ComplianceOne Newsletter – December 2022
ComplianceOne Newsletter – December 2022
The topics discussed in this monthly newsletter are as follows:
1. Asia's First Crypto Asset ETFs were launched on HKEX
2. SFC reminds the Risks associated with Unregulated Virtual Asset Platform
3. SFC revises Business and Risk Management Questionnaire (BRMQ)
4. SFC to launch investor identification regime (HKIDR) in March 2023
5. MSCI's Report to reveal trends in ESG & Climate for 2023
6. SFC suspends Wang Pei Yi for 10 months for making false declarations
7. SFC fines and suspends Chung Tung Sau for seven months for breach of conflicts of interest
8. SFC bans Sun Yiding eight months for circumvention of personal dealings without approval from employer
9. SFC reprimands and fines Guosen Securities (HK) Brokerage Company, Limited $2.8 million over regulatory breaches
MARKET NEWS
1. Asia's First Crypto Asset ETFs were launched on HKEX
CSOP Asset Management Limited (“CSOP”) launched the CSOP Bitcoin Futures ETF (3066.HK) and CSOP Ether Futures ETF (3036.HK) on 16 December 2022 which were then traded on the HKEX; the strategy of which was to capture the performance of the actively traded Bitcoin and Ether futures in CME which amount up to 39% and 17% of the total market cap respectively.
SIGNIFICANCE:
The launch of the two ETFs was marking the first time Asian retail investors can have access to this type of virtual assets with a minimum investment of USD100 traded through the traditional brokerage accounts.
The approval from the SFC and the HKEX of two new ETFs based on the CME Bitcoin and Ether futures was an importance benchmark in the development of digital asset trading and an unprecedented step forward to accommodate the robust growth and vehement client demand for exposure to Bitcoins and Ethers, yet traded under highly regulated exchanges like CME where protection of investors can be assured.
2. SFC reminds the Risks associated with Unregulated Virtual Asset Platform
The SFC wishes to remind investors of the risks associated with virtual asset (VA) platforms offering VA “deposits”, “savings”, “earnings” or “staking” services (VA Arrangements) to investors in Hong Kong in light of their continued prevalence.
The SFC has observed that some of these platforms may offer a high “interest rate” on VA “deposits” or a daily generation of additional VA at a guaranteed or fixed rate to investors, and there are significant risks associated with investing in these types of VA Arrangements. Investors may suffer significant or even total loss, especially in the event of fraud or collapse of a VA platform.
The SFC has figured out some key features investors have to be aware of:
(i) Some VA Arrangements are commonly labelled as “deposits” or “savings” products, while they are NOT regulated and are not the same as ordinary bank deposits; and investors are not ensured with any protection;
(ii) A vast majority of VA platforms offering VA Arrangements are unregulated;
(iii) VA is exposed to heightened risks like insufficient liquidity, high price volatility or fraud, which may lose the entire value;
(iv) Some VA Arrangements could amount to a collective investment scheme (CIS) as defined under the SFO, yet they are not authorized CIS per se and may be highly risky to investors.
SIGNIFICANCE:
On one hand, the HKSAR Government is keen on developing HK as an international financial hub for virtual asset trading; while on the other hand, the governing regime is still on the stage of coping and catch up with the inherent ever-changing and volatile market scenarios of the trading platforms or channels of these VA products. Currently, most of the VA or VA platforms are not yet regulated to ensure sufficient protection to investors at large which can justify the external potential regulatory risks incurred. The HKSAR Government should endeavour to maintain a balance in launching its financial policies.
3. SFC revises the Business and Risk Management Questionnaire (BRMQ)
The SFC published a revised Business and Risk Management Questionnaire (BRMQ) on 23 Dec 2022 for licensed corporations (LCs) and associated entities (AEs).
The BRMQ is a supervisory tool adopted by the SFC to collect additional data and information on a variety of functions and business activities to enhance the effectiveness of its risk-based supervision amid the rapidly changing operation and business environment. It is noted that many new questions are incorporated to collect more granular clients and transaction data with focus on analyzing the issues on money laundering and internal risk controls.
SIGNIFICANCE:
This Circular is published with an aim to allow sufficient preparation time for LCs and AEs, thus the revised BRMQ would be used for financial years ending on or after 30 November 2023.
LCs and AEs are urged to review and familiarise themselves with the revised questionnaires, and start gathering, compiling the required information and implementing the system enhancement whatever deemed necessary.
One crucial implication of the BRMQ is used as an indicative checklist, though not exhaustive, of the required standards expected by the SFC. It serves as an operational guideline with step by step for the LCs to prepare themselves the details of how the requirements in the guidelines are implemented in real operational routines.
4. SFC to launch investor identification regime (HKIDR) in March 2023
The SFC announced on 12 Dec 2022 that the investor identification regime (HKIDR) for the securities market in Hong Kong will finally be launched on 20 March 2023.
