Copilot Deep Research mode summary of HK Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping) Rules

The FCJ used the recently upgraded Copilot which incorporates GPT-5 and also Deep Research modes to summarize a 200 + page HK Securities and Futures (OTC Deriv Transactions - Reporting and Record Keeping rules).

The objective here is to:

a) Simplify the doc into more easily digestible content.

b) Be more approachable to readers and those who require frequent reference to this Handbook.

c) Create the content such that the next step is to convert the text into an internal online reference tool for those who require frequent usage.

The results are as follows:

Comprehensive Summary of Compliance Requirements under the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules (Effective from September 2025)

Introduction

Hong Kong stands at the forefront of regulatory modernization for the over-the-counter (OTC) derivatives market, aiming to enhance market transparency, systemic stability, and international alignment. The Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules (referred hereafter as the "Reporting Rules" or "Rules")—effective 29 September 2025—represent a significant evolution in the regulatory landscape, driven by both international commitments and local policy imperatives. Their core objective is to establish robust, harmonized standards for reporting and record keeping of OTC derivatives and to extend regulatory oversight across associated market participants and products.

This report delivers a thorough analysis of every key compliance requirement embedded within the Rules and related frameworks, including the latest regulatory interpretations, timelines, procedural obligations, and operational best practices. Drawing upon a multitude of recent regulatory documents, official FAQs, legal commentaries, and market analyses, the report is organized by topical categories corresponding to the major areas of compliance, with all individual requirements detailed as actionable obligations. The concluding sections also address emerging areas, such as environmental, social, and governance (ESG) obligations, virtual asset and stablecoin regulation, and the rise of RegTech.

1. Regulatory Requirements under the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping) Rules

1.1 Scope of Application and Core Entities

• Who is Subject to the Rules:

• Licensed Corporations (“LCs”) regulated by the SFC.

• Authorized Institutions (“AIs”), mainly banks regulated by the HKMA.

• Approved Money Brokers (“AMBs”).

• Recognised Clearing Houses (“RCHs”) acting as central counterparties.

• Certain central counterparties (CCPs) authorized under the Automated Trading Services (“ATS-CCP”) regime.

• Definition and Coverage:

• The Rules apply to specified types of OTC derivatives. These currently encompass all five key asset classes: interest rates, foreign exchange, equities, credit, and commodities.

• “Prescribed Persons” are defined in Schedule 1 and further clarified in official FAQs.

• Both Hong Kong-incorporated and overseas-incorporated entities operating in Hong Kong—in particular through branches—are subject to reporting when transactions are “conducted in Hong Kong” or booked to a Hong Kong balance sheet.

Analysis:

The scope ensures broad market coverage and brings Hong Kong in line with global reform principles. Coverage includes transactions with a Hong Kong nexus, ensuring the reporting regime captures both direct dealings and broader global group activities when sufficiently linked to Hong Kong operations.

1.2 When Reporting and Record Keeping Obligations Arise

• Trigger Events:

• Entering into a specified OTC derivative transaction by a prescribed person.

• An event that changes the previously reported data (e.g., amendment, termination).

• Transactions “conducted in Hong Kong” for the benefit of an affiliate.

• Exemptions:

• De minimis exemption: where the notional amount of outstanding OTC derivatives does not exceed US$30 million, reporting may not be compulsory; however, once exceeded, full and permanent obligations are triggered.

• Affiliate Reporting: If the affiliate has reported the transaction, prescribed persons may be deemed to have fulfilled their reporting/record keeping obligation, with certain documentation required to evidence this arrangement.

Analysis:

Reporting triggers are purposefully broad. The de minimis rule avoids overburdening small players; however, non-compliance post-threshold has permanent consequences. Entities must have robust monitoring to ensure timely compliance as thresholds are approached or exceeded.

1.3 Transactions Captured

• Specified OTC Derivatives:

• Transactions defined by rules and periodically updated lists in FAQs.

