14 August, 2016
An asset manager with a Type 1 (or Type 9) licence will need to apply for a Type 11 (Dealing in and Advising on OTC Derivative Products) licence if it also provides a discrete service of:
(i) advising on OTC derivative products (i.e. giving non-discretionary investment advice on OTC derivative products); or
(ii) dealing in OTC derivative products which are not “securities” in nature (e.g. providing a central dealing desk for group companies to trade interest rate swaps, credit default swaps or total return swaps).
The SFO definition of “securities” is very broad and incudes some OTC derivative products e.g. OTC stock options. A Type 1 licensed asset manager will be exempted from having to obtain a Type 11 licence to the extent that it will only deal in OTC derivative products which constitute “securities”. If however, the Type 1 licensed asset manager will deal in non-securities OTC derivative products (e.g. interest rate swaps, credit default swaps and total return swaps) it will need to be licensed for Type 11.
Some asset managers have a “mini” Type 1 licence which only permits them to market and distribute funds (managed by others). As these Type 1 licences do not allow them to deal with non-fund securities, they will need to apply for a Type 11 licence if they wish to provide either of the above services.
The SFC has issued a circular to intermediaries and other persons engaged in activities concerning OTC derivative products or transactions. The circular is available here.
For further information, please contact:
Isabella Wong, Deacons