Source: Official website of the Hong Kong Securities and Futures Commission, compiled by: Bitchain Vision

The Hong Kong Securities and Futures Commission (SFC) published the “Circular on Shared Liquidity on Virtual Asset Trading Platforms” and “Circular on Expansion of Products and Services of Virtual Asset Trading Platform》Two new regulatory guidance documents.The document sets out the expected standards for operators of virtual asset trading platforms licensed by the China Securities Regulatory Commission (platform operators). It has important guiding significance in promoting virtual asset trading platforms to connect to global liquidity and expand the scope of products and services provided.

One of the circulars states,The China Securities Regulatory Commission allows platform operators and related overseas virtual asset trading platforms’ trading instructions to be merged into a shared order book, and this move is the first step taken by the Securities and Futures Commission to attract global platforms, trading flows and liquidity providers under Pillar A (Access Connectivity) of the ASPIRe roadmap.Through tight and seamless cross-platform order matching and execution, Hong Kong investors can expect to benefit from increased market liquidity and more competitive pricing, while mitigating additional risks with 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 then consider whether to further expand the relevant arrangements..

In order to optimize Pillar P (Products) within the roadmap aimed at expanding new products and services,In another circular, the SFC permitted 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 sell tokenized securities and digital asset-related investment products..In addition, an associated entity of the platform operator may provide custody services for virtual assets or tokenized securities that are not traded on the relevant platform.

1. Shared liquidity among licensed virtual asset trading platforms

In the “Circular on Shared Liquidity between Virtual Asset Trading Platforms”, the Hong Kong Securities and Futures Commission sets out the regulatory guidelines and expected standards for licensed virtual asset trading platform operators (Platform Operators) to integrate their listings with those of their globally associated virtual asset trading platform operators (Overseas Platform Operators).The circular stated that trading instructions from different platforms will be allowed to be merged into a comprehensive liquidity pool to achieve cross-platform order matching and execution of transactions (shared order books).

1.1 Background

The Securities and Futures Commission of Hong Kong stated that virtual asset trading is inherently borderless, and liquidity is dispersed across trading platforms overseas.According to Pillar A (Access) of the ASPIRe roadmap, the SFC is committed to promoting the integration of Hong Kong and 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 list of orders.This strategy aims to improve market efficiency, provide Hong Kong investors with deeper global liquidity, narrow price differences, and optimize price discovery.Currently, the transaction settlement risk for platform operators is low because, in accordance with the Securities and Futures Commission’s “Guidelines Applicable to Operators of Virtual Asset Trading Platforms” (“Guidelines for Virtual Asset Trading Platforms”), all trading instructions have been prepaid and matching trades are settled immediately by the platform operator.

The Hong Kong Securities and Futures Commission stated that after the introduction of a shared order book, the trading instructions of platform operator customers may be matched with the trading instructions of overseas platform operator customers who have received prepayment outside Hong Kong, thus creating settlement risks.The implementation of shared liquidity has also made the operation of market surveillance more complex, so coordinated measures need to be taken to deal with potential market misconduct.The China Securities Regulatory Commission said that the increased risks caused by the operation of shared listings must be properly managed to protect the interests of customers and maintain the integrity and stability of the market.Therefore, platform operators that provide shared listings must take the measures listed in the circular.

1.2 Regulatory regulations

1.2.1 Qualified overseas platform operators and customers

The Hong Kong Securities and Futures Commission stated that the shared listing book should be jointly managed by platform operators and overseas platform operators licensed in the relevant jurisdictions to conduct their activities.The jurisdiction in which 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 to the FATF; and (b) have effective regulation that is broadly consistent with the FATF recommendations and the Policy Recommendations for Crypto and Digital Asset Markets issued by the International Organization of Securities Commissions (IOSCO) on market irregularities and customer asset protection.

1.2.2 Transaction and settlement risks

The Securities and Futures Commission of Hong Kong stated in the circular that settlement risk 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 associated entity of the platform operator.Settlement may be subject to potential delays or failures due to operational difficulties or external factors such as counterparty insolvency or cross-border asset transfers.

Trading operations

The circular stated that the shared order book should operate according to a comprehensive set of rules (shared order book rules), and the rules must clearly define the pre-trade and post-trade procedures and operations for the use of the shared order book that are applicable to all its participants (platform participants).These rules should cover prepayment, placing of trade instructions, execution of trades, change of liability (if applicable), settlement and default management.In addition, the rules should clearly set out the roles, rights, obligations and responsibilities of all parties, including the platform operator as the joint platform operator and the overseas platform operator, 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 order book should only accept transaction instructions that have been fully prepaid 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-trade verification mechanisms to confirm that prepayments have been received and ensure that there are sufficient assets for settlement.

