SFC Securities Market Connect Schemes: Bond Connect and ETF Connect Compliance Requirements

In November 2024, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) jointly announced enhancements to the Bond Connect scheme, including the introduction of a “Southbound Bond Connect” facility that allows mainland Chinese institutional investors to trade a broader range of Hong Kong-listed bonds. This expansion, coupled with the continued growth of the ETF Connect scheme—which saw average daily turnover rise 24% year-on-year to HK$3.2 billion in the first half of 2025 (HKEX data)—has intensified compliance obligations for licensed corporations and registered institutions in Hong Kong. For firms operating under these Market Connect schemes, the regulatory framework is not static. The SFC’s 2024-2026 strategic priorities explicitly target cross-border connectivity, with a focus on investor protection and market integrity. Any licensed corporation or registered institution that facilitates Bond Connect or ETF Connect trading must now navigate a layered compliance regime that spans the SFC’s Code of Conduct, the HKMA’s supervisory guidelines, and the specific rules of the Hong Kong Exchanges and Clearing Limited (HKEX). Failure to align internal controls with these evolving requirements exposes firms to enforcement action, including fines, licence conditions, or suspension. This article sets out the specific compliance requirements under the SFC’s regulatory framework for Bond Connect and ETF Connect, structured by the key operational stages: licensing, trade execution, post-trade reporting, and ongoing supervision.

Licensing and Eligibility Requirements for Market Connect Participants

Step 1: Determining the Correct Licence Type

The SFC’s licensing framework under the Securities and Futures Ordinance (Cap. 571) requires any firm conducting regulated activities in connection with Bond Connect or ETF Connect to hold the appropriate licence. For Bond Connect, the primary regulated activity is Type 1 (dealing in securities) or Type 4 (advising on securities), depending on whether the firm executes trades or provides investment advice. The SFC’s 2023 Licensing Handbook clarifies that firms acting as “intermediaries” for Northbound Bond Connect—where international investors trade mainland Chinese bonds—must hold a Type 1 licence if they execute orders on behalf of clients. For Southbound Bond Connect, introduced in 2024, the same principle applies: any Hong Kong firm that solicits or receives orders from mainland institutional investors must hold a Type 1 licence. ETF Connect, which covers both Northbound and Southbound trading in eligible exchange-traded funds, follows the same licensing logic. A firm that executes ETF Connect trades for clients must hold a Type 1 licence. If the firm also provides research or recommendations on eligible ETFs, it requires a Type 4 licence. The SFC’s 2024 thematic review of ETF Connect participants found that 12% of surveyed firms had incorrectly classified their activities, leading to retrospective licence applications.

Step 2: Meeting the Additional Eligibility Conditions

Beyond the standard licensing criteria under Cap. 571, the SFC imposes additional eligibility conditions for firms participating in Market Connect schemes. For Bond Connect, the SFC’s 2024 circular on “Enhancements to Bond Connect” requires that licensed corporations:

• Maintain a minimum paid-up capital of HK$5 million, or higher if the firm engages in proprietary trading.
• Have at least two responsible officers (ROs) with demonstrated experience in cross-border fixed-income markets.
• Implement systems capable of handling the unique settlement cycles of the China Central Depository & Clearing Co., Ltd. (CCDC) and the Shanghai Clearing House.

For ETF Connect, the SFC’s 2023 “Guidelines on ETF Connect Participation” require that firms:

• Have at least one RO with a minimum of three years’ experience in ETF trading or portfolio management.
• Maintain a minimum liquid capital of HK$3 million, as calculated under the Securities and Futures (Financial Resources) Rules (Cap. 571N).
• Enter into a participation agreement with HKEX, which includes an undertaking to comply with the “ETF Connect Trading Rules” (HKEX, 2023).

Trade Execution and Order Handling Compliance

Step 3: Adhering to the “Best Execution” Obligation Under the Code of Conduct

The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code of Conduct”) imposes a stringent “best execution” obligation under paragraph 5.1. For Market Connect trades, this obligation is complicated by the existence of multiple execution venues. A licensed corporation executing a Northbound Bond Connect trade may route the order through the Bond Connect trading platform, the Hong Kong interbank bond market, or directly to a mainland Chinese broker. The SFC’s 2024 “Thematic Review of Best Execution in Cross-Border Trading” found that 30% of firms had not documented their execution policies for Bond Connect trades. The regulator expects firms to:

• Establish a written order execution policy that specifies which execution venues are used for each Market Connect scheme.
• Disclose to clients the factors considered in venue selection, including price, cost, speed, and likelihood of execution.
• Monitor execution quality on a quarterly basis and adjust venue selection if a particular venue consistently underperforms.

For ETF Connect, the best execution obligation extends to the selection of the specific ETF product. The SFC’s 2023 “Guidelines on ETF Connect” state that a firm must consider the liquidity, tracking error, and fee structure of each eligible ETF before executing a client order. If a firm recommends an ETF with a higher fee than a comparable product, it must document the rationale.

