VA Activities

Key Changes / Takeaways

Distribution of VA related Products

• In relation to the VA knowledge test ("VA Knowledge Test") which SFC Intermediaries will have to conduct for its client prior to effecting a transaction in VA-related Products (non-exhaustive criteria of which are set out under Appendix 1 of the Circular), SFC Intermediaries are no longer allowed to consider such client to have passed the VA Knowledge Test solely if the client has executed five or more transactions in any VA or VA-related product within the past three years.

• For risk disclosure statements which should be provided to clients (except for institutional professional investors and qualified corporate professional investors[3]), SFC Intermediaries should also disclose, other than risk disclosures already set out under the 2022 Circular, (i) the legal uncertainty of whether VAs can be regarded as "property" under the law; and (ii) difficulties in verifying the ownership of VAs.

VA Dealing Services

• It remains that VA dealing services (including acting as introducing agent or as broker under an omnibus account) can only partner with SFC-licensed VATPs.

• SFC Intermediaries may provide VA dealing services to retail clients, but it must (i) notify the SFC, (ii) ensure that the VA dealing activities are conducted through omnibus accounts established and maintained with a VATP that is not subject to the licensing condition that it can only service "professional investors" (as defined under the SFO), and (iii) ensure that the retail clients can only trade VAs made available for trading by retail investors.

• SFC Intermediaries should not make any arrangements with their clients on using the client VAs received or held by the SFC Intermediaries with the effect of generating returns for the clients or any other parties (i.e. SFC Intermediaries may not use client VAs for staking, lending and other purposes).

• For orders in VAs (including VAs classified as "complex products") which are placed by a client directly on the VATP, or directly to staff of an SFC Intermediary for onward passing to the VATP for execution, the SFC Intermediary is not required to ensure that the transaction is suitable for the client if there has been no solicitation or recommendation made by the SFC Intermediary.

• If an SFC Intermediary makes a solicitation or recommendation to retail clients on VAs, the SFC Intermediary should take all reasonable steps to ensure that the VAs solicited or recommended are of high liquidity.

• Except for institutional and qualified corporate professional investors, an SFC Intermediary, before providing services in VA dealing activities, should assess with due skill, care and diligence a client’s risk tolerance level, determine the client’s risk profile and assess whether it is suitable for the client to participate in the trading of VAs.

• The VA Knowledge Test (as amended in the Circular) continues to be applicable.

• SFC Intermediaries may now receive client VAs, but must do so through and hold these client VAs on trust for their clients in a segregated account(s) established and maintained with a VATP or an authorized financial institution (or a subsidiary of a locally incorporated authorized financial institution) which meets the expected standards of VA custody issued by the HKMA from time to time.

• SFC Intermediaries should also comply with the requirements under Chapter 12 of the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-licensed Virtual Asset Service Providers) ("SFC AML Guidelines") when handling client VA deposits and withdrawals.

• SFC Intermediaries should notify the SFC (and HKMA, where applicable) in advance if they intend to provide dealing services in tokenised securities and should comply with the existing requirements governing dealing in securities and the expected standards of conduct and guidance on tokenised securities issued by the SFC from time to time.

VA Advisory Services

• SFC Intermediaries may provide VA advisory services to retail clients, but it must (i) notify the SFC, and (ii) ensure that the VAs recommended are made available for trading by retail investors by VATPs.

• Except for institutional and qualified corporate professional investors, an SFC Intermediary, before providing services in VA dealing activities, should assess with due skill, care and diligence a client’s risk tolerance level, determine the client’s risk profile and assess whether it is suitable for the client to participate in the trading of VAs.

• The VA Knowledge Test (as amended in the Circular) continues to be applicable.

• If an SFC Intermediary provides advisory services to retail clients on VAs, the SFC Intermediary should take all reasonable steps to ensure that the VAs solicited or recommended are of high liquidity.

• SFC Intermediaries should notify the SFC (and HKMA, where applicable) in advance if they intend to provide advisory services in tokenised securities and should comply with the existing requirements governing advising on securities and the expected standards of conduct and guidance on tokenised securities issued by the SFC from time to time.

VA Fund Management Services (for fund managers managing portfolios which meets the De Minimis Threshold[4])

• The previous T&Cs relating to VA Fund Management is substantially similar to the SFC’s "Fund Managers Code of Conduct" (applicable to all SFC fund managers). Accordingly, in the latest T&Cs appended in the Circular, the SFC has removed certain duplicated terms.

• The SFC has removed the hard-wired requirement that a VA fund manager may only allow professional investors to invest in a VA fund.

• SFC Intermediaries may provide VA discretionary account management services to retail clients, but it must (i) notify the SFC, and (ii) ensure that the VAs recommended are made available for trading by retail investors by VATPs.

• The SFC and the HKMA clarified that they are only prepared to allow SFC intermediaries licensed or registered for Type 9 (asset management) regulated activity to provide asset management activities in respect of VAs which meet the De Minimis Threshold.

• SFC Intermediaries should notify the SFC (and HKMA, where applicable) in advance if they intend to provide asset management services in tokenised securities and should comply with the existing requirements governing asset management and the expected standards of conduct and guidance on tokenised securities issued by the SFC from time to time.