, virtual asset trading platforms must demonstrate that they have implemented effective measures to protect client assets, such as implementing management and monitoring measures for transfer restrictions, establishing a whitelist for client wallet addresses or wallet addresses used for deposits and withdrawals, especially when tokenized securities are on a public non-permissioned network. However, the relevant virtual asset trading platforms must complete the second phase of assessment before applying to the SFC for custody services for digital assets other than their non-tradable tokenized securities.