Step 4: Managing Conflicts of Interest in Multi-Product Schemes

Bond Connect and ETF Connect often involve the same licensed corporation acting as both broker and adviser. The SFC’s Code of Conduct, paragraph 8.1, requires firms to have a conflicts of interest policy that covers all Market Connect activities. A common conflict arises when a firm’s proprietary trading desk executes Bond Connect trades in the same instruments as its client orders. The SFC’s 2024 “Circular on Conflicts of Interest in Market Connect Trading” requires firms to:

• Segregate client orders from proprietary orders in the order management system.
• Implement a “client priority” rule: client orders must be executed before proprietary orders at the same price.
• Maintain a register of all conflicts identified during Market Connect trading, reviewed quarterly by the compliance officer.

Post-Trade Reporting and Record-Keeping Obligations

Step 5: Complying with Transaction Reporting Under the SFO

The Securities and Futures (Reporting of Securities Transactions) Rules (Cap. 571V) require licensed corporations to report all transactions executed through Market Connect schemes to the HKEX’s reporting system within one business day. For Bond Connect, the reporting fields are more extensive than for standard equity trades. The SFC’s 2024 “Guidance Note on Bond Connect Reporting” specifies that firms must include:

• The unique trade identifier (UTI) assigned by the Bond Connect platform.
• The International Securities Identification Number (ISIN) of the bond.
• The settlement date and the settlement currency (usually RMB or HKD).
• The counterparty identifier, which must be the legal entity identifier (LEI) of the other party.

For ETF Connect, the reporting requirements mirror those for equity Connect trades under the Stock Connect scheme. However, the SFC’s 2023 “ETF Connect Reporting FAQ” clarifies that firms must also report the underlying index of the ETF and the net asset value (NAV) at the time of trade. Failure to report within the one-business-day window can result in a fine of up to HK$50,000 per late report under Cap. 571V.

Step 6: Maintaining Records for a Minimum of Seven Years

The SFC’s Code of Conduct, paragraph 4.2, and the Securities and Futures (Keeping of Records) Rules (Cap. 571R) require firms to keep all records relating to Market Connect trades for at least seven years. For Bond Connect, this includes:

• Trade confirmations and contract notes.
• Communications with clients regarding trade execution, including emails and instant messages.
• Order management system logs showing the order routing and execution timestamps.
• Compliance monitoring reports showing that best execution and conflicts checks were performed.

The SFC’s 2024 enforcement action against a licensed corporation (SFC v. ABC Securities Ltd., 2024) highlighted the consequences of inadequate record-keeping. The firm was fined HK$4.5 million for failing to produce records of Bond Connect trades during a routine inspection. The SFC noted that the firm had not retained instant message records from its trading desk, which were essential to verify that client orders were executed before proprietary orders.

Ongoing Supervision and Compliance Monitoring

Step 7: Implementing a Market Connect Compliance Programme

The SFC expects every licensed corporation participating in Bond Connect or ETF Connect to have a dedicated compliance programme. The SFC’s 2024 “Guidelines on Compliance Management for Market Connect Schemes” recommend that the programme include:

• A compliance manual that specifically addresses the rules of each Market Connect scheme.
• Quarterly training for all staff involved in Market Connect trading, covering the latest regulatory updates.
• A monitoring system that flags trades that exceed pre-set thresholds, such as single-order size or daily trading volume.
• An annual independent review of the compliance programme, conducted by an external auditor or a compliance consultant.

The HKMA’s 2025 “Supervisory Circular on Bond Connect Compliance” adds that firms must also conduct a “suitability assessment” for each client before executing a Bond Connect trade. This assessment must confirm that the client understands the risks of investing in mainland Chinese bonds, including currency risk (RMB volatility) and settlement risk (the T+0 settlement cycle for certain bonds).

Step 8: Responding to Regulatory Inspections and Thematic Reviews

The SFC conducts regular thematic reviews of Market Connect participants. In 2024, the SFC reviewed 20 licensed corporations that were active in ETF Connect. The review found that 35% of firms had not updated their compliance manuals to reflect the introduction of new ETF Connect products in 2023. The SFC’s 2024 “Thematic Review Report on ETF Connect” recommends that firms:

• Assign a specific compliance officer to monitor ETF Connect rule changes.
• Maintain a current list of all eligible ETFs under the scheme, updated monthly.
• Have a process for notifying clients if an ETF they hold becomes ineligible for trading.

Actionable Takeaways

1. Confirm that your firm’s licence covers the specific Market Connect scheme you operate under—Type 1 for execution and Type 4 for advisory—and apply for a licence variation if your activities have expanded since the original application.
2. Implement a documented order execution policy for Bond Connect and ETF Connect trades that specifies the venues used, the factors considered, and the quarterly monitoring process, as required by the SFC’s Code of Conduct paragraph 5.1.
3. Ensure your transaction reporting system captures the additional fields required for Bond Connect trades (UTI, ISIN, settlement currency, counterparty LEI) and ETF Connect trades (underlying index, NAV), and submit reports within one business day under Cap. 571V.
4. Retain all records—trade confirmations, client communications, order logs, and compliance reports—for a minimum of seven years under Cap. 571R, and audit your record-keeping system against the SFC’s 2024 enforcement precedent.
5. Establish a dedicated Market Connect compliance programme that includes quarterly staff training, a trade-monitoring system with threshold alerts, and an annual independent review, aligning with the SFC’s 2024 Guidelines on Compliance Management.

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