牌照 · 2025-12-21

SFC Listed Structured Product Liquidity Provider Regime: Obligations and Regulatory Oversight

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The Hong Kong Securities and Futures Commission (SFC) introduced a dedicated regulatory regime for liquidity providers in listed structured products in 2023, codified in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code of Conduct). This regime became fully operational on 1 November 2023, replacing the previous patchwork of guidance and waivers. For any firm acting as a liquidity provider for listed structured products — including callable bull/bear contracts (CBBCs), warrants, and derivative warrants — compliance with this regime is now a direct licensing obligation, not a matter of voluntary market practice. The SFC’s 2024-2025 enforcement priorities, published in its annual report, explicitly flag liquidity provider misconduct as a focus area, particularly around timely quote provision and fair treatment of counterparties. Firms that fail to align their internal systems and controls with the new requirements risk enforcement action, including licence suspension or revocation. This article sets out the key obligations under the regime, the operational standards required, and the regulatory oversight framework that applies.

The Scope of the Liquidity Provider Regime

The SFC’s liquidity provider regime applies to any person licensed or registered to carry on Type 1 (dealing in securities) or Type 2 (dealing in futures contracts) regulated activity who acts as a liquidity provider for listed structured products on the Stock Exchange of Hong Kong (SEHK). The regime is set out in paragraph 5.5 of the Code of Conduct, supplemented by the SFC’s Guidelines on the Regulation of Liquidity Providers for Listed Structured Products (the Guidelines), published in October 2023.

Who Is Captured

The regime captures two categories of liquidity providers. The first is the appointed liquidity provider, which is a licensed corporation formally appointed by the issuer of a listed structured product to provide liquidity for that product. The second is the back-up liquidity provider, which steps in if the appointed liquidity provider is unable to perform its duties. Both categories must be licensed by the SFC and registered with the SEHK.

The Guidelines clarify that the regime does not apply to market makers in exchange-traded funds (ETFs) or other non-structural products. Those activities remain governed by the SEHK’s separate market-making rules.

What Products Are Covered

The regime covers all listed structured products, specifically:

  • Derivative warrants (including call warrants and put warrants)
  • CBBCs (callable bull/bear contracts)
  • Other structured products as defined in the SEHK’s listing rules

The SFC’s 2023 consultation paper on the regime noted that as of 31 December 2022, there were approximately 8,200 listed structured products on the SEHK, with an average daily turnover of HK$12.3 billion. The regime was designed to address the specific liquidity risks inherent in these products, which differ from those in equities or ETFs.

Core Obligations Under the Regime

The Code of Conduct imposes five core obligations on liquidity providers. Each obligation carries specific operational requirements that firms must implement through their internal systems and controls.

Obligation 1: Continuous Quote Provision

A liquidity provider must provide continuous two-way quotes during the trading hours of the relevant listed structured product. The quotes must be within the maximum spread prescribed by the SEHK and must be of a minimum size as specified in the product’s listing documents.

The SEHK’s Rules Governing the Listing of Securities (the Listing Rules) set out the specific spread and size requirements by product type. For CBBCs, the maximum spread is typically 10 ticks for products with a price below HK$0.25, and 20 ticks for products with a price of HK$0.25 or above. For derivative warrants, the maximum spread is generally 20 ticks regardless of price.

The SFC’s Guidelines require that a liquidity provider’s quote provision be “continuous and reliable.” This means the liquidity provider must maintain its quoting obligations for at least 90% of the trading day, measured on a monthly basis. Any failure to meet this threshold must be reported to the SFC within five business days.

Obligation 2: Fair and Orderly Provision

The liquidity provider must provide quotes in a manner that is fair and orderly. This obligation prohibits practices such as quote stuffing, layering, or any conduct that creates a false or misleading appearance of market activity.

The SFC’s 2024 enforcement report highlighted a case in which a liquidity provider was found to have placed and immediately cancelled large orders to create the impression of liquidity. The SFC imposed a fine of HK$4 million and suspended the firm’s Type 1 licence for two months. The case illustrates the SFC’s willingness to take enforcement action against conduct that undermines market integrity.

Obligation 3: Timely Response to Requests

The liquidity provider must respond to all quote requests from SEHK participants within the time frames specified in the product’s listing documents. For most structured products, the response time is 10 seconds from the receipt of the request.

The Guidelines require that the liquidity provider’s systems be capable of processing quote requests automatically and without manual intervention. Any manual override of the automated system must be justified and recorded.

Obligation 4: Record Keeping

The liquidity provider must maintain records of all quotes provided, including the time, price, size, and direction of each quote. These records must be kept for at least seven years and be readily accessible to the SFC upon request.

