ComplianceOne Newsletter - August 2023
The topics discussed in this monthly newsletter are as follows:
SFC’s Consultation Conclusion on Proposed Risk Management Guidelines for Futures Contracts Dealing Activities was released
SFC concluded Consultation on Amendments to Enforcement-related Provision of the SFO
SFC and CSRC reached Consensus on Introducing Block Trading under Stock Connect
HKMA, SFC, and IA jointly Published a New Roadmap to Promote Fintech Adoption in Financial Services Sector
Reminder to Intermediaries on the Over-the-counter Securities Transactions Reporting Regime (OTCR)
SFC Warned Investors about Improper Practices of Unlicensed Virtual Asset Trading Platforms
Changjiang Corporate Finance (HK) Limited was fined $20 million for Serious Sponsor Failures in 6 Listing Applications during 2015 to 2017
China Industrial Securities International Brokerage Limited was fined $3.5 million for failures to monitor Suspicious Trading Activities and record of Client Order Instructions
Mayer Holdings Limited (1116.HK) and its Former Senior Management were found misconduct for Late Disclosure of Inside Information
MARKET NEWS
The SFC had published the consultation conclusions on its proposed risk management guidelines for the licensed futures brokers. The guidelines provide a very comprehensive risk management approach which covers market risk management, commodity futures trading, client credit risk management, concessionary margining and risk management over executing or clearing agents. Other requirements like the funding of liquidity risk management, safeguarding client assets, trading in futures markets outside Hong Kong and stress testing are also included.
As Ms Julia Leung, the SFC’s Chief Executive Officer, had said, “a robust risk management framework is crucial in ensuring the resilience of futures brokers when the market is volatile.” A prudent risk management approach not only helps futures brokers ensure their continuity in business; it is also crucial for protection of clients’ assets held under the brokers.
Futures brokers have a transitional period of six months to comply with the guidelines and an additional 12 months to implement system changes for compliance with requirements relating to the automation of client risk limit controls and stress testing.
SIGNIFICANCE:
There are some key takeaways futures brokers have to bear in mind in order to maintain themselves compliant with the coming requirements:
(i) Responsible Officers (ROs) and Managers-In-Charge (MICs) of the futures brokers are revised to have coordination in the risk management of futures business;
(ii) Futures brokers handling physical settlement of commodity futures are required to have sufficient knowledge about the underlying commodity markets;
(iii) Futures brokers can follow their internal policies in deciding whether a forced liquidations (“FLQ”) on a client who has triggered the internal policy’s threshold should be executed or not. Waivers can be granted provided that the senior management has a proper justification and be safeguarded that a deviation from FLQ would not have adverse influence on the financial stability of the futures broker;
(iv) The thresholds for applying concessionary margining to clients have been revised to a limit of 50% of the higher of a futures broker’s excess liquid capital (ELC) and its available fundings;
(v) For margins maintained with overseas brokers, futures brokers should adopt a prudent approach to manage their exposures to maintain excess clients’ margins and to disclose to clients the relevant risks involved in conducting transactions overseas;
(vi) As a minimum requirement, futures brokers have to perform stress tests at least on a weekly basis; further that it is necessary to follow the requirements set by the exchanges or clearing houses in formulating the scenarios for conducting the stress tests;
(vii) Last but not least, futures brokers have to observe the transitional period after which they have to ensure that client risk limits have been incorporated in the risk management system, order management system or the trading platforms; and to carry out stress tests using the assumed stress scenarios as designed by the Guidelines.
2. SFC concludes Consultation on Amendments to Enforcement-related Provision of the SFO
The SFC published on 8th August 2023 a consultation conclusions on proposed amendments to enforcement-related provisions of the SFO.
It was stated that the SFC would proceed with the proposal which was intended to broaden the scope of the SFO’s insider dealing provisions to cover: (i) insider dealing perpetrated in Hong Kong with respect to securities listed on overseas stocks markets; and (ii) insider dealing perpetrated outside of Hong Kong involving stocks listed on a recognised stock market like the SEHK.
Having received responses from industry practitioners, and considered the complexities in implementation raised by the respondents, the SFC has decided to put a hold on the other two proposed amendments which concern the professional investors exemption and injunctions and other orders at this stage.
SIGNIFICANCE:
The proposed amendments consisted of three parts:
Part 1: Amendments to section 213 of the SFO:
Despite comments on legal and implementation issues from the industry, the SFC reiterated that the policy objective of the proposal was to enhance the remedies to protect the investing public in situations where the SFC cannot directly require the regulated persons in breach of SFC codes or guidelines to compensate the suffered clients.
Part 2: Amendments to exemptions in section 103 of the SFO:
Many respondents had expressed concerns about the (i) necessities of the amendments and (ii) foreseeable operational difficulties and impact on the marketing process to professional investors