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Licensing for commodities related activities



Derivatives Market in Hong Kong

  • Hong Kong Futures Exchange (HKFE), under Hong Kong Exchange Company (HKEx), approved market operator for trading futures and option contracts in Hong Kong
  • Traditionally Hong Kong has been an equity-focused market
    • currency futures
    • 6 December 2012 completion of HKEx and London Metal Exchange (LME) merger
    • LME registered another record trading year in 2013, with 171.1 million lots transacted (up 7.1% from 2012) with an 84% share in the notional volume of global exchange-traded base metal futures. This is equivalent to US$14.6 trillion and 4.0 billion tonnes of material.

Commodity Market in Hong Kong

  • Hong Kong to develop commodity market
  • catering to the demand for commodity risk management to hedge price swings, particularly coming from China
  • HKEx has signed memorandum of understanding on cooperation and the exchange of information with:
    • Dalian Commodity Exchange (on 6 July 2011)
    • Zhengzhou Commodity Exchange (on 14 November 2011)
    • China Financial Futures Exchange (on 11 January 2012)
    • Shanghai Futures Exchange (on 5 March 2012)
    • Bank of China (on 24 June 2013)
    • China Beijing International Mining Exchange (on 27 June 2013)

The LME-HKEx Merger

  • LME is the world’s leading price formation venue for base metals, with a market share of approximately 84.2% in global non-ferrous metals futures trading.
  • New trading records were registered in 2013 for copper, up 11.6% , and aluminum, which was up 8.1% compared to the previous year. The LME nickel contract saw the greatest surge in trading, with volumes up 23.1% year-on-year and record turnover of 14 million lots. Zinc, cobalt and molybdenum also set new records, with volumes up 2.1% , 4.0% and 11.1% respectively.
  • The total market capitalisation of the securities market (including the Main Board and the Growth Enterprise Market (GEM) of the HKEx) at the end of 2013 was HK$24,042.8 billion, 10% higher than at year-end 2012.
  • Hong Kong serves as a gateway to China, the world’s biggest producer and consumer of non-ferrous metals, accounting for about 40% of the global total.
  • HKEx’s acquisition of the LME will improve Hong Kong’s position as Asian commodities trading centre.
  • Over the past few years, trading on LMEselect, the LME’s electronic trading system, has been increasing in the Asian time zones
  • In 2010, trading on LMEselect before 7 am London time, the afternoon in Asia, doubled from 2009, prompting the LME to launch its Asian Benchmark Price for LME Aluminium, LME Copper and LME Zinc to enhance its market for LME users in Asia. Members allowed to connect directly with LMEselect for market data from 24 March 2014
  • In 2012, three-month futures trading on LMEselect in Asian time zones increased by another 13 per cent year-on-year
  • In 2014 LMEstage was launched – will help to ensure market integrity by providing a simulated live market environment in which users can test their trading strategies
  • Going forward, we predict that there will be continued increase in Asian trading on the LME due to growing relevance of Asia (in particular, China) in the global commodity markets.
  • Asian trading on LME is encouraged by the increased focus on Asia, notably this is boosted by:
    • continued enhancement of the Asian time zone price discovery mechanism through the LME Asian Benchmark
    • lowering barriers to access from Asia
    • increase in LME membership from Asia
    • increased use of the bourse as wholesale customers in China are increasingly exposed to international price risk through the import of base metals
    • LME-HKEx’s work on RMB clearing in London and expansion of warehouse networkin Asia
  • Launch of new commodity derivatives is anticipated in the near future

What does this all mean from a Hong Kong legal perspective?

  • with the surge of physical trading and hedging of metals in the region, businesses could capture this market by opening in Hong Kong
  • this usually means obtaining a licence with the Securities and Futures Commission (SFC) to carry out regulated activities, including:
    • marketing, dealing and advising on futures contracts, metal ETFs and metal hedging products
      • This will require a licence to carry out Type 2 (dealing in futures contracts) and/or Type 5 (advising in futures contracts) regulated activities
    • management and valuation of metal portfolios
      • This will require a licence to carry out Type 9 (asset management) regulated activity

Licensing in Hong Kong

  • Any person carrying on regulated activities in Hong Kong has to be licensed or registered with the SFC unless specific exemption is provided.
  • You will need a licence if you are not an authorised financial institution (such as a bank or deposit-taking company) and you either:
    • carry on a business in one or more regulated activities
    • actively market to the public any services that you provide which could constitute a regulated activity if provided in Hong Kong
    • are an individual performing a regulated function for your principal in relation to any regulated activity.
  • The principal legislation dealing with the licensing of licensed corporations and persons accredited to them is the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (“SFO”) and this is administered by the SFC.
  • The SFC also publishes a number of codes and guidances in relation to licensing matters. Some key codes and guidelines are:
    • Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, Guidelines of Competence
    • Fit and Proper Guidelines
    • Management, Supervision and Internal Control Guidelines

