Hong Kong SFC Unveils Landmark Expansion for Virtual Assets: Margin Financing and Perpetual Contracts Now Permitted

The Securities and Futures Commission (SFC) of Hong Kong today, November 11th, announced a pivotal update to its regulatory framework, allowing licensed virtual asset trading service providers to significantly broaden their offerings. This includes the introduction of “virtual asset margin financing,” enabling the use of virtual assets as collateral. Concurrently, the SFC has established a “high-level framework” for licensed virtual asset trading platforms to offer perpetual contracts exclusively to professional investors.

Opening Virtual Asset Margin Financing: A Catalyst for Market Participation

These forward-looking measures represent the latest stride in expanding the diversity of digital asset products and services under the SFC’s strategic “ASPIRe roadmap.” Moving forward, licensed virtual asset brokers will be authorized to provide virtual asset financing services to their securities margin clients, contingent on the availability of ample collateral and robust investor protection mechanisms.

SFC Chief Executive Officer, Julia Leung, previously noted the inherent volatility of virtual assets, which informed the Commission’s cautious initial approach. Consequently, the first phase of this expansion will restrict eligible collateral to Bitcoin (BTC) and Ethereum (ETH) – the two cryptocurrencies with the largest market capitalization and strongest liquidity.

The SFC anticipates that this initiative will encourage greater participation from margin clients possessing sound credit profiles and sufficient collateral. This controlled expansion is expected to enhance liquidity within the Hong Kong market while meticulously managing associated risks.

Perpetual Contracts Introduced: A Regulated Avenue for Professional Investors

Perhaps the most anticipated development is the SFC’s inaugural “high-level framework” for licensed virtual asset trading platforms. This framework guides operators in developing leveraged products, including the highly sought-after perpetual contracts, strictly for professional investors.

Perpetual contracts are derivative products without an expiry date, designed to track the underlying spot price through a funding rate mechanism. They represent the largest trading instrument by volume in the global cryptocurrency market. While Hong Kong has maintained a prudent stance on such products in the past, their controlled introduction for professional investors signals the regulator’s proactive alignment with international market practices, all while prioritizing risk management.

The SFC emphasizes that this new framework is built upon three core principles: highly transparent product design, clear and comprehensive information disclosure, and robust operational monitoring measures.

According to the SFC, the introduction of perpetual contracts aims to empower investors with sophisticated risk management strategies and contribute to improved spot market liquidity for related assets.

Affiliate Market Makers: Bolstering Liquidity and Market Depth

To further invigorate the virtual asset trading ecosystem, the SFC has also approved licensed virtual asset trading platforms’ affiliates to act as market makers on their respective platforms. This approval, however, comes with a critical caveat: the establishment of stringent measures to prevent conflicts of interest.

This strategic move is poised to introduce new liquidity channels through a compliant framework, which is expected to narrow bid-ask spreads and significantly enhance market depth.

Dr. Keith Choy, Executive Director of the Intermediaries Division at the SFC, underscored the importance of this progressive development strategy, aligning with the ASPIRe roadmap, for the scalable growth of Hong Kong’s digital asset market.

He affirmed that these targeted initiatives not only aim to bolster market liquidity but also unequivocally demonstrate the SFC’s unwavering commitment to fostering a sustainable and collaborative digital asset market in Hong Kong.

The SFC has stated its intention to continuously monitor the implementation of these measures and maintain close dialogue with the industry. This ongoing engagement will ensure that the new guidelines effectively contribute to Hong Kong’s ambition of creating a safe and highly competitive market environment for virtual assets.