How Hong Kong’s New Crypto Exchange Policies Connect Global Liquidity

The Hong Kong Securities and Futures Commission (SFC) has taken a groundbreaking step towards integrating its virtual asset market into the global trading sphere. By allowing licensed local crypto platforms to merge order books with overseas affiliates, the SFC is setting the stage for deeper market liquidity and more globally aligned pricing for Hong Kong investors. This initiative marks a significant stride towards the SFC’s vision of establishing Hong Kong as a pivotal international hub for virtual assets.

The ASPIRe Roadmap: Aligning with Global Markets

The SFC’s new policy is part of the ‘Access’ pillar of the ASPIRe roadmap, which aims to bridge Hong Kong’s market liquidity with global exchanges. By focusing on connectivity, the SFC seeks to enhance transaction efficiency, reduce price discrepancies across markets, and attract international liquidity back into Hong Kong.

This innovative approach permits order book sharing within the same corporate group, a move expected to streamline transactions and bring local market prices closer to global benchmarks. Yet, this integration presents new operational and regulatory challenges, given the different judicial territories of settlement assets and counterparties.

Four Core Regulatory Requirements

Under this new framework, the SFC has stipulated essential conditions that must be met:

• Compliance and Licensing: Overseas platforms must be licensed and operate in jurisdictions part of FATF or similar bodies, adhering to regulatory standards consistent with international norms.

• Risk Management: Cross-border transactions entail risks such as settlement delays. Consequently, all trades must be pre-funded, verified automatically, and adhere to Delivery Versus Payment principles, ensuring synchronized asset and currency exchanges. Furthermore, daily settlements and real-time risk monitoring systems are mandated.

• Compensation Measures: Platforms are accountable for all shared order book transactions. They must establish a reserve fund in Hong Kong equal to the unsettled trade limit and procure insurance to cover losses from fraud or theft.

• Market Misconduct Prevention: As cross-border trading expands, the risk of market manipulation grows. Local compliant platforms must develop a unified monitoring strategy with overseas affiliates, ensuring effective cross-border trading supervision.

Operational Regulations and Fair Trade Practices

The SFC has also outlined operational rules for order book sharing to ensure fairness and transparency. All participants’ rights and responsibilities must be clearly defined, with funds held in escrow and transactions conducted through prepaid funding. Regular settlements with overseas affiliates are required, particularly to mitigate risks associated with fluctuating trade volumes.

Information Disclosure and Investor Awareness

Transparency is crucial under the new policies. Platforms offering shared order book services must disclose responsibilities, settlement procedures, potential conflicts of interest, and compensation coverage to investors. This disclosure aims to ensure that retail customers are fully informed of the additional risks associated with cross-border trades, such as lower regulatory protection in foreign jurisdictions, and that participation is purely voluntary.

The SFC highlights that all platforms intending to adopt shared order books must secure prior written approval from the commission. This policy will be implemented gradually, with ongoing monitoring of market dynamics and associated risks.