SFC Market Maker Regime: Regulatory Framework for Liquidity Provision in Hong Kong Securities Markets

The Hong Kong Securities and Futures Commission (SFC) published its long-anticipated consultation conclusions on the proposed market maker regime in March 2024, setting a firm trajectory for implementation in the first half of 2025. This regulatory framework, codified under the Securities and Futures Ordinance (Cap. 571), represents a fundamental shift in how liquidity provision is structured in Hong Kong’s equity, debt, and derivatives markets. For firms seeking to establish or expand market-making operations, the new regime replaces the current patchwork of individual waivers and no-action letters with a single, transparent licensing pathway. The SFC estimates that approximately 60 licensed corporations currently engage in some form of liquidity provision, many operating under bespoke regulatory conditions. The 2025 regime standardises these arrangements, imposing uniform capital requirements, reporting obligations, and conduct standards. This article examines the statutory architecture, licensing conditions, and operational obligations under the new market maker framework. It also addresses the interplay between SFC authorisation and Hong Kong Exchange (HKEX) rules, and provides compliance officers and applicants with a structured guide to the application process.

The Statutory Architecture of the Market Maker Regime

Legislative Basis and Regulatory Instruments

The market maker regime operates under section 116 of the Securities and Futures Ordinance (Cap. 571), which empowers the SFC to impose conditions on licences for regulated activities. The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code of Conduct) was amended in 2024 to include a dedicated chapter on market making activities. Paragraph 12.1 of the amended Code defines a market maker as a person who holds itself out as willing to buy and sell securities on a continuous basis at prices quoted by that person.

The SFC issued a new set of Guidelines for Market Makers in December 2024 (the Guidelines), which became effective on 1 March 2025. These Guidelines supersede the previous Guidelines on the Registration of Market Makers (2011 edition) and consolidate all regulatory requirements into a single instrument. The Guidelines specify that market making is classified as Type 1 (dealing in securities) regulated activity under Schedule 5 of Cap. 571, with a specific condition code “MM” to denote market maker status on the SFC’s public register.

Interaction with HKEX Listing Rules and Trading Rules

Market makers must comply with both SFC regulatory requirements and HKEX trading rules. The HKEX Rules of the Exchange (the Trading Rules) at Rule 501A require all market makers to be registered with the Exchange. The HKEX published a consultation paper in November 2024 proposing amendments to the Trading Rules to align with the new SFC regime. The key change is the introduction of a single “Designated Market Maker” (DMM) category, replacing the previous distinction between “Registered Market Maker” and “Liquidity Provider”.

Under the amended Trading Rules, effective 1 March 2025, a DMM must maintain a minimum quote size of HK$100,000 per quote for stocks in the Hang Seng Index constituents, and HK$50,000 for other eligible securities. The maximum bid-ask spread is set at 2% for stocks priced above HK$10, and 4% for stocks priced at or below HK$10. These parameters are set out in HKEX Guidance Note GL-123-24, published in January 2025.

Licensing Pathway and Application Process

Step 1: Determining the Appropriate Licence Type

The SFC’s Guidelines establish three categories of market maker licences. Category A applies to firms that make markets only in exchange-traded securities on HKEX. Category B covers firms making markets in over-the-counter (OTC) derivatives and structured products. Category C is a combined licence for firms conducting both exchange-traded and OTC market making.

Each category carries distinct capital requirements. Category A requires paid-up capital of at least HK$5 million and liquid capital of not less than HK$3 million. Category B requires paid-up capital of HK$10 million and liquid capital of HK$6 million. Category C requires paid-up capital of HK$15 million and liquid capital of HK$9 million. These figures are specified in the SFC’s Securities and Futures (Financial Resources) Rules (Cap. 571N), which were amended by the Securities and Futures (Financial Resources) (Amendment) Rules 2024.

Step 2: Preparing the Application Dossier

The application must be submitted through the SFC’s e-licensing portal, WINGS. The required documents include a business plan detailing the proposed market making activities, a compliance manual addressing the Code of Conduct requirements, and a statement of financial resources certified by the firm’s auditor. The SFC’s Licensing Handbook (January 2025 edition) at section 4.2.1 specifies that the business plan must include the types of securities to be traded, the proposed quote parameters, and the risk management framework.

Applicants must also submit a declaration from the responsible officer (RO) confirming that the firm’s trading systems meet the SFC’s Guidelines on Electronic Trading (January 2024 edition). The RO must have at least three years of relevant market making experience, as defined in the SFC’s Guidelines on Competence (December 2023 edition).

