Hong Kong crafts crypto OTC derivative rules in accordance with European standards

Hong Kong financial regulators are setting requirements for over-the-counter crypto derivatives in line with European Securities and Markets Authority standards, including the use of Digital Token Identifiers.

The Hong Kong Monetary Authority and the Securities and Futures Commission published a plan on September 26 to align OTC reporting requirements with those of ESMA after reviewing responses to a March 2024 advisory.

The HKMA and SFC suggest that the mandatory use of Digital Token Identifiers for CTO derivatives reporting will begin to come into force on 29 September 2025.

The decision was made after regulators received feedback on the proposal from some Hong Kong stakeholders, who suggested using DTIs “to clearly define the basis of crypto assets for OTC derivatives.”

Hong Kong shareholders and investors commented that they had difficulty placing OTC derivatives in any of the five traditional asset classes of interest rates, foreign exchange, credit, commodities and equities.

Therefore, Hong Kong regulators decided to implement reporting requirements to comply with the use of DTI.

In the statement, the HKMA and SFC stated that ESMA proposed DTI and began implementing it in reporting as early as October 2023. Additionally, DTI currently serves as the key reference point for crypto asset service providers across Europe.

“To support reporting entities in the transition to UTI, they may continue to report Unique Interchange Identifier (USI) and Unique Trade Identifier (TID) trade identifiers according to existing reporting requirements through the implementation date, or they may voluntarily report UTI.”

The statement also points to “cross-border cooperation on a coordinated implementation plan for UTI in the Asia-Pacific” with financial regulators in countries such as Singapore, Australia and Japan
(APAC) region will enable smooth adoption of UTI in Hong Kong”,

On September 12, South China Morning Post reported that Hong Kong’s Customs and Excise Department was considering teaming up with the local Securities and Futures Commission to explore a new licensing regulation for OTC crypto services.

Before the joint efforts, C&ED was the only organization regulating OTC services. The SFC is advising industry players on the potential new regime and is evaluating regulations on cryptocurrency custody services.