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ComplianceOne Newsletter – March 2022



ComplianceOne Newsletter – March 2022



The topics discussed in this monthly newsletter are as follows:


1. SFC emphasizes the importance of Business Continuity Planning (BCP) amidst latest COVID-19 situation

2. The requirement of End-To-End (E2E) Test for systems relating to Hong Kong Investor Identification Regime (HKIDR)

3. SFC Waives the annual licensing fee

4. Reminder to complete BRMQ by 30 April 2022

5. SFC reprimands and fines HSBC Securities Brokers (Asia) Limited $6.3 million for regulatory breaches

6. SFC reprimands and fines Emperor Securities Limited and Emperor Futures Limited $5.4 million for breaches of anti-money laundering regulatory requirements



MARKET NEWS



1. SFC emphasizes the importance of BCP amidst latest COVID-19 situation


Amidst the acute situation of the fifth wave of COVID-19 infections in Hong Kong, the SFC again reminds licensed corporations to review and update their business continuity plan (BCP). As the HKSAR Government has announced its intention to implement a Compulsory Universal Testing (CUT) scheme, albeit its timing and details have not been announced yet, licensed corporations should start preparing now considering the number of actions that may need to be taken in advance.


Specifically, licensed corporations should critically assess the impact of sudden disruptive events such as the scenarios of temporary staff shortages or reduced service offerings by essential vendors and service providers, as a result of positive cases identified before or during the CUT scheme, and take steps to manage associated risks to ensure that their business operations and client interests are not unduly affected.


Significance:  Even the number of infected victims decreased recently, and the CUT scheme is temporary postponed, a BCP which should still be in place for every licensed corporation as something as "need-to-do".


Preparing a BCP commensurate with its operational scale poses an insurmountable burden for those small-size brokers within which there is only one staff for each functional role, or even one staff to take several roles.


Having considered that there is still a regulatory requirement of "segregation of duties" which governs that a single staff cannot assume roles of front end and back office at the same time which further complicates any job rotations to fill the gap of infected staff of any designated role.



2. The requirement of End-To-End (E2E) Test for systems relating to HKIDR


Reference is made to the Circular on 13 September 2021 regarding the roadmap to implement the HKIDR and Over-the-counter Securities Transactions Reporting Regime (OTCR).


To enable Relevant Regulated Intermediaries (RRIs) to get ready for the implementation of the HKIDR, an E2E Test will start between mid-May and June 2022. It is mandatory for all RRIs to participate in the E2E Test. 


The E2E Test will cover: (i) the submission of the BCAN-CID Mapping File and Reporting Forms to the Stock Exchange of Hong Kong’s (SEHK) data repository (applicable to all RRIs), as well as (ii) the test on BCAN tagging for order submission to the SEHK trading system (applicable to RRIs who are Exchange Participants only).


The following two set of documents will be published by SEHK by the end of March 2022:


1. E2E Test package; and

2. HKIDR File Transfer Connectivity Guide


The exact start date of the E2E Test will be further announced in mid-April 2022.


Significance:  Currently when the SFC begins an investigation, it is only possible to identify exchange participants (i.e. the brokers) which place securities orders directly through the HKEX trading system. In case the SFC intends to detect any suspicious trading activities, it is necessary to obtain information from brokers in order to identify the actual individual or any entity behind the scene where trades orders are placed. With the introduction of the HKIDR, any relevant information concerning the individual/ entity who places orders can be spot out directly with reference to the submitted BCAN-CID information provided by the brokers.


From the brokers’ point of view, there will be a great burden to kick off given the complicated operational and technical procedures to be fulfilled before they can participate successfully in the E2E Test, examples are the generation of BCANs, preparation of the BCAN-CID Mapping File as well as submission of the Reporting Forms. Brokers, especially the EPs, have to make good preparation in understanding the entire BCAN regime and requirements beforehand, or otherwise it will be very time-consuming to implement remedial measures to revert and start all over again!  Most of all, failure to comply with the BCAN-CID requirements is construed as a breach of the HKEX trading rules and induces reprimand from the SFC!


 

3. SFC Waived the annual licensing fee


The Securities and Futures Commission (SFC) will waive the annual licensing fees of all intermediaries and licensed individuals incurred during the period from 1 April 2022 to 31 March 2023.


The SFC will not issue the usual demands for payment for annual licensing fees which would ordinarily become payable during this one-year period. Payments of all other fees, including for licence applications and transfers, will not be affected.


 

4. Reminder to complete BRMQ by 30 April 2022


Licensed corporations are reminded that the deadline to submit the Business and Risk Management Questionnaire (BRMQ) via WINGS, the latest common flatform for electronic forms and submission, is 30 April 2022.



ENFORCEMENT NEWS



5. SFC reprimands and fines HSBC Securities Brokers (Asia) Limited $6.3 million for regulatory breaches



The Securities and Futures Commission (SFC) has reprimanded and fined HSBC Securities Brokers (Asia) Limited (HCCB) $6.3 million for internal control failures and breaches of the Code of Conduct.


The SFC found that between September 2018 and September 2021, HCCB failed to ensure compliance with the Rules of the SEHK (Rules of the Exchange) by making multiple errors: (a) in the assignment of the BCAN to its clients who traded A-shares through the China Connect Securities (CCS), (b) in the mapping of CID to BCAN, and (c) in the tagging of BCAN to the clients’ orders. As a result, incorrect BCAN and CID information in relation to 92 clients were submitted to SEHK, involving 3,379,065 orders and 4,202,534 trades.


Significance:  It was found that the errors were due to deficiencies in HCCB’s client onboarding and BCAN assignment, more seriously the manual nature of account creation procedures and the use of manual process in updating data between their systems with multi-layered data structure. It has been reminded and reiterated in the SFC circulars that the use of manual process should be kept to minimal as practicable as possible in order to avoid any human input errors and manipulations of data integrity. 


Moreover, it was also found that HCCB erroneously self-matched 370 warrant orders with their market making engine for reason of their insufficient knowledge of the system in handling live orders across trading sessions. It demonstrates expressly the failure of HCCB to act with due skill and diligence in conducting their business, either internally in market making activities, or externally in executing orders on behalf of their clients.


 

6. SFC reprimands and fines Emperor Securities Limited and Emperor Futures Limited $5.4 million for breaches of AML regulatory requirements



The Securities and Futures Commission (SFC) has reprimanded and fined Emperor Securities Limited (ESL) and Emperor Futures Limited (EFL) (collectively, “Emperor”) $5.4 million for failures in complying with anti-money laundering and counter-terrorist financing (AML/CFT) regulatory requirements.


The SFC found that Emperor failed to implement adequate and effective policies and procedures to mitigate the risks of money laundering with third party deposits and payments. In particular, (a) with third party fund transfers with no accompanying explanations yet approved, (b) no further inquiries for supporting documents for verification when these are required.


Significance:  It was obvious that Emperor adopted a lax attitude towards the clients in handling the third-party fund transfer.  As a LC, the message from the SFC is so explicit that it would endeavor to combat any breach of AML regulatory requirements; and the continual connivance with facilitating clients in third party transfers is nothing other than a “one way ticket” to disciplinary action by the SFC!



For more details, please click on the title of the topic above. 


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~ Make It Right Today, Better Tomorrow ~ 


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The Newsletter is for general information purpose only and is not intended to constitute legal or other professional advice.


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