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SFC Market Sounding Guidelines unpacked: Challenges and practical considerations

SFC Market Sounding Guidelines unpacked: Challenges and practical considerations

Since the SFC’s Market Sounding Guidelines came into effect on 2 May 2025, their application has sparked considerable discussion within the financial industry. The new guidelines also bring Hong Kong in line with other global market soundings regimes, including the UK which already has an established market soundings regime. With this being a key priority area for the regulator, licensed corporations (LCs) participating in the sounding process should be mindful of associated facets and challenges.

 

Market sounding scripts and communications

It’s important to note that the guidelines only apply to a licensed or registered person who:

  1. discloses confidential information that is entrusted to it by a client, an issuer or an existing shareholder selling or buying in the secondary market (Market Sounding Beneficiary) during a market sounding (Market Sounding Information or MSI) (Disclosing Person); or
  2. receives market sounding Information during a market sounding (Recipient Person) collectively referred to as a Market Sounding Intermediary.

Recipient Persons have observed that Disclosing Persons often blend in the disclaimers MSI with Material Non-Public Information (MNPI). These communications, accompanied by disclaimers, can lead to confusion about whether the guidelines or wall cross procedures should apply.

 

Market soundings vs. market conversations

The distinction between market soundings and regular market conversations remains a key global challenge. Market conversations, informal expressions of interest, and ‘market colour’ are generally excluded from the guidelines if the information is deemed non-confidential. However, the conversations between market participants often evolve as feedback is gathered, with discussions shifting from exploratory to firm orders. 

This fluidity creates challenges, meaning you must confirm the intent and scope of communications, especially when the nature of the conversation is unclear.

Any firm receiving a sounding must also undertake its own analysis of the information to consider whether it should be deemed inside information. Not all market soundings involve inside information – but it’s vital that you come to your own conclusion. This is particularly important where there’s a difference in opinion between the disclosing firm and the recipient of information. The decision-making process should be documented to demonstrate to regulators that they’ve followed proper procedures and haven’t intentionally or negligently disclosed inside information to others.

 

Nominee roles and risk tolerance

One of the key requirements on Recipient Persons is to assign informed individuals to receive MSI. In the UK for example, these are referred to as ‘gate keepers’, and will be the main point of contact for deciding whether the firm should be wall-crossed. 

These nominees should understand the investment team’s risk tolerance and restrictions, and clear on situations where the team is willing to accept restrictions on securities or sectors. This requires pre-defining operating procedures for scenarios where confidential information is received regarding securities already held.

 

Managing restrictions and timeframes

Before agreeing to receive MSI, Recipient Persons should understand the likely duration of restrictions or negotiate specific timeframes for treating MSI as confidential. Safeguards should also be established to ensure that actions taken on securities are not based on confidential or non-public information. While timeframes can provide structure, Recipient Persons must ultimately rely on a facts and circumstances approach to demonstrate that they’ve acted responsibly and within the bounds of the guidelines.

There’s also a risk that market soundings can be received despite a firm not wishing to receive them. Regulators have identified cases where inside information has been disclosed inadvertently in the initial phase of a conversation when establishing whether a firm wishes to receive a market sounding.

In some situations, the recipient may be able to infer from the information disclosed who the issuer is and the likely terms of a deal. Even though this is more likely to happen in niche markets with smaller market participants, Recipient Persons should always make their own assessment as to whether they are in possession of inside information. This should be done using the information disclosed and any other information they hold, following any conversation with the issuer or disclosing market participant. 

Make sure you have controls in place to limit insider dealing risk. Unnecessary delays between initial contact and providing consent to receive the sounding can lead to potential insider trading if the issuer can be identified or inferred from the initial conversation.

 

How can Ocorian help?

Our Hong Kong team can help you understand the new guidelines by assessing your current practice, developing policies and procedures, and implementing an effective compliance framework and information barriers.

We also draft market sounding scripts to ensure your staff are communicating with third parties in a way that minimises the risk of unlawful disclosure of inside information.

Our bespoke and tailored training includes real life examples to staff involved in the disclosure and receipt of market soundings. 

Get in touch if you’d like support in navigating the complexities of the guidelines, making sure your business stays compliant, and reducing the risk of regulatory issues.