The platform operator should ensure that (a) transactions 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 document points out that liquidity-sharing operations may not always be settled immediately because settlement assets may be stored in different locations, resulting in a time lag between trade matching and settlement.Platform operators should design their operating procedures to effectively reduce the risk of unsettled transactions and related operational risks.

The 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.The overseas platform operator shall be responsible for delivering the settlement assets related to the overseas platform operator’s trading instructions.Asset swap procedures should address real time variables, including delays in moving assets from cold wallets to hot wallets; potential disruptions due to blockchain network outages; and fiat currency settlement delays due to bank holidays.Relevant processes should minimize delays and continue to 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, customer virtual assets should be held in custody by an associated entity of the platform operator.

In addition, given the volatility in trading volumes, platform operators should conduct intraday settlement to ensure that unsettled trade risks are limited to pre-set limits (unsettled trade caps).Platform operators should implement robust real-time monitoring measures to track unsettled transaction risks.

compensation arrangements

The document mentioned that platform operators that provide shared order books should demonstrate sound financial capabilities to manage the shared order book and should bear full responsibility to their customers for transactions executed through the shared order book, as if such transactions were executed on the platform operator’s own order book.

The circular document stipulates that the platform operator must establish a reserve fund in Hong Kong, which shall be held in trust by the platform operator and designated for customer compensation to compensate for customer losses caused by settlement failure.The size of the reserve fund should not be less than the unsettled transaction limit and should be adjusted for the expected unsettled transaction risk.

According to paragraph 10.22 of the “Virtual Asset Trading Platform Guidelines”, platform operators are required to have compensation arrangements in place to provide protection for potential losses of clients’ virtual assets under custody.Customers of the platform operator should enjoy the same level of protection in relation to the settlement assets to be delivered.Therefore, platform operators should purchase insurance4 or establish compensation arrangements to provide protection against potential losses of settlement assets (such as losses due to theft, fraud or misappropriation), the amount of which shall not be less than the amount required by the “Guidelines for Virtual Asset Trading Platforms”.

1.2.3 Market Misconduct Risk

The circular document states that in accordance with paragraphs 8.1 to 8.4 of the “Guidelines for Virtual Asset Trading Platforms”, platform operators should implement internal policies and control measures to properly monitor trading activities on their trading platforms and adopt an effective market surveillance system.According to paragraphs 9.8 to 9.10 of the “Virtual Asset Trading Platform Guidelines”, the platform operator should be satisfied with the client and ultimate beneficiary who were initially responsible for issuing the instruction based on reasonable reasons.

Market misconduct risks may increase when transactions span jurisdictions with different regulatory standards.Platform operators should jointly implement a unified market surveillance plan covering shared listings with overseas platform operators, and should not conduct separate surveillance based on the jurisdiction where their customers open accounts.

Platform operators should designate at least one responsible person or core functional manager who is responsible for overseeing the joint market surveillance program, ensuring compliance with the Securities and Futures Commission’s regulations, participating in the decision-making process and parameter selection on the surveillance system, overseeing the handling of potential misconduct warnings, and regularly evaluating the effectiveness of the program.

The document stated that platform operators should immediately provide the SFC with information on the shared order book upon request, including all transaction instructions and transaction data, information on the persons who issued the transaction instructions 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 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 in the “Virtual Asset Trading Platform Guidelines”, including the reliability and security of the trading platform under paragraphs 5.1(g), 7.22 and 7.27 and Parts XII and XIV of the “Virtual Asset Trading Platform Guidelines”, comprehensive trading and operating rules, network security and record keeping.The platform operator must maintain records that adequately describe the design, development, testing, operation and modification of the shared listing list.

Before providing trading services through a shared order book, platform operators should clearly disclose the main risks so that customers can make informed decisions.Relevant disclosures should include potential conflicts of interest between platform operators and overseas platform operators; settlement mechanisms; parties responsible for settlement and related risks; different situations in which settlement fails and the parties involved; default management; risk mitigation measures; customer protection scope; and customers’ rights and recourse.

Platform operators can only provide shared order book services to retail investors if (a) the additional risks involved in matching and settlement in overseas jurisdictions have been clearly explained (including that the level of customer protection may be lower than in Hong Kong), and (b) customers have explicitly chosen to participate.

The document finally states that platform operators intending to operate shared listings must obtain prior written approval from the Hong Kong Securities and Futures Commission.The SFC will impose the “Terms and Conditions Applicable to the Operation of Shared Listings” on the license of platform operators.