Exemptions from Licensing Requirements

  • The SFC specifies certain common situations in which exemption from licensing requirements may apply under the SFO.
  • The major applicable exemptions include :
    • incidental exemption
    • advising group company exemption
    • dealing with professional investor exemption
  • Incidental exemption :

    Licensed for type 2 regulated activity and carry out certain other regulated activities

    • If you are licensed for type 2 regulated activity (dealing in futures contracts) and you wish to carry out type 5 (advising on futures contracts) and/or type 9 (asset management) regulated activity, you do not need to be licensed for types 5 and 9 provided that these activities are carried out wholly incidental to your futures dealing business.
    • The exemption normally applies to futures brokers who provide investment advice or manage discretionary accounts for their futures clients

    Licensed for type 9 regulated activity and carry out certain other regulated activities

    • If you are licensed for type 9 regulated activity (asset management) and you wish to carry out type 2 (dealing on futures contracts) and/or type 5 (advising on futures contracts) regulated activity, you will not need to be licensed for these activities provided that they are carried out wholly incidental to your asset management business.
    • The exemption normally applies to fund managers who manage portfolios of securities and/or futures contracts and in doing so place orders to deal in securities and/or provide investment advice/research
  • Advising group company exemption :
    • You are not required to be licensed for type 4 (advising on securities), type 5 (advising on futures contracts) or type 9 (asset management) regulated activity if you provide the relevant advice or services solely to your wholly owned subsidiaries, your holding company which holds all your issued shares, or other wholly owned subsidiaries of that holding company
  • Dealing with professional investor exemption :
    • You may not be required to be licensed for futures or securities dealing activity if you act as principal and deal with “professional investors” only.
    • “Professional investor” is specifically defined in Part 1 of Schedule 1 to the SFO
    • However, definition of “professional investor” in the Securities and Futures (Professional Investor) Rules does not apply in this exemption

Capital Requirements

  • Depending on the type of regulated activity which a licensing corporation applies for, it must maintain at all times paid-up share capital and liquid capital not less than the specified amounts according to the Securities and Futures (Financial Resources) Rules.
  • For example, a type 5 licensed advisor would be required to have a minimum paid-up share capital of HK$5 million and minimum liquid capital of HK$3 million if it holds client assets.
  • If a licensed corporation carries on more than one type of regulated activity, then the highest amount required amongst those regulated activities shall apply.

Licensed Persons

Responsible officers:

  • Each licensed corporation is required to appoint two responsible officers who have been approved by the SFC to supervise the conduct of each regulated activity
    • At least one of the responsible officers must be an executive director (defined as a director who actively participates in, or is responsible for directly supervising, the business of a regulated activity for which a corporation is licensed)

Licensed representatives :

  • Any individual who carries on one or more regulated activities on behalf of a licensed corporation is required to apply for approval as a “licensed representative” accredited to that corporation

Fit and Proper Requirements

  • The licensing applicant must demonstrate that it has a proper business structure, good internal control systems and have qualified personnel to ensure proper management of risks
  • In assessing a licensing applicant (whether a individual or corporation), the SFC will examine whether the licensing applicant (and its substantial shareholders in the case of a corporate applicant) and proposed responsible officers are fit and proper for the purpose of licensing and it shall, in additional to any other matter that it may consider relevant have regard to the following:
    • financial status or solvency
    • educational or other qualifications or experience having regard to the nature of the functions to be performed
    • ability to carry on the regulated activity concerned competently, honestly and fairly
    • reputation, character, reliability and financial integrity of the applicant and other relevant persons as appropriate

Competence Requirements

  • Proposed responsible officers and licensed representatives must possess the appropriate ability, skills, knowledge and experience to properly manage and supervise the corporation’s proposed regulated activities and fulfill four basic elements. Below are the requirements expected of a responsible officer –
Four basic elements Can be compensated by
(1) Academic / industry / qualification

Passed one of the recognised industry qualifications

  • Degree in accounting, business administration, economics, finance or law; or other degree (with passes in at least two courses in the above disciplines); or
  • Internationally recognised professional qualifications in law, accounting or finance; or
  • Passes in English or Chinese, and Mathematics in HKCEE or equivalent plus an additional 2 years relevant industry experience; or
  • An additional 5 years relevant industry experience

(Applicant may apply for exemption from the recognised industry qualification requirement if he satisfies the exemption criteria)

(2) Industry experience

Possess 3 years relevant industry experience over the 6 years immediately prior to the date of application