• Includes all trades booked in Hong Kong and any transactions where the “decision-maker” operates in Hong Kong, even when counterparties or bookings are offshore.

• Transactions between group affiliates involving a Hong Kong branch are subject to reporting if the branch plays a decision-making or execution role.

• Exclusions:

• Certain spot contracts and physically settled foreign exchange derivatives may be carved out, subject to ongoing regulatory updates.

Analysis:

Granular transaction capture prevents regulatory arbitrage and ensures comprehensive data. Regular review of product lists is crucial for compliance teams, especially as new derivative structures and asset classes—such as crypto derivatives—gain prominence.

2. Record Keeping Obligations for OTC Derivatives

2.1 Statutory Record Keeping Requirements

• Obligation Scope:

• Prescribed persons must keep comprehensive records relating to each reportable OTC derivative transaction.

• Retention Period:

• Records must be retained for at least five years from the date the transaction is terminated, matured, or transferred.

• Nature of Records:

• Must enable “complete and accurate reconstruction” of all relevant details of the transaction, including trade date, time, valuation, collateral, confirmation data, and all amendments or post-trade lifecycle events.

• Language and Accessibility:

• Records must be kept in an easily accessible form and be provided to regulators upon request without undue delay.

• Jurisdictional Reach:

• Even if a transaction is entered into or conducted outside Hong Kong, if the reporting entity or the counterparty is a prescribed person, records must still be maintained.

Analysis:

Firms must implement data retention and archiving solutions robust enough to reconstruct historic trade flows. Cross-border transactions and global trading desks should ensure records are maintained within the prescribed regulatory framework, regardless of counterparty domicile or trade execution venue.

2.2 Examples of Required Documents

• Trade confirmations.

• Valuation statements and reconciliations.

• Communications evidencing order receipt and execution.

• Agreements governing derivatives master terms (e.g., ISDA Master Agreements).

• Collateral/margin documentation.

• Lifecycle event records (amendments, terminations, novations).

Analysis:

Detailed documentation ensures transparency and facilitates regulatory investigations or audits. Effective integration between front office, operations, legal, and compliance functions is essential to meet these standards.

3. Reporting Timelines and Deadlines

• Standard Reporting Deadline:

• Reporting must be completed no later than the next business day following the transaction date (“T+1”).

• Subsequent Event Reporting:

• Any modification, termination, or other lifecycle events must also be reported by T+1 following the event.

• Special Provisions:

• Where the reporting obligation arises as a result of an affiliate’s involvement or if transactions are automatically “deemed reported,” documentary evidence must be provided in a timely manner.

• Valuation and Margin/Collateral Reporting:

• Valuation data and margin/collateral information must be updated and reported at the prescribed frequency and within designated cut-off times as specified in the SFC and HKMA guidelines.

Analysis:

The report-next-day deadline leaves a narrow operational window. Firms need automated workflows to ensure data quality and timely transmission to the Hong Kong Trade Repository (HKTR). Escalation processes for exceptions must be in place.

4. Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Requirements

• Legal Foundations:

• Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) applies.

• All reporting entities are subject to customer due diligence (CDD), transaction monitoring, and suspicious transaction reporting requirements in line with FATF recommendations.

• Enhanced AML for Virtual Assets:

• Firms dealing with virtual asset-related OTC derivatives must adopt risk-based controls, enhanced CDD, and comply with the latest digital AML/CFT guidelines.

• AI/ML solutions for transaction monitoring are encouraged and, in some cases, mandated for enhancement of AML/CFT effectiveness.

• Ongoing Compliance:

• Regular AML risk assessments and periodic review of high-risk relationships.

• Record keeping for AML purposes must align with both OTC reporting and statutory AML/CFT requirements.

Analysis:

AML obligations are layered and demand ongoing risk assessment protocols, especially for entities dealing with innovative products, cross-border exposure, or virtual assets where regulatory expectations are evolving rapidly.