2. Expand the 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 stated that the document aims to expand the types of products and services that can be provided by SFC-licensed virtual asset trading platforms as one of the plans to promote the continued and robust development of Hong Kong’s digital asset ecosystem.

2.1 Background

The circular document stated that under Pillar P (Products) of the ASPIRe roadmap issued by the Hong Kong Securities and Futures Commission on February 19, 2025, the Securities and Futures Commission expects to review the types of digital asset products and services in Hong Kong’s regulated market to meet the diverse needs of different types of investors.The proposed policies aim to promote continued market development while implementing robust safeguards to protect retail investors.

The document also states that in this circular, the Hong Kong Securities and Futures Commission has expanded the products and services that can be provided by SFC-licensed virtual asset trading platforms by: (i) amending the token inclusion requirements; (ii) clarifying the current regulatory requirements applicable to the distribution of tokenized securities and digital asset-related investment products on virtual asset trading platforms; and (iii) updating the requirements applicable to virtual asset trading platforms providing custody services for digital assets that customers may not buy and sell on the platform.

2.2 Vocabulary definitions

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

2.3 Token inclusion regulations

The circular document stated that in order to expand product types, the Hong Kong Securities and Futures Commission no longer requires virtual assets (including stable coins) sold to professional investors on virtual asset trading platforms to have a 12-month track record.In addition, stablecoins issued by licensed stablecoin issuers do not need to meet the 12-month track record requirement and can be sold to retail investors.Nonetheless, 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 removed, the SFC refers to paragraph 7.6 of the “Guidelines Applicable to Operators of Virtual Asset Trading Platforms” (“Guidelines on Virtual Asset Trading Platforms”) and reiterates:

a) Before including any virtual assets (including stablecoins) for trading, virtual asset trading platforms should conduct all reasonable due diligence on such virtual assets and ensure that they continue to comply with all inclusion criteria set by the Token Inclusion and Review Committee; and

b) Virtual asset trading platforms should make full disclosures if they offer virtual assets (including stablecoins) with a track record of less than 12 months to professional investors on their platforms.

The Hong Kong Securities and Futures Commission stated that, for the avoidance of doubt, under the Virtual Asset Trading Platform Guidelines, the 12-month track record requirement does not apply to tokenized securities or other digital securities.

2.4 Virtual asset trading platform distributes digital asset-related products and tokenized securities

The circular pointed out that currently, according to the standard licensing conditions, licensed virtual asset trading platforms can operate centralized virtual asset trading platforms for digital asset transactions, as well as operate digital asset trading businesses conducted outside the platform.In order to enable licensed virtual asset trading platforms to provide a wider range of services and products, the SFC proposes to amend the set of standard licensing conditions to explicitly allow:

a) The virtual asset trading platform issues digital asset-related products and tokenized securities in accordance with the laws, codes, guidelines and regulatory regulations of the Financial Secretary; and

b) The virtual asset trading platform, in accordance with the requirements of the distribution arrangement, agrees to open a trust account or customer account with the custodian of certain digital asset-related products or tokenized securities for the purpose of holding digital asset-related products or tokenized securities on behalf of its customers.

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 applications for approval to the Securities and Futures Commission.

2.5 Custody of tokens that are not bought and sold on virtual asset trading platforms

The circular document states that the Hong Kong Securities and Futures Commission has noticed that some virtual asset trading platforms may wish to provide custody services for digital assets that are not traded on the virtual asset trading platform through their associated entities.This is not allowed under the current licensing conditions.However, in order to promote the more diversified development of digital asset custody business, the China Securities Regulatory Commission now allows virtual asset trading platforms seeking to provide such services to apply for modifications to relevant licensing conditions.

The Securities and Futures Commission of Hong Kong stated in the circular document that virtual asset trading platforms should comply with the existing “Guidelines for Virtual Asset Trading Platforms” and the Tokenization Circular, especially those related to custody, when providing such custody services to customers through their associated entities.

Virtual asset trading platforms should continually evaluate 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 technology networks, and the emergence of security threats.Virtual asset trading platforms must also ensure that their internal control measures, technical infrastructure, and anti-money laundering monitoring and market surveillance tools can effectively manage any specific risks related to such digital assets.

The circular document also pointed 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 application, virtual asset trading platforms must demonstrate that they have put in place effective measures to safeguard customer assets, such as implementing administrative controls on transfer restrictions and establishing permission lists for customer wallet addresses or wallet addresses used for withdrawals, especially when tokenized securities are on a public, non-permissioned network.However, the relevant virtual asset trading platform must complete the second stage of assessment before applying to the Securities and Futures Commission to provide custody services for its digital assets other than tokenized securities that are not for trading.