SECTION 1: Market outlook
1.1 Please clarify which products or markets your
jurisdiction hosts that are affected by Mifid II.
Hong Kong is a significant trading hub for a large number of
financial institutions, asset managers and other investment
firms, including group companies that include Mifid firms and
branches of Mifid firms.
The products and services offered by Hong Kong-based firms
include the entire range of equities, fixed income,
derivatives, funds and structured products as well as
investment advisory services.
SECTION 2 (b) – Non-EU countries
2.1 How prepared is your market for Mifid II?
The level of preparedness varies greatly between different
sectors within the industry.
Those firms that are branches or affiliates of Mifid firms
(primarily international banking institutions but also some of
the larger international asset managers) are generally well
advanced in assessing the impact of Mifid II on their business
operations and are putting in place steps to implement it.
On the other hand, those institutions that have limited
connection with the EU (for example, fund managers whose sole
nexus with the EU is via EU broker-dealers and other trading
counterparties) are less prepared. This is understandable as
they will not be directly impacted by Mifid II. However, the
lack of information on the precise impact on the terms of their
brokerage and other trading and product distribution
documentation is cause for concern.
Generally, Hong Kong based firms are expecting to be guided
by their Mifid firm counterparties as to what their new
requirements will be and how this will affect existing
documentation and trading arrangements.
2.2 In which areas are market participants most in need of
guidance/certainty over the rules?
The issues being focused on under Mifid II differ depending
on the sector of the financial markets. However, in summary,
the main areas of focus include:
(a) Trading obligations: including accessing EU markets and
transaction reporting obligations.
(b) Research and inducements: including whether non-Mifid
firms will, in practice, be expected to pay for research
(notwithstanding there being no obligation for non-Mifid firms
to pay) and the sharing of research within corporate groups
that include Mifid firms.
(c) Product distribution: including the new terms expected
to be applicable to distribution agreements providing for the
distribution of products into the EU.
There are other areas that are relevant to market
participants in Hong Kong, and the relevance of any specific
area is driven in large part by the corporate structure of the
relevant participant and the extent of its activities in the
SECTION 3: Research
3.1 Please summarise the challenges Mifid II will pose in
your jurisdiction with regards to research.
The requirements being introduced pursuant to Mifid II
through the relevant Delegated Act with respect to inducements
and, in particular, the introduction of the requirement for
Mifid firms to pay for research received from brokers and other
market providers, are among the most significant of the Mifid
The changes will principally effect the following three
categories of firm based in Hong Kong:
(i) Hong Kong based firms that include Mifid investment
firms as part of their group: These firms are not, themselves,
directly subject to the Mifid II requirement to pay for
research. However, any Mifid firm that is a member of the group
that receives a copy of that research (for example, the
circulation of equity research disseminated to various
management businesses within the group, including a Mifid firm
based in the EU) would then be required to pay for that
research, notwithstanding that the original recipient, based
outside the EU and, accordingly, not a Mifid firm, was not
under such an obligation.
Firms falling in this category will need to implement clear
procedures and processes to identify the research it expects to
receive and how, based on the structure and policies of the
Mifid firm group member, such research may be distributed
within the group. This will require clear internal policies and
may impact existing trading relationships.
(ii) Hong Kong based firms that generate research for
distribution to clients that include Mifid firms: The
obligation to pay for research is an obligation imposed on the
Mifid firm. Accordingly, brokers and other market participants
based in Hong Kong, for example, that prepare and distribute
research to Mifid firm clients will be required to charge for
such research and, accordingly, change their charging
This will require rate cards for different types of research
to be prepared and the implementation of appropriate monitoring
infrastructure to ensure that they can enable their Mifid
clients to meet their obligations to pay for research.
(iii) Hong Kong based firms that currently receive research
for free: Even though non-Mifid firms are not required to pay
for research in Hong Kong, there has been some industry concern
that brokers and other market participants will start charging
all clients for research, regardless as to whether the firm is
subject to Mifid II (and so obliged to pay) or not, so as to
minimise the costs involved in operating a bifurcated model for
the provision of research, among other reasons.
However, it seems that current market view is that most
brokers and market participants involved in the provision of
research intend to provide a split model enabling them to
continue to provide free research to non-Mifid firms on a
similar basis to their current arrangements. This being noted,
it is possible that this may change in future as either
regulatory requirements in other jurisdictions, including Hong
Kong, impose similar obligations or brokers and other market
participants look to provide a standardised client offering
including 'paid-for' research.
3.2 Is pricing research compatible with market practices
and existing legal frameworks?
It is not common market practice in Hong Kong for providers
of research to charge separately for it where there is a
related trading relationship between the parties.
3.3 Is there clarity on how to resolve challenges in
unbundling research and complying with Mifid II in this
There are a limited number of options available to Hong Kong
based firms that will be effected by the changes to the rules
applicable to inducements and, in particular, potential charges
As indicated above, Hong Kong based firms that consume
research will not directly be subject to the requirements under
Mifid II to pay for research and should not need to change
their existing models (particularly given the expectation that
research providers will continue to provide research to
non-Mifid firms on a free of charge basis).
Those firms however that are members of groups that include
Mifid regulated firms are putting in place policies to identify
the research they receive and what, if any, of such research
may be disseminated to the group Mifid entity and be charged
Similarly, Hong Kong based firms that generate and
distribute research to clients that include Mifid II firms are
having to develop charging models for the various types of
research they provide and implement operational infrastructure
to appropriately identify the nature of the entity to whom they
are providing the research. As many of these firms are part of
larger financial institutions that have operating centres
located in the EU, the policies and operational infrastructure
their Hong Kong based branches and/or entities are implementing
will largely be guided by the policies and infrastructure
implemented by the main European hub for the firm.