Ever since the consultation in 2021, the SFC has been closely monitoring the readiness of the licensed corporations (“LC”) in implementing the HKIDR. The survey and recent rehearsals indicate that some intermediaries may need more time to obtain the client consent which is a prerequisite for the HKIDR to authorize the LC to collect, store and process the personal data of the underlying clients. Investors are also reminded to respond to their relevant brokers in order to facilitate the process.
As Mr Ashley Alder, former CEO of the SFC, has said: “The launch of the investor identification regime will be a significant milestone in Hong Kong’s securities market”. The HKIDR enables more effective market surveillance, reinforce market integrity and promote confidence of the investors, which are the indispensable pillar for Hong Kong as an international financial centre.
5. MSCI's Report to reveal trends in ESG & Climate for 2023
In the MSCI ‘s 11th annual ESG & Climate Trends to Watch Report, it is stated that listed companies will deplete their share of the global emissions budget for limiting temperature rise to 1.5°C by December 2026.
Researchers explained in the ESG & Climate Trends to Watch Report that the ongoing war in Ukraine and record levels of inflation globally may limit near-term pressure to reduce global greenhouse-gas emissions as governments around the world are prioritizing energy security and affordability on their to-do-list. However, MSCI ESG data also reveals that major power companies are keeping their eyes on longer-term decarbonization trends and expanding deployment of renewables.
Amid the above changes, investors continue to evaluate how the climate crisis will impact their portfolio in 2023. As Meggin Thwing Eastman, Managing Director and Global ESG Editorial Director at MSCI, has said: “ESG risk is financial risk, and the ESG and climate research showcased in today’s report was conducted to support investor needs to synthesize previously unseen risks and incentivize companies to better manage both emerging issues and the longstanding, expansive threat of the climate crisis.”
SIGNIFICANCE:
It is expected that ESG and climate-related risks remain and continue to remain as dominant factors of consideration for investors in constructing their portfolios. Apart from diverting resources to comply with the EGS standards which definitely incurs additional costs, it is still of paramount importance for companies to explore business opportunities upon this decarbonization transition; or otherwise, they will not be able to weather the storm in this global trend.
ENFORCEMENT NEWS
6. SFC suspends Wang Pei Yi for 10 months for making false declarations
The SFC has suspended Ms Wang Pei Yi, a former licensed representative of SinoPac Securities (Asia) Limited (SinoPac), for 10 months for making false declaration in the account opening forms of three corporate clients between June 2015 and April 2017.
Wang had falsely declared that she had met and witnessed the signing of forms of the clients; and provided them with relevant risk disclosure statements. Her failure to take all reasonable steps to establish the true and full identity of the clients definitely violated the principles to act honestly, with care and diligence, and best interest of the clients themselves.
7. SFC fines and suspends Chung Tung Sau for seven months for breach of conflicts of interest
The SFC has suspended Mr Chung Tung Sau, a former licensed representative of Quam Securities Company Limited (Quam), for seven months from 15 and fined him $60,000.
It was found that between 1 and 11 August 2017 Chung had traded in the shares of a listed company (Company A) for himself while executing a client’s good-till-cancel buy order for the same shares (GTC Order). Chung deliberately arranged matched trades between the GTC orders of the client and his own selling orders, resulting in a profit of approximately $60,000 from these transactions.
The SFC considers Chung’s conduct has called into questions his fitness and properness as a licensed person, in particular, his failure to:
(i) take reasonable step to avoid the conflicts of interests between himself and the client;
(ii) comply with the staff dealing policy of Quam;
(iii) execute the GTC Order in best available price for the client.
The SFC has prohibited Ms Sun Yiding from re-entering the industry for eight months from 15 December 2022 to 14 August 2023.
It was found in an investigation that between July 2019 and July 2020, Sun failed to obtain her then employer’s approval to open a securities trading account with an external brokerage firm and conducted 829 personal trades in the account unbeknownst to it. She also traded in three stocks on her then employer’s restricted list and sold certain stocks within 30 days of purchase without its pre-approval.
SIGNIFICANCE:
The same scenario as the case before, the SFC has demonstrated to the licensed persons that "fitness and properness" remain as crucial elements in assessing the integrity of a licensed person; and bear the same material weight as any breach of other market misconducts.
The SFC has reprimanded and fined Guosen Securities (HK) Brokerage Company, Limited (Guosen) $2.8 million for regulatory breaches in relation to the handling of client assets and the provision of client account statements.
The SFC’s investigation found that:
(i) between 1 January 2021 and 7 March 2021, Guosen relied on expired standing authority of 1,009 clients to obtain financial accommodation by repledging their securities collateral with a bank as collateral;
(ii) from May 2020 to November 2020, Guosen had provided monthly statements with incomplete and incorrect information to 930 clients.
Guosen’s failures constitute breaches of the Securities and Futures (Client Securities) Rules (CSR), the Securities and Futures (Contract Notes, Statement of Account and Receipts) Rules (CNR) and the Code of Conduct.
SIGNIFICANCE
The case is an excellent example of lack of internal controls and operation deficiency in fulfilling the annual routines in a timely manner. It also reveals the facts that some staff may be incompetent in fulfilling their obligations for providing statements which should be precisely reconciled.
For more details, please click on the title of the topic above.
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