ComplianceOne Newsletter - June 2024
The topics discussed in this monthly newsletter are as follows:
1. HKEX to implement severe weather trading in securities and derivatives markets
2. SFC marks its 35-year history as the guardian of Hong Kong financial markets
3. SFC’s deficit nearly tripled to 298 million ending in March 2024
4. SFC enforcement report shows 175 completed cases in 2023-2024
6. WONG Ming Chung was convicted for providing investment advice on Telegram without a licence
7. SFC disciplined WU Chao for circumventing personal dealings
MARKET NEWS
1. HKEX to implement severe weather trading in securities and derivatives markets
Hong Kong Exchanges and Clearing Limited (HKEX) announced on 18 June 2024 that the Severe Weather Trading (SWT) will commence on 23 September 2024 in both securities and derivatives markets, the consultation conclusions received from market participants showed strong support for the implementation.
The SWT covers Stock Connect, derivatives holiday trading, and after-hours trading, during severe weather events; and to ensure safety, remote working and the use of online services are strongly encouraged. Some adjustments are also required to ensure the market’s operational resilience as certain services may not be available during SWT day. As HKEX Chief Executive Officer, Bonnie Y Chan, had said: “This is an important step that will make Hong Kong's markets always available to regional and international investors during trading hours, whatever the weather, and underscores HKEX’s commitment to supporting the resilience and competitiveness of Hong Kong as a world-class financial centre.”
Besides, the Hong Kong Association of Banks and the Hong Kong Interbank Clearing Limited have confirmed that, during SWT days, banking services, such as electronic money transfer channels, will be available from designated banks and settlement banks of relevant clearing houses of HKEX to facilitate the operations and settlement process.
To allow small-and-medium-sized brokers adequate preparation time, HKEX plans to offer special arrangements to eligible participants requiring assistance, for example by temporarily fulfilling margin payment or settlement obligations for these participants on a SWT day. The above special arrangements will be in place from the SWT effective date until the end of 2024.
SIGNIFICANCE:
During the SWT day, HKEX's trading, clearing, settlement and market data systems will be fully accessible via remote networks; and HKEX has made enhancements to its infrastructure and operational arrangements to reduce the need for physical access among participants, and will arrange testing sessions before the launch of SWT to ensure readiness of market participants.
Severe Weather Trading is no doubt a bold step of the HKEX to achieve a seamless trading environment uninterrupted by any unfavourable weather conditions, thus providing more opportunities and protections to investors to manage their risks and exposures along with the global market conditions.
2. SFC marks its 35-year history as the guardian of Hong Kong financial markets
SFC issued an Annual Report on 19 June 2024 which highlighted various initiatives to promote the resilience and sustainable growth of Hong Kong’ s capital markets as well as laying out the roadmap to prepare the capital markets for future opportunities and challenges.
As SFC’s CEO Ms Julia Leung has said: “To remain a world-class regulator and lead Hong Kong’ s capital markets to new heights in decades to come, the SFC must strengthen its dual role as protector and enabler, by staying agile and vigilant as well as harnessing new opportunities from sustainability and new technologies, without compromising investor protection.”
Also, cherishing to enhance the super-connector role of Hong Kong has been one of the top initiatives, the SFC has been endeavouring to collaborate with the China Securities Regulatory Commission (CSRC) to deepen the mutual market access.
The flagship Stock Connect scheme has recorded a 20-fold advance in average daily trading since 2014; together with the ETF Connect, the Swap Connect, which strengthen the role of HK as an offshore risk management hub.
To lead financial market transformation via technology, the SFC has pioneered in launching the VA licensing regime to facilitate the trading of VAs and its VA-related spot ETFs accessible to retail investors. More details in other areas are delineated in the Annual Report 2023-24 for public interests.
3. SFC’s deficit nearly tripled to 298 million ending in March 2024
With reference to the Annual Report posted on 19 June 2024, the SFC recorded a deficit of HK$298 million for the year ending in March 2024 as over the past three years, staff costs were up 8% and total expenses up 5% (page 142); the recorded loss in the previous fiscal year was HK$101 million.
The total income for the year was HK$1835 million, down 6% from HK$1942 million last year, owing to decrease in securities market turnover with resulting levy income went down 19% from last year to $1,390 million.
Apart from the above, the SFC still has to complete the transaction for acquiring nine office floors as its permanent office, and HK$2.3 billion form the property acquisition reserve has been utilized. As of 31 March 2024, the reserves still stood at $7.6 billion, of which $1.2 billion has been set aside to support the acquisition of three additional floors and future principal bank loan repayments.
SIGNIFICANCE:
Despite of the above financial figures, the SFC remains as the robust regulatory body in Hong Kong with irreplaceable role as regulator and facilitator in maintaining the integrity and governing regime of this international financial centre.
4. SFC enforcement report shows 175 completed cases in 2023-2024
In the Annual Report 2023-2024 of the SFC, 183 investigation cases had been launched with 175 cases completed, and 24 cases were brought to criminal proceedings.