The SFC’s Guidelines on Record Keeping (Cap. 571 subsidiary legislation) specify that records must be stored in a tamper-proof format and must be retrievable within 24 hours of a request. Failure to maintain adequate records can result in disciplinary action, as seen in the SFC’s 2022 action against a liquidity provider that was fined HK$2.5 million for failing to produce records on time.

Obligation 5: Notification of Changes

The liquidity provider must notify the SFC and the SEHK of any material change to its liquidity provision arrangements. Material changes include:

  • A change in the appointed liquidity provider or back-up liquidity provider
  • A change in the systems or technology used for quote provision
  • A change in the firm’s financial resources that could affect its ability to perform its duties

The notification must be made at least 14 days before the change takes effect, unless the change is required to address an immediate regulatory concern.

Operational Standards and Systems Requirements

The SFC’s Guidelines impose specific operational standards that liquidity providers must meet. These standards cover systems, controls, and personnel.

Systems and Technology

The liquidity provider’s quoting system must be automated and capable of generating quotes in real time. The system must be tested at least annually to ensure it can handle peak trading volumes. The SFC’s 2023 consultation paper noted that a liquidity provider’s system failure during the 2022 market volatility caused a 45-minute gap in quote provision for 200 structured products, resulting in a loss of investor confidence.

The Guidelines require that the liquidity provider have a business continuity plan (BCP) that includes a back-up system capable of taking over quote provision within 30 minutes of a primary system failure. The BCP must be tested at least quarterly.

Internal Controls

The liquidity provider must have internal controls to monitor compliance with its quoting obligations. These controls must include:

  • Real-time monitoring of quote provision against the prescribed spread and size requirements
  • Automated alerts for any breach of the 90% continuous quote threshold
  • A compliance officer responsible for overseeing the liquidity provider’s activities

The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (paragraph 5.5) requires that the liquidity provider’s compliance officer report directly to the board of directors on liquidity provider matters.

Personnel

The liquidity provider must have at least two designated staff members who are responsible for the day-to-day operation of the liquidity provision function. These staff members must hold a relevant licence (Type 1 or Type 2) and must have completed the SFC’s continuing professional development (CPD) training on structured product liquidity provision.

The SFC’s 2024 annual report noted that 80% of liquidity providers had at least one staff member who had completed the CPD training by the end of 2024. The SFC expects all designated staff to have completed the training by 31 December 2025.

Regulatory Oversight and Enforcement

The SFC’s oversight of liquidity providers is conducted through a combination of on-site inspections, desk-based reviews, and data analysis.

On-Site Inspections

The SFC conducts on-site inspections of liquidity providers on a risk-based basis. The frequency of inspections depends on the size and complexity of the liquidity provider’s operations, as well as its compliance history. The SFC’s 2024 annual report stated that it conducted 12 on-site inspections of liquidity providers in 2024, resulting in three enforcement actions.

Data Analysis

The SFC uses automated surveillance systems to monitor quote provision in real time. The systems flag any deviation from the prescribed spread or size requirements, as well as any pattern of conduct that may indicate market manipulation.

The SFC’s 2023 consultation paper noted that its surveillance system had identified 45 instances of potential liquidity provider misconduct in the 12 months to 31 December 2022. Of these, 12 resulted in formal investigations.

Enforcement Powers

The SFC has a range of enforcement powers under the Securities and Futures Ordinance (Cap. 571). These include:

  • Issuing a reprimand
  • Imposing a fine of up to HK$10 million
  • Suspending or revoking a licence
  • Issuing a prohibition order

The SFC’s 2024 enforcement report highlighted a case in which a liquidity provider was fined HK$5 million for failing to provide continuous quotes. The SFC found that the liquidity provider’s system had failed to generate quotes for 30 minutes, and the firm had failed to switch to its back-up system within the required 30-minute window.

Practical Takeaways

Firms acting as, or considering becoming, liquidity providers for listed structured products should take the following actions:

  1. Audit your quoting systems against the SFC’s continuous quote threshold of 90% and ensure your back-up system can be operational within 30 minutes of a primary system failure.

  2. Designate at least two licensed staff responsible for liquidity provision and ensure they have completed the SFC’s CPD training on structured product liquidity provision before the 31 December 2025 deadline.

  3. Implement real-time monitoring of spread and size compliance with automated alerts for any breach, and assign a compliance officer to report directly to the board on liquidity provider matters.

  4. Review your record-keeping arrangements to ensure all quote records are stored in a tamper-proof format and are retrievable within 24 hours for a period of seven years.

  5. Prepare a notification protocol for material changes to liquidity provision arrangements, ensuring the SFC and SEHK receive at least 14 days’ notice before any change takes effect.

This article is for informational purposes only and does not constitute legal advice. The regulatory requirements described are subject to change. Firms should consult the SFC’s current Code of Conduct and Guidelines, and seek independent legal advice for their specific circumstances.