5. Virtual Assets and Stablecoins Compliance

• Stablecoins Ordinance:

• Came into force 1 August 2025; no stablecoin issuer or intermediary may operate without a specific license from the HKMA.

• Licensing Regime:

• Applies to primary market issuance and secondary market activity involving “fiat-referenced” or otherwise specified stablecoins with a Hong Kong nexus.

• Transaction reporting for OTC derivatives on stablecoins must comply with both the Reporting Rules and specialized stablecoin reporting requirements.

• AML/CFT for Stablecoins:

• Stablecoin issuers must meet AML/CFT obligations, maintain robust risk management, and submit to regulatory supervision, including regular audits and operational reviews.

• Market Conduct:

• Prohibitions against advertising, offering, or inducing transactions in stablecoins without a valid license.

• Cross-border participants must be vigilant about activities with Hong Kong connections.

Analysis:

The stablecoin regime is intentionally broad, designed to capture both issuers and market facilitators. Given the global nature of virtual assets, firms with any operational link to Hong Kong must assess their regulatory exposure and licensing obligations.

6. Capital and Financial Resource Requirements

• Regulated Activities and Licensing:

• The FRR (Financial Resources Rules) are being updated for the new OTC derivative regulated activities (Type 11 and Type 12).

• Licensed corporations dealing/advising in OTC derivatives or offering client clearing services must hold adequate regulatory capital, with detailed new requirements to be implemented post-consultation period (expected soon after 29 September 2025).

• Key Aspects:

• Specific risk charges for market risk, counterparty credit risk, and model risk.

• Internal Models Approach (IMA) for market risk under strict governance and validation controls.

• Ongoing capital adequacy, liquidity, and solvency monitoring, with periodic regulatory reporting and independent audits.

• Special Rules for Cryptoassets:

• Additional capital deductions or risk weightings for exposures to cryptoassets and stablecoins are mandated under new banking rules effective 1 January 2026.

Analysis:

Tighter capital requirements reflect both international standards (Basel III/IV) and Hong Kong’s local risk environment. Entities must update capital planning and risk management models—especially for new activities and digital assets.

7. ESG Reporting and Governance Obligations

• Climate Disclosures:

• For financial years starting 1 January 2025, all listed companies must report Scope 1 and Scope 2 greenhouse gas (GHG) emissions; companies listed on the Main Board or LargeCap Index soon face even wider mandatory climate-related disclosures.

• ESG Code:

• Enhanced ESG disclosures, including governance metrics, risk management, resilience strategies, target setting, and progress towards sustainability objectives, are required under the Hong Kong Exchanges and Clearing (HKEX) ESG Reporting Guide and the new HK Sustainability Disclosure Standards (fully aligned with ISSB).

• Non-listed Firms and Financial Institutions:

• From 2028, significant financial institutions (non-listed PAEs) required by sector regulators to comply with new HK-based ESG standards.

• Governance Requirements:

• Board responsibility for ESG oversight and internal controls.

• Maintenance of auditable records for ESG metrics and narrative disclosures.

Analysis:

The climate disclosure regime is rapidly converging with global best practices. Firms must develop robust internal ESG data collection, integrate sustainability targets into business strategy, and enhance governance capabilities to ensure compliance and mitigate potential reputational risk.

8. Fintech and RegTech Adoption Guidelines

• AI/RegTech Integration:

• HKMA and SFC encourage—and at times require—the adoption of technology-driven solutions for OTC derivatives reporting, transaction surveillance, and AML/CFT monitoring.

• Guiding Principles:

• Governance: Board-level oversight and accountability for AI and RegTech use.

• Data Quality: Rigorous validation, explainability, and periodic review of models.

• Cybersecurity: Continuous controls for data protection and resilience.

• Ethical Use: Fairness, explainability, and transparency for all applications, including client-facing AI tools and transaction monitoring systems.