A landmark of investigation cases in 2023 was the highly organized, large scale and sophisticated market manipulation case with several individuals involved and charged with various criminal offences at the High Court in May last year.
Moreover, following the investigation by the SFC, cases of two suspects of the key members of a "ramp-and-dump" syndicate were transferred to the District Court.
As Mr Tim Lui, Chairman of the SFC, had stated the SFC had gained valuable experiences and achieved remarkable results in the past years, and would continue to ensure the integrity, stability and resilience of the financial markets in Hong Kong amid the emerging challenges over the world.
ENFORCEMENT NEWS
5. SFC suspends PICC’s former licensed representative for seven months for failures in managing a private fund
On 20 June 2024, the SFC has suspended Mr Shum Wai Nap, former licensed representative of PICC Asset Management (Hong Kong) Company Limited (PICC), for seven months from 20 June 2024 to 19 January 2025 for fund management failures.
The investigation found that Shum was the investment manager of a Cayman-incorporated fund (the “Fund”) under PICC between May 2018 to April 2020, and he failed to: (i) properly manage the Fund in line with its investment objectives and restrictions; and (ii) properly manage the risks of the Fund with PICC’s policies.
Taking a thorough scrutiny of the Statement of Disciplinary Action of what Shum had done, it serves as a negative example to illustrate how funds should be properly managed!
(1) Failure to adhere to the Fund’s investment strategy, objectives and investment restrictions: the memorandum of the Fund was capital preservation with steady capital appreciation in a diversified portfolio; SHUM only held 1 to 3 stocks with highly concentrated positions, including a Stock X which was NOT in the approved stock pool under the internal policies of PICC’s Investment Committee with respect to the investment mandate.
(2) Failure to mitigate the risks associated with the Fund’s holding of an unsuitable stock: Shum continued with several requests to add the Stock X to the stock pool despite repeated rejections from the Investment Committee with “SELL” only restriction to him, and Shum declined to follow.
(3) Failure to manage liquidity risks: under the guideline of illiquid assets (ie, assets that required more than 30 days to sell), holding of illiquid assets should not exceed 20% of a Fund’s portfolio; under Shum’s management, the ratios were as high as 80.7 % and 91.69%!
(4) Failure to manage concentration risks: according to PICC’s policies, holding of a single stock should not exceed 20% of the Fund’s total NAV; and the holding of Stock X and others under Shum far exceeded 20%.
(5) Failure to comply with PICC’s stop loss procedure: there is a guideline for stop-loss of more than 50% of a particular single stock; and Shum did not follow the instructions to execute forced sales of the Stock X within three trading days as required.
SIGNIFICANCE:
Shum’s repeated failure to properly manage the Fund and his deliberate intention NOT to comply with PICC’s risk management policies was in breach of General Principle 2 (diligence) of the Code of Conduct which requires a licensed person to act with due skill, care and diligence, in the best interests of his clients and the integrity of the market in conducting business activities.
The mal-practices of Shum are typical incidences a licensed corporation in asset management should endeavour to avoid as remedial measures to mitigate potential regulatory breaches!
6. WONG Ming Chung was convicted for providing investment advice on Telegram without a licence
On 20 June 2024, the Eastern Magistrates’ Court today convicted Mr WONG Ming Chung (WONG) for providing investment advice on a subscription-based chat group on Telegram he hosted without a licence in a prosecution brought by the SFC. WONG pleaded guilty to the charge and was fined HKD10,000 together with the SFC’s investigation costs.
The investigation found that between 2 January 2018 and 21 May 2019, WONG hosted a chat group on Telegram named “FRANKY - 即市直播谷” which was opened to members of the public on a subscription by payment basis.
SIGNIFICANCE:
Despite that WONG was licensed under the SFC to conduct with Type 1 (dealing in securities) and Type 4 (advising in securities) regulated activities, the CRUX of the conviction was that the Telegram group was not operated on behalf of the licensed corporation WONG was accredited to, but for his own remunerations.
7. SFC disciplined WU Chao for circumventing personal dealings
On 26 June 2024, the SFC prohibited Mr WU Chao (“WU”), a former responsible officer, manager-in-charge (MIC) and chief operations officer of DA International Financial Service Limited (DA), from re-entering the industry for three years and seven months from 26 June 2024 to 25 January 2028.
The investigation found that between February and April in 2022, WU concealed from DA his beneficial interest in and direct control over a securities margin account held by a third party at DA without obtaining DA’s prior approval. WU’s conduct circumvented DA’s employee dealing policy from being monitored under personal trading activities. In all, the unauthorised transactions conducted in the account at the material time totalled $7.3 million.
WU also abused his right as a member of DA’s senior management to make 33 unauthorised adjustments to the margin loan limits of the account and the margin financing ratios to facilitate his trading activities.
The SFC considers that WU’s conduct was dishonest and it called into question his fitness and properness to be a licensed person.
SIGNIFICANCE:
No matter how comprehensive and stringent are the prevailing rules and guidelines, there are always loopholes to be abused, in particular by anyone who is in authority to circumvent and override the existing regulatory framework for his own advantages.”
For more details, please click on the title of the topic above.
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