SECTION 4: Trading/market structure
4.1 Which areas of trading / type of instruments will be
most impacted by Mifid II in your jurisdiction and how might
they be impacted?
The impact for Hong Kong based firms (that are not branches
of Mifid regulated firms) that trade financial instruments
covered by Mifid II will be relatively limited.
Such Hong Kong based firms will not be directly subject to
the obligations of Mifid II. The main legal effects are
expected to be in respect of the terms and conditions of the
brokerage and related documentation they have entered into with
their EU broker counterparties. It is expected that these
changes will principally cover specific information sharing
provisions as well as enhancing the rights of the EU brokers to
suspend trading and other areas of oversight.
One aspect of trading that is expected to impact relevant
firms are those that have direct electronic access rights to
trade financial instruments on EU markets and/or which engage
in algorithmic trading via their EU brokers or EU trading
venues. Under Mifid II, EU brokers and trading venues will be
required to conduct proper due diligence on trading strategies
and algorithms (including, in certain instances, obligations to
share such information with their local EU competent
authorities). This will require these EU institutions to have
rights to require such Hong Kong based firms to disclose
details of their trading strategies and/or algorithms.
There are also certain specific issues for which the market
generally is looking for a resolution, including obligations
relating to the trading of dual-listed securities and whether
any non-EU trading venues that are recognised as the primary
markets for those securities will be recognised as equivalent
(and thus enabling execution of trades on such markets in
compliance with the Mifid II requirements to execute trades for
securities admitted to trading on an EU trading venue (or
equivalent trading venue) to be executed on such venue.
4.2 What will be the key challenges with regards to
transaction reporting and pre-trade transparency?
Hong Kong based firms are unlikely to be directly impacted
by the transaction reporting or pre-trade transparency
obligations as, for the most part, this will be an obligation
imposed on their Mifid EU counterparty, and/or related EU
trading venue, as applicable.
However, it is expected that Hong Kong based firms will need
to have appropriate infrastructure in place to assist their EU
counterparties with their transaction reporting obligations.
They will also need to obtain appropriate legal identifiers, as
this is a requirement for trading in the EU markets following
the implementation of Mifid II.
The main relevance to Hong Kong based firms of the increased
range of instruments to which pre-trade transparency will apply
is most likely to be in connection with the nature of the
markets themselves. The derivatives and fixed income markets,
for example, may, as a result, start to behave in a similar
manner to the equities markets which may present the market
with opportunities and challenges with respect to their
existing trading strategies.
4.3 What are the main considerations that trading venues
and exchanges will have to make?
Please see response to Question 4.2 above.
SECTION 5: Investor protection
5.1 Explain the impact of heightened investor protection
obligations in your jurisdiction.
The issue of investor protection is a live topic in Hong
Kong with a variety of regulatory and legal changes having been
effected to enhance the levels of investor protection.
That said, the regime in Hong Kong has significant
differences from the regime being introduced pursuant to Mifid
II and, as such, Hong Kong based firms looking to execute
transactions on behalf of Mifid clients and/or to distribute
products and/or services into the EU will need to familiarise
themselves with the various product governance and other
aspects of Mifid II that they will be subject to (either
directly, to the extent that they provide the products or
services directly via a Mifid entity or indirectly).
5.2 Which area of focus within investor protection is of
most concern/importance to your jurisdiction?
The issue of investor protection needs to be considered
holistically and requires compliance with principles as well as
with specific regulatory or legal obligations. A particular key
area of focus in Hong Kong recently has been around the areas
of suitability and appropriateness. In this respect, some of
the obligations applicable to product manufacturers and
distributors under Mifid II are conceptually similar (although
different in detail) to those being implemented in Hong Kong.
SECTION 6: Outlook 2017
6.1 What are the overall risks or opportunities that Mifid
II might bring to your market? Will Mifid II impact the
competitiveness of your market?
For many Hong Kong based firms, the impact should be
relatively limited, with Mifid II having only indirect effect
on the operations of their businesses. However, there is still
a significant repapering and infrastructure exercise that many
Mifid firms will have to undergo and delays in the completion
of these steps may disrupt the ability of Hong Kong based firms
from accessing and dealing in the EU markets and servicing EU
6.2 What are the next steps – what should market
participants be doing now to best prepare themselves?
Hong Kong based firms that are not branches of Mifid firms
or members of groups with Mifid entities, should identify in
what manner they have any nexus with the EU (for example, is it
limited to trading with EU counterparties, do they distribute
products into the EU and so on). This will then enable them to
determine which specific aspects of Mifid II will be relevant
to their business. These firms should also contact their EU
Mifid II regulated counterparties as soon as possible to
discuss with them what changes they expect to make to their
Hong Kong based firms that are either branches of Mifid
firms or members of groups with Mifid entities should, in
addition to the above steps, also coordinate with their Mifid
entity to determine which policies, infrastructure and
operational requirements that the Mifid entity will be
implementing will be relevant to them and/or to which they will
need to comply.
Partner, Simmons & Simmons
T: + 65 6831 5610
Jason Valoti is a recognised leading practitioner in
the Singapore and Hong Kong legal markets and acts for
leading international investment banks in relation to
structured and OTC derivative transactions and related
regulatory matters. He has a particular focus on highly
structured equity, credit and fund-linked transactions
and has developed bespoke product solutions and
platforms for a number of clients.
Valoti also acts for fund and asset managers in
respect of their transactional and trading
requirements, including Prime Brokerage, ISDA and other
Partner, Simmons & Simmons
T: + 852 2583 8268
Simon McKnight is a derivatives and structured
products specialist whose work spans a wide range of
products, including equity, credit and commodity linked
products in OTC, loan and notes format. He has
particular expertise in equity derivatives (such as
margin loans and collar financings), credit
derivatives, stock loans/repos and repackagings.