• ML/TF Monitoring:

• All AIs must conduct a feasibility study on the use of AI in AML/CFT systems and submit implementation plans to HKMA.

• RegTech solutions must undergo regular evaluation for effectiveness and compliance with regulatory requirements.

Analysis:

The adoption of digital solutions in compliance is not merely optional but increasingly mandated. Proactive investment and upskilling in RegTech and AI are needed to meet evolving expectations and exploit potential opportunities for efficiency gains.

9. Licensing and Registration for Derivative Activities

• Regulated Activity Types:

• Type 11: Dealing in or advising on OTC derivatives.

• Type 12: Providing client clearing services in respect of OTC derivatives.

• Expanded Type 9: Discretionary management of portfolios including OTC derivatives.

• Expanded Type 7: Operating automated trading services for OTC derivatives.

• Transitional Arrangements:

• Existing firms performing eligible activities may be “deemed licensed” if they fulfill eligibility and notification requirements.

• Fit and Proper Criteria:

• Applicants must demonstrate financial integrity, competence, adequate internal controls, and continuous professional training.

• Ongoing Requirements:

• Responsible officers, continuous regulatory returns, compliance function, and notification of changes to management or business scope.

Analysis:

The expanded licensing regime brings significant new classes of activity into regulatory scope. Firms must work closely with legal and compliance advisors to evaluate whether their business activities now constitute regulated activities, triggering licensing or registration requirements.

10. Penalties, Enforcement, and Sanctions

• Breach Consequences:

• Administrative penalties, fines, license suspension or revocation for non-compliance with reporting or record-keeping obligations.

• Criminal sanctions for repeated, willful, or egregious violations.

• Regulatory “naming and shaming” and public censures may be applied.

• Disciplinary Powers:

• SFC and HKMA retain broad discretionary powers under the Securities and Futures Ordinance (SFO), the Banking Ordinance, and new Circulars to order pecuniary penalties, issue prohibition orders, and conduct on-site or off-site reviews.

• Rectification Requirements:

• Firms may be required to implement remedial programs, enhance systems, or hire independent auditors following compliance breaches.

Analysis:

Regulatory expectations are high; prompt self-reporting and remediation of breaches can mitigate sanctions. A strong culture of compliance is the most effective defense against enforcement action.

11. Cross-border and ‘Conducted in Hong Kong’ Criteria

• "Conducted in Hong Kong" Definition:

• Transaction is considered “conducted in Hong Kong” if:

• The person making the decision to enter into the transaction is a trader in Hong Kong (or employed to perform duties predominantly in HK).

• The transaction is arranged by personnel of a Hong Kong entity and executed or booked offshore, but on behalf of the entity or its affiliates.

• Activities on business trips outside Hong Kong are not captured if the individual works predominantly outside Hong Kong.

• Booking versus Execution:

• Transactions booked to a HK balance sheet are in scope, regardless of execution location. Transactions involving HK branches of overseas entities are subject to special rules.

• Affiliates and Group Companies:

• Obligation may transfer to the group entity if proper documentation exists and regulatory requirements for substituted compliance are met.

Analysis:

Cross-border group structures require clear policies and documentation to attribute reporting responsibility correctly. Regular staff training on the “conducted in Hong Kong” rules is essential to avoid inadvertent non-compliance.

12. Unique Transaction Identifier (UTI) Generation

• Mandatory Use:

• All reported OTC derivatives must have a Unique Transaction Identifier (“UTI”) in line with global CPMI/IOSCO harmonization guidelines. Mandated from 29 September 2025.

• Responsibility for UTI Creation:

• Default: Determined by following the CPMI/IOSCO “waterfall” method for assigning responsibility.

• Parties may bilaterally agree on UTI generation, though the waterfall remains the default.

• If interim UTIs are used, procedures for replacing them with official UTIs must be followed promptly as per technical guidance.

• Operational Readiness:

• Firms are responsible for updating trade capture and reporting systems to accommodate UTI generation, assignment, and reporting.

