SFC framework for secondary trading of tokenised funds

Background

In late 2023, the Securities and Futures Commission (SFC) first set out its tokenisation-related regulatory framework, including the Circular on tokenisation of SFC-authorised investment products (the 2023 Circular). The 2023 Circular established the regulatory framework for tokenised SFC-authorised funds, which was permitted for primary dealing only.

The SFC recently launched a new regulatory framework to pilot the secondary trading of tokenised SFC-authorised investment products (Tokenised Products) in Hong Kong. This new guidance sets out the framework under which the Hong Kong public can trade Tokenised Products on SFC-licensed virtual asset trading platforms (VATPs).

In this article, we outline the key requirements under the SFC's "Circular on secondary trading of tokenised SFC-authorised investment products" (Circular) issued on 20 April 2026, from the perspective of managers of SFC-authorised investment products (Product Providers) and VATPs. The 2023 Circular was also updated on 20 April 2026 to reflect the updated regulatory framework.

Key Requirements for Secondary Trading of Tokenised Products

A. Requirements Applicable to Product Providers

1. Product Compliance and Structure

• Product Providers must ensure that Tokenised Products meet all applicable rules, regulations, and product codes, including eligibility, structure, investment, operational requirements, disclosure, and ongoing compliance obligations.

2. Liquidity and Market Making

• Product Providers must use their best endeavours to ensure each Tokenised Product has at least one market maker. At least one market maker must give not less than three months' notice prior to terminating the market making arrangement.
• Product Providers must closely monitor secondary trading activities and liquidity, maintain dialogue with market makers, and establish contingency plans (e.g., backup market makers, trading halts if primary dealing is suspended).
• Product Providers should appoint distributors who are SFC-licensed corporations or registered institutions. Distributors are expected to process creation and redemption requests from third-party investors (except in certain remote scenarios).
• Arrangements should be in place with SFC-licensed VATPs to facilitate the transfer of Tokenised Products between primary and secondary markets.

3. Disclosure

• Offering documents (including the product key facts statement) must clearly set out:
  • Risks associated with secondary trading (e.g., liquidity, price deviation, price fragmentation, market maker reliance).
  • Key information on trading channels, settlement processes, market making arrangements (including any incentive schemes), and indicative fee ranges.
  • Circumstances under which secondary trading may be suspended.
  • The list of market makers (with a link to a website for the latest list) and any affiliated entities acting as market makers, with disclosure of potential conflicts of interest.

4. Notification

• Product Providers must give the SFC early alerts of any untoward circumstances affecting Tokenised Products, including issues impacting operations, secondary trading, or liquidity.
• Immediate notification to the SFC and investors is required if trading or market making ceases or is suspended, with an assessment of the impact, remedial actions, and contingency plans.

B. Requirements Applicable to SFC-Licensed VATPs

1. Trading Operations and Controls

• Secondary trading must be conducted via on-platform trading (on-screen auto-matching) on SFC-licensed VATPs. On-platform trading of Tokenised Products should follow the existing trading operation, rules and risk control measures under the Guidelines for Virtual Asset Trading Operators.
• VATPs must ensure trades are only executed if clients have sufficient capital or product holdings to cover the trades.
• VATPs must implement effective risk management and supervisory controls, including:
  • Price Deviation Alerts: Investors must be alerted if execution prices deviate significantly from the indicative NAV.
  • Primary Market Alternative: Investors must be informed of the option to subscribe or redeem at NAV and the implications.
  • System Controls: Automated pre-trade and regular post-trade monitoring, trading bands, and controls to prevent excessive price fluctuations and market manipulation.

2. Market Maker Oversight

• VATPs must conduct due diligence and regular monitoring of market makers' performance.
• VATPs must ensure market makers maintain appropriate bid-ask spreads, quote sizes, minimum order durations, and participation rates.
• VATPs must specify in their arrangements with market makers (i) eligibility criteria and obligations for market makers, and (ii) arrangements if a market maker is no longer available.

3. Disclosure and Client Onboarding

• VATPs must provide online access to:
  • Details of secondary trading arrangements, market making arrangements (including incentive schemes), eligibility criteria for market makers, fee schedules, and price quotations.
  • Real-time or near real-time indicative NAV (typically updated at least every 15 seconds during trading hours) and last NAV, with data source and update frequency.
  • Prominent risk disclosures (liquidity, price deviation, price fragmentation, market maker reliance).
• VATPs must obtain client confirmation that they understand these risks before onboarding them for secondary trading.

Conclusion

The SFC notes in the Circular that it has referenced experiences of Hong Kong's ETF market and SFC-licensed VATPs in formulating the framework for secondary trading of Tokenised Products. Indeed, a number of requirements in the Circular echo regulations for ETFs in Hong Kong, such as the advance notice requirement for market maker termination, appointment of distributors to process creation and redemption requests, and publication of real-time indicative NAV and last NAV. These requirements aim to ensure fair pricing and liquidity of the Tokenised Products on the secondary market. Unlike ETFs, some of these requirements for Tokenised Products are imposed on VATPs instead of on Product Providers. Product Providers can leverage their experience in the management and operation of ETFs in issuing Tokenised Products. We expect there to be legal and operational aspects to be addressed, to ensure that the roles and responsibilities of the different parties are clearly defined and that operations are suitable for the 24/7 trading nature of Tokenised Products, before these products can be traded on VATPs.

Product Providers should engage in prior consultation with the SFC for (i) new investment products with tokenisation features (primary dealing and/or secondary trading) requiring SFC authorisation; and (ii) existing SFC-authorised investment products introducing tokenisation features (the SFC will also need to approve such features). The SFC should also be consulted for any subsequent material changes to previously approved secondary trading arrangements e.g., trading mechanism, Price Deviation Alert, market making arrangements, or addition of trading channels.