(3) Management experience

Has a minimum of 2 years proven management skill and experience

(4) Regulatory knowledge

Passed one of the recognised local regulatory framework papers

Applicant may apply for exemption from taking the recognised local regulatory framework paper if he satisfies the exemption criteria

Office Premises

  • Licensed corporations are required to have suitable office premises to conduct regulated activities.
  • In assessing whether office premises are appropriate, the SFC will consider the following:
    • the security of the premises and whether there is a proper segregated office area
    • whether essential office equipment and telecommunication systems are situated in an area accessible only by the firm’s personnel
    • whether the firm has taken sufficient actions/measures to avoid confusion to its clients due to the co-existence of other forms in the same premises
    • whether confidential or non-public information and client privacy will be sufficiently safeguarded against unauthorised access or leakage
    • whether the premises are always accessible for visit by regulators

Application Process

  • A licensing applicant is required to submit an application together with:
    • prescribed fee
    • all the required supporting documents (including, inter alia, business plans, compliance manuals, application forms and supplements) in connection with the licensed applicant and its proposed responsible officers and substantial shareholders
  • How long the SFC takes to process the application will depend on the quality and completeness of the application submitted.
  • The SFC’s performance pledge for processing applications from the date the application is formally accepted by the SFC are currently:
    • 15 weeks (for licensed corporation application)
    • 8 weeks (for normal licensed representative application)
    • 10 weeks (for responsible officer application)

Recent Licensing Experience

  • We regularly assist and make submissions to the SFC on behalf of clients for obtaining of licenses to carry out regulated activities in Hong Kong
  • Selected licensing work:
    • recently advised a US headquartered financial-services firm in connection with its establishment of a Hong Kong subsidiary or branch for the set up of a futures contracts dealing practice in Hong Kong and the establishment of its leveraged foreign exchange business in Hong Kong
    • recently advised on the approval for change of substantial shareholder and approval of new nominated responsible officer of a fund management and securities advisory firm following its acquisition by a Thai private banking group
    • recently advised on the approval for change of substantial shareholders following the global merger of our client, an independently-owned private capital investment management firm, with a locally-based private investment group
    • recently advised on the approval to carry out asset management and securities advisory services in connection with a US-based group focusing on global energy and investments funds, which we were also advising in connection with its Chapter 21 listing on the Hong Kong Stock Exchange
    • recently advised on the merger of Hong Kong offices of a Taiwanese financial services and securities firm (which we assisted in setting up) with the Hong Kong subsidiary of another listed Taiwanese financial group

Other Related Experience

  • On an ongoing basis, we provide licensing compliance advice, such as :
    • ongoing satisfaction of capital requirements and response to regulatory enquiries
    • notifications of changes to the licensing corporation and licensed persons
  • We also advise on non-contentious matters including :
    • employment matters; and
    • corporate governance
  • We have excellent links and networks with law firms both domestically and internationally. Our associated firm Boase Cohen & Collins offers advice on contentious matters such as tax matters, employment matters and commercial disputes

What Can Charltons Do For You?

  • Charltons has extensive licensing, private equity, listing and funds experience and we can:
    • assist you in setting up your business in Hong Kong to capture the growth in the metals industry in Hong Kong
    • advise you on establishing and structuring of funds and metals-backed securities to leverage opportunities and use of commodities derivatives to manage risk
  • Charltons advises clients constantly in terms of licensing and regularly compliance, whether on specific complex issues or on an ongoing-basis
  • Charltons also provide corporate establishment and other legal administration services which makes us your ideal “one-stop” shop for establishing a business presence in Hong Kong
  • Charltons is increasingly mandated by overseas financial services firms, securities advisory and investment management firms to assist them with licensing applications with the Securities and Futures Commission as well as related structuring and matters
  • Charltons also keeps a close eye on changes to the regulatory requirements – in particular in the LME-HKEx context, the possible development of mutual product listing/licensing arrangements with leading exchanges and regulators

Practice Areas

  • Capital Markets
    • listing on the Hong Kong, Shanghai, Shenzhen, London and Luxembourg stock exchanges
    • IPOs and placings
    • global offerings and GDRs
  • Corporate and Commercial
    • mergers and Acquisitions
    • joint ventures
    • stock exchange advisory
    • corporate governance
    • stock options
    • employment law
  • Investment Funds: China and Offshore
    • unit funds and mutual funds approval/ investment companies
    • authorised and unauthorised funds
    • stock exchange listing (including Hong Kong, Dublin, London, Cayman, Bermuda stock exchanges)
    • closed-end and open-ended structures
    • hedge funds
  • Securities
    • compliance and disclosure
    • dealing and advisory authorisations in Hong Kong and the PRC
    • options
  • Mergers and Acquisitions
    • Hong Kong Code on Takeovers and Mergers
    • public offerings
    • reverse takeovers
    • private acquisitions
    • due diligence in China and elsewhere in Asia
  • Derivatives
    • structuring listed and unlisted derivatives
    • placings on Hong Kong and Luxembourg listed warrants and other structured products
    • compliance and regulatory
  • Restructuring
    • schemes of arrangement
    • workouts
    • corporate recovery
    • asset injections
  • Private Equity and Venture Capital
    • optimum PRC and offshore structures
    • PRC regulations
    • preferred stock financing
    • exit strategies
  • Investment
    • China investment regulations
    • Vietnam investment regulations
    • structuring a major foreign direct investment projects
    • evaluation and due diligence

So Who Are We?