Analysis:

The UTI regime is critical for global trade matching and regulatory harmonization. Failure to generate, assign, or report UTIs precisely leads to data breaks and regulatory scrutiny; robust systems integration is non-negotiable.

13. Branch and Head Office Legal Entity Identifier (LEI) Reporting

• Mandatory Requirement:

• Each reporting entity must report its own LEI and, where relevant, the head office LEI for branch transactions.

• Counterparty LEIs must also be included in all eligible reports.

• Procedural Guidance:

• Reporting entities must ensure counterparties have valid LEIs or, in their absence, company registration numbers.

• Absence of valid LEIs precludes trading in covered instruments.

• LEI Maintenance:

• Entities are responsible for maintaining valid, up-to-date LEIs and ensuring they are linked to the correct entity within the global LEI system.

Analysis:

Effective LEI management supports accurate reporting and market transparency. Operations and compliance teams should conduct periodic audits to verify LEI status and mapping.

14. Interpretations and Frequently Asked Questions (FAQs)

• Regulatory Guidance:

• The SFC and HKMA maintain comprehensive FAQs to interpret ambiguous rules, clarify complex scenarios, and provide operational examples.

• Binding/Non-binding Status:

• While FAQs provide authoritative guidance, statutory rules and published Guidelines take precedence in the event of conflict.

• Updates and Consultation:

• FAQs are updated regularly to address evolving market questions and new product types; stakeholders are advised to monitor updates and participate in consultations.

Analysis:

Staying current with FAQ updates is critical for operational compliance, particularly as new regulatory requirements are phased in.

15. Operational Procedures and Documentation Standards

• How to Report:

• Reporting must be performed electronically to the HKTR, using the mandated ISO 20022 XML schema from September 2025.

• Reports must include all Critical Data Elements (CDEs), UTI, UPI, participant and counterparty details, and trade-level data.

• Data Standards:

• Critical Data Elements (CDEs) and Universal Product Identifiers (UPIs) must meet global standards and technical formatting requirements.

• Data Masking:

• Certain jurisdictions may permit masking of counterparty details, with relief provided under designated conditions.

• Amendment and Correction Process:

• Entities must have policies to promptly correct errors or omissions in reported data and respond rapidly to inquiries from HKMA/SFC.

Analysis:

A high standard of data integrity, controls over processing and error correction, and close coordination between trading and infrastructure teams is essential for compliance.

16. Summary Table: Key Compliance Requirements by Category:

Elaboration:

Comprehensive compliance is achieved only when all these elements are systematically implemented. The technical, operational, and governance burdens are significant, but necessary to ensure robust market transparency and regulatory effectiveness.

Conclusion and Recommendations

Hong Kong’s Reporting Rules create a robust compliance architecture for the OTC derivatives market—one that is dynamic, globally harmonized, and technologically progressive. The multi-layered obligations extend far beyond simple trade reporting, requiring integrated operational frameworks, strong AML/CFT programs, climate and ESG disclosures, and advanced technology adoption across all regulated entities.

Key Recommendations for Market Participants:

• Assign board and senior management responsibility for oversight of OTC compliance programs.

• Invest in integrated technical systems to manage CDE capture, UTI/UPI generation, and electronic submissions.

• Conduct gap analyses and regular compliance reviews covering both regulatory and technical standards.

• Provide continuous staff training, especially on cross-border activities and emerging product types, including virtual assets and stablecoins.

• Establish robust documentation and error correction procedures to respond to audits and regulatory inquiries.

• Track ongoing regulatory changes and engage in market dialogues and consultations.

By adhering to these practices, market participants not only ensure compliance but also build operational resilience and reputational strength in one of Asia’s most dynamic financial centers.

For further details on specific obligations, regulatory interpretations, and technical standards, market participants are strongly encouraged to regularly review the HKMA and SFC official websites, updated FAQs, and participate in industry consultations.