Step 3: SFC Review and Approval Timeline

The SFC aims to process complete applications within 12 weeks from the date of acknowledgement. The SFC’s Annual Report 2023-2024 reported that the average processing time for Type 1 licence applications was 10.5 weeks. The SFC may impose additional conditions on the licence, including restrictions on the types of securities that may be traded or requirements for enhanced reporting.

During the review period, the SFC may request supplementary information under section 388 of Cap. 571. The SFC has indicated in its consultation conclusions that it will conduct on-site inspections of applicants’ trading premises in approximately 30% of cases.

Ongoing Compliance Obligations

Reporting and Record-Keeping Requirements

The Guidelines impose comprehensive reporting obligations on market makers. Daily transaction reports must be submitted to the SFC by 9:00 a.m. the following trading day, using the SFC’s Market Maker Transaction Report (MMTR) template. The MMTR must include the security code, transaction time, price, volume, and the counterparty identifier.

Monthly statistical reports must be filed within 10 business days after month-end. These reports must include the total number of quotes provided, the fill rate (percentage of quotes that resulted in trades), and the average bid-ask spread maintained. The SFC’s Guidelines on Reporting Requirements for Market Makers (March 2025) at paragraph 3.4 requires that the fill rate must not fall below 60% for any single security over a rolling three-month period.

Record-keeping obligations under section 130 of Cap. 571 require market makers to retain all trading records for at least seven years. This includes order book data, quote logs, and communications related to market making activities.

Conduct Standards and Prohibited Practices

The Code of Conduct at paragraph 12.3 prohibits market makers from engaging in conduct that creates a false or misleading appearance of active trading. This includes quote stuffing, layering, and spoofing. The SFC’s Guidelines on Market Conduct (November 2024) at section 5.2 specifically prohibits market makers from placing orders with the intention of cancelling them before execution, unless the cancellation is due to a legitimate error or market disruption.

Market makers must also comply with the insider dealing provisions under Part XIII of Cap. 571. The SFC has issued a Guidance Note on Insider Dealing and Market Making (February 2025) clarifying that a market maker may rely on the defence under section 271(3) of Cap. 571 if it can demonstrate that the information was obtained in the ordinary course of market making and that the trade was necessary to fulfil a pre-existing quote obligation.

Capital and Risk Management Requirements

The Securities and Futures (Financial Resources) Rules (Cap. 571N) require market makers to maintain liquid capital at all times at not less than 100% of the required amount. The SFC’s Guidelines on Risk Management for Market Makers (March 2025) at paragraph 6.1 require firms to implement stress testing procedures at least weekly, covering scenarios including a 20% market decline and a 50% increase in volatility.

Market makers must appoint a designated risk manager who is a licensed representative under Type 1 regulated activity. The risk manager must review the firm’s intraday risk exposure at least every two hours during trading hours.

Practical Considerations for Applicants

Common Application Deficiencies

The SFC’s Licensing Newsletter (Issue 12, December 2024) identified the three most common reasons for application delays or rejections. First, inadequate business plans that fail to specify the types of securities to be traded or the geographic scope of operations. Second, insufficient financial resources documentation, particularly where applicants fail to demonstrate the source of capital. Third, lack of relevant experience among proposed responsible officers.

The SFC noted that approximately 15% of market maker applications in 2024 required at least one round of supplementary information requests. The average delay caused by such requests was six weeks.

Coordination with HKEX

Applicants must register as a DMM with HKEX within 30 days of receiving SFC approval. The HKEX registration fee is HK$50,000 per security, with a cap of HK$500,000 for firms registering as DMMs for more than 10 securities. The HKEX Listing Fee Schedule (2025 edition) at section 3.2 sets out the fee structure.

Market makers must also enter into a Market Making Agreement with HKEX, which sets out the operational parameters including the minimum quote duration (15 seconds for stocks, 30 seconds for ETFs) and the maximum response time to quote requests (10 seconds).

Actionable Takeaways

1. Submit the SFC market maker application at least 16 weeks before the intended commencement of operations, accounting for the 12-week processing timeline and potential supplementary information requests.
2. Ensure the proposed responsible officer holds at least three years of verifiable market making experience, as the SFC’s Guidelines on Competence require this as a minimum threshold.
3. Prepare the business plan with specific detail on the securities to be traded and the quote parameters, as this is the most common source of application deficiencies.
4. Register as a Designated Market Maker with HKEX within 30 days of receiving SFC approval, and budget HK$50,000 per security for registration fees.
5. Implement daily transaction reporting systems and weekly stress testing procedures before the licence becomes effective, as the SFC conducts on-site inspections in approximately 30% of new applications.

This does not constitute legal advice. Consult a solicitor for your specific case.