Introduction to Charltons

  • Charltons is a firm with extensive experience in corporate finance and in-depth knowledge of Hong Kong law and practice
  • representative offices in Shanghai, Beijing and Myanmar
  • “Corporate Finance Law Firm of the Year in Hong Kong” awarded to Charltons in the Corporate INTL Magazine Global Award 2014
  • “Boutique Firm of the Year” awarded to Charltons by Asian Legal Business for the years 2002, 2003, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014 and 2015
  • “Hong Kong’s Top Independent Law Firm” awarded to Charltons in the Euromoney Legal Media Asia Women in Business Law Awards 2012 and 2013
  • “Equity Market Deal of the Year” awarded to Charltons in 2011 by Asian Legal Business for advising the AIA IPO


  • Excellent links and networks with law firms worldwide.
  • Julia Charlton was named a “Capital Markets Lawyer of the Year – Hong Kong” in the Finance Monthly Global Awards 2014.
  • Julia Charlton was named a “Leading Lawyer” by Asia Law & Practice for the years 2002, 2003, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014 and 2015.
  • Julia Charlton was also named a “Leading Advisor” by Acquisition International for 2013.
  • “Asian Restructuring Deal of the Year” 2000 awarded to Charltons by International Financial Law Review for their work with Guangdong Investment Limited.
  • Finalist for China Law & Practice’s “Deal of the Year (M&A)” 2007 for their work on Zijin Mining Group Co Ltd.’s bid for Monterrico Metals plc.

Charltons Approach

  • Commitment: Charltons is committed to apply a fresh solution-oriented approach to the provision of legal services to our clients. We seek to combine legal excellence with efficiency and economy
  • Commercial: our lawyers who give legal advice is sensitive to the clients’ relevant business or industry environment
  • Cutting-Edge: our lawyers regularly contribute to legal and business publications as well as government consultations. We can provide seminars and in-house education for clients and always available to discuss ways we can help our clients
  • Efficient & Accessible: our lawyers seek to achieve high levels of efficiency in communicating with clients and to be accessible and responsive at all times
  • Exceeding Expectations: our lawyers aim to exceed clients’ expectations – we achieve this by understanding clients’ needs, committing and planning to meet those needs, creatively resolving issues faced by clients, meeting clients’ timetables and regular monitoring and reviewing our performance

The Charltons Team

  • The Charltons team is composed of individuals with the following knowledge and skills:
    • detailed knowledge of Hong Kong law and practice
    • extensive experience of providing legal services for Hong Kong, PRC-related and cross-border transactions
    • indepth knowledge of the Hong Kong regulations (including the Listing Rules, Securities and Futures Ordinance, Takeovers Code, Share Repurchase Code, Companies Ordinances, and other rules, codes and guidelines) relevant to private and public companies, licensed corporations as well as listed issuers

Team Profile : Julia Charlton

Julia Charlton – Partner

  • Julia, LL.B (1st class Honours), A.K.C (Kings College, London) was admitted as a solicitor in England & Wales in 1985 and has practised as a solicitor in Hong Kong since 1987.
  • Julia is a member of the Listing Committee of the Stock Exchange of Hong Kong Limited and the Takeovers Panel and the Takeovers Appeal Panel of the SFC.
  • Julia was named a “Leading Lawyer” by Asia Law & Practice for the years 2002, 2003, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014 and 2015.
  • Julia was named a “Leading Advisor” by Acquisition International for 2013.
  • Julia was also named the “Capital Markets Lawyer of the Year – Hong Kong” in the Finance Monthly Global Awards 2014.
  • Julia has extensive experience in China work and is a Mandarin speaker.

Licensing for commodities related activities in Hong Kong

Commodities market in Hong Kong

London Metal Exchange (LME)

Licensing in Hong Kong

Licensing applications with the Securities and Futures Commission

Commodities derivatives

Securities and Futures Ordinance

SFC’s Code of Conduct

SFC’s Fit and Proper Guidelines

SFC’s Management, Supervision and Internal Control Guidelines

Competence requirements of licensed persons in Hong Kong
Trade commodities