Key questions to the OTC derivatives licensing regime

Introduction

The OTC derivatives licensing regime (i.e., the Type 11 licensing regime) is expected to come into effect in the second half of 2027, and will be the most significant change to the Hong Kong licensing regime in the past twenty years. With the first consultation on the OTC derivatives licensing regime dating back to 2011 and a long history behind it, we have taken this opportunity to revisit this important piece of reform.

In this briefing note, we will answer some of your burning questions on the upcoming OTC derivatives licensing regime: what will the regime regulate, what are the key exemptions, where are we now, who may be impacted, and how firms should prepare?

What is the background to Type 11?

As a recap, the proposed Type 11 licensing regime regulates “dealing in OTC derivative products or advising on OTC derivative products”. Broadly speaking, these mirror the scope of existing “dealing” and “advising” regulated activities, but with respect to OTC derivative products. The Type 11 licensing regime seeks to introduce a licensing regime for all types of OTC derivatives (e.g., equity, FX, interest rate, weather and commodity OTC derivatives). Currently, only certain types of OTC derivatives activities are regulated under the existing licensing regime. For example, subject to applicable exemptions, dealing in equity derivatives is currently regulated as a Type 1 regulated activity and dealing in FX derivatives is currently regulated as a Type 3 regulated activity.

What are the key exemptions?

The exemptions to the Type 11 licensing regime are complex and is an area where professional legal advice will be relevant. There are over twenty exemptions to consider, without taking into account certain proposals from the 2017 consultation conclusions. There are exemptions, amongst others, for overlapping regulated activities carried out by persons with certain licenses (e.g., a Type 1 regulated activity carried out by a Type 1 licensee), authorized institutions, price takers, and certain corporate treasury centers. There are various nuances as to how these exemptions apply which warrant further discussion. For example, the exemption on overlapping regulated activities may not apply to a Type 1 licence holder if the Type 1 licence holder is dealing in equity derivatives as principal with certain counterparties.

Where are we now?

We expect more developments to follow ahead of the implementation of the Type 11 licensing regime. In particular, we expect, among other things: (i) the consultation conclusions to the regulatory capital requirements for OTC derivatives to be published; (ii) the legislation to the OTC derivatives licensing regime and various subsidiary legislation to be finalised; and (iii) there to be ffurther guidance on the relevant application and notification forms for the OTC derivatives licensing regime.

Who may be impacted?

1. Securities and Futures Commission (“SFC”) licensed asset managers – for asset managers (i) carrying on a Type 9 (asset management) regulated activity, they will need an expanded Type 9 licence to manage OTC derivative products; (ii) providing sub-advisory services in OTC derivative products, they will need a Type 11 licence unless exemptions apply; and (iii) that operate a central dealing desk in Hong Kong and provide trading services to other group affiliates, a Type 11 licence will likely be required and there will be further considerations as to the applicable regulatory capital.

2. SFC licensed broker dealers – SFC licensed broker dealers will require a Type 11 licence if they deal in or advise on OTC derivative products without an exemption. Firms will need to assess to what extent the overlapping exemption will apply to them. In addition, the transitional period in Note 2 to paragraph 20.2 of the Code of Conduct for Persons Licensed by or Registered with the SFC for unregulated affiliates providing OTC derivative services will expire when the Type 11 licensing regime is in effect.

3. Commodity derivative dealers – commodity derivative dealers may need a Type 11 licence subject to any exemptions.

4. Virtual asset (“VA”) dealers – while there isn’t any specific guidance to VA dealers, the same requirements should apply to OTC derivatives that have VA as their underlying. This is consistent with the FSTB/SFC's December 2025 consultation conclusions on the proposed VA dealing regime, which provide that derivatives and structured products referencing VAs would generally fall within Type 1 regulated activity, Type 2 regulated activity and/or Type 11 regulated activity under the SFO. The consultation conclusions also note that the proposed VA dealing regime has been narrowed to avoid duplicative licensing in respect of such products. Accordingly, VA dealers will need to consider whether they require a Type 11 licence.

How should we prepare ourselves?

Firms should consider whether they can meet the relevant regulatory requirements. Key considerations include (i) the applicability of the Type 11 licensing regime to their business; (ii) the regulatory capital impact on its business (if any); and (iii) if a Type 11 licence or a Type 9 upgrade is required, the relevant application requirements.

Firms should also revisit whether their policies and procedures will need to be updated.

Further information

Please feel free to contact us if you would like any further information.

For our asset management and broker dealer clients, we will also be publishing a separate and more in-depth frequently asked questions (“FAQ”) and toolkit to help you with this transition and will be available on request.