J. FAQs specific to OTCR

Q1 :
Are bonds and listed debt instruments within scope of the OTCR?

A: The OTCR only covers ordinary shares of a company, or units of a REIT, listed on SEHK. Other securities, such as bonds and listed debt instruments, are not within scope of the OTCR.

Q2 : Does a bought and sold note transaction (not recorded on SEHK) need to be reported under the OTCR?

A: When an RRI (whether as principal or agent) makes a transfer of shares in connection with a bought and sold note transaction, which is an OTC Securities Transaction, the share transfer will be reportable by the RRI under the OTCR.

Q3 : Is a transfer of shares between two RRIs for the same client, or a transfer of shares between two accounts held by the same client in an RRI, reportable under the OTCR?

A: No, as the transfer of shares is not in connection with an OTC Securities Transaction.

Q4 : If a client of an RRI deposits a physical certificate for the purposes of selling via SEHK which is reportable under the HKIDR, or a client of an RRI withdraws a physical certificate after buying on SEHK which has been reported under the HKIDR, are the deposit and withdrawal of the physical certificate concerned reportable by the RRI under the OTCR?

A: Yes, provided that the physical certificate relates to ordinary shares of a company, or units of a REIT, listed on SEHK.

Q5 : Is a deposit or withdrawal of a physical certificate, which does not involve any change of beneficial ownership, reportable under the OTCR?

A: A deposit to or withdrawal from an RRI of a physical certificate will be reportable by the RRI under the OTCR, regardless of whether any change in beneficial ownership is involved.

Q6 : An LC or RI provides securities brokerage services for a client (“Client A”) in respect of orders placed through an account opened and maintained for Client A. On the other hand, the same LC or RI acts as a custodian for another client (“Client B”), i.e. no securities brokerage services are provided for Client B. Does that LC or RI need to report relevant activities conducted for Client A or Client B under the OTCR?

A: Client A – yes, as the LC or RI acts as an RRI for Client A.

Client B – no, as the LC or RI does not act as an RRI for Client B.

Q7 : Are corporate actions such as cash offer reportable under the OTCR?

If corporate actions do not involve transactions in respect of which stamp duty is chargeable (such as issuance of new shares, open offer, rights issue and privatization, etc.) or are reportable to the SEHK (such as placing of existing shares carried out by an EP), they are not OTC Securities Transactions. Therefore, share transfers in connection with these corporate actions are not reportable under the OTCR.

On the other hand, where an RRI (whether as principal or agent) makes a transfer of shares in connection with a cash offer, which is an OTC Securities Transaction, such transfer is reportable by the RRI under the OTCR. In such case, the RRI has to report to the SFC under the OTCR within three Hong Kong trading days after the share transfer date (i.e. the date on which the RRI has come to the knowledge that acceptance is settled, which is also the share transaction date to be reported under the OTCR).

For an offer with scrip consideration, the transfer of offer shares out of an account of an RRI (as a result of accepting the offer by a client of the RRI) is reportable under the OTCR. However, the RRI does not need to report the scrip consideration received, which could be reasonably inferred from the transfer of offer shares i.e. the principal transaction.

Q8 : A reporting obligation will arise under the OTCR when an RRI makes a relevant transfer (“relevant transfer” means a transfer of shares in connection with an OTC Securities Transaction). How should an RRI determine whether it “makes a relevant transfer” in this regard?

An RRI should refer to the description in Field #15 of paragraph 11 of the Technical Information Paper (i.e. “Role of Relevant Regulated Intermediary in the share transfer”). When an RRI “makes a relevant transfer” under the OTCR, it will involve one of the following activities by the RRI for a relevant transfer:

shares are transferred into an account of an RRI;
shares are transferred out of an account of an RRI; or
shares are transferred between accounts of an RRI.

Q9 : Is voluntary reporting allowed?

A: There is no prohibition on voluntary reporting, i.e. reporting activities that are not required to be reported under the OTCR. RRIs should nevertheless ensure that information submitted on a voluntary basis is accurate and kept up-to-date.

Q10 :
An individual client, who does not provide an RRI with express consent (for the transfer of his/her client identification data to the SFC) under the OTCR, has an entitlement in a corporate action. Can the RRI provide services to this individual client regarding the corporate action entitlement, which may result in a transfer of shares into the individual client’s account with the RRI?

In addition, can the individual client exercise a stock option, the underlying stock of which is listed on the SEHK, or be assigned an exercise notice to buy the underlying stock when a stock option is exercised (e.g. when the individual client shorts a put option and the option is subsequently being exercised), which may result in a transfer of shares into the individual client’s account with the RRI?

For the purpose of the OTCR, RRIs are required to report to the SFC when the RRIs, whether as principal or agent for a client, make a transfer of shares in connection with an OTC Securities Transaction, or deposit or withdraw a physical share certificate. It is our policy intent that the requirements under paragraph 5.7(h) of the Code of Conduct should apply, as far as the relevant activities are reportable under the OTCR.

It follows that, with reference to FAQ J7, where a corporate action is not reportable under the OTCR (for example, scrip dividend, bonus issue, exercise of a rights issue and application for excess shares under a rights issue, and stock split), an RRI is not prohibited from providing corporate actions services to an individual client who does not provide the RRI with express consent for the transfer of his/her client identification data to the SFC under the OTCR, even if the corporate action entitlement may result in a transfer of shares into the individual client’s account with the RRI.

Similarly, where the reporting exemption under paragraph 5.7(c) of the Code of Conduct applies, an RRI is not prohibited from carrying out an instruction to exercise a stock option, the underlying stock of which is listed on the SEHK, from an individual client who does not provide express consent for the transfer of his/her client identification data to the SFC under the OTCR to the RRI, and the RRI is not prohibited from assigning to the individual client an exercise notice to buy the underlying stock listed on SEHK when a stock option is exercised, notwithstanding shares may be transferred into the individual client’s account with the RRI from the option exercise.

Last update: 29 May 2023