Hong Kong Virtual Assets Regulatory Update (2): Joint Circular on Intermediaries’ Virtual Asset-Related Activities

On 22 December 2023, the Securities and Futures Commission (“SFC”) and the Hong Kong Monetary Authority issued an updated Joint Circular on Intermediaries’ Virtual Asset-Related Activities (the “Circular”) in light of the latest market developments in the virtual asset (“VA”) space.

Against the backdrop of SFC’s authorisation of VA futures exchange-traded funds for public offering in Hong Kong, and its preparedness to accept applications for the authorisation of other funds with exposure to VAs (including VA spot exchange-traded funds^[1]), the Circular^[2] has been updated to specify (i) the requirements applicable to intermediaries when distributing VA-related products^[3] and (ii) the standards of conduct expected of them when distributing SFC-authorised VA funds.

The Circular supersedes the joint circular dated 20 October 2023 (the “October Circular”), although the key requirements under the October Circular on intermediaries’ distribution of VA-related products and provision of dealing, asset management and advisory services in respect of VAs continue to apply under the Circular. View our previous update summarising the October Circular here. 

Requirements on distribution of investment products with exposure to VAs

1. Investment products with exposure to VAs

The Circular clarifies that exchange-traded funds, exchange-traded products, funds, and derivative products which:

• have a principal investment objective or strategy to invest in VAs; or
   
• derive their value principally from the value and characteristics of VAs; or
   
• track or replicate the investment results or returns which closely match or correspond to VAs, will be regarded as VA-related products for the purposes of the Circular and are very likely considered to be complex.

Intermediaries distributing VA-related products considered to be complex products should comply with the SFC’s requirements on the sale of complex products, and implement additional investor protection measures including selling restrictions (to only professional investors) and VA-knowledge test.

A limited suite of VA-related derivative products that are traded on regulated exchanges specified by the SFC, exchange-traded VA derivative funds that are authorised or approved for offering to retail investors by the regulator in a designated jurisdiction^[4], and public VA futures exchange-traded funds authorised by the SFC and traded on the Stock Exchange of Hong Kong Limited or authorised or approved in a designated jurisdiction for offering to retail investors by the respective regulator and traded on a specified exchange, are not subject to the “professional investors” only restriction, and may be offered to retail investors.
 

2. Standards of conduct expected of intermediaries when distributing VA funds

VA funds authorised by the SFC for public offering will not be subject to the “professional investors only” restriction, but the following requirements will apply in their distribution:

• If listed and traded on the Stock Exchange of Hong Kong Limited: Intermediaries may execute client orders in them on exchange without the need to comply with the suitability requirement or the minimum information and warning statement requirement^[5] if there has been no solicitation or recommendation. However, they should still conduct a VA-knowledge test on the client concerned.

• If not listed, or listed but with trading in their fund units conducted off exchange^[6]: Intermediaries should comply with the suitability requirement and the minimum information and warning statements requirements, and conduct a VA-knowledge test on the client concerned.

If these funds are VA derivative funds, intermediaries must follow the existing requirements for derivative products as well.

We will continue to monitor VA-related regulatory developments. For advice on compliance-related issues, please contact Joyce Chan and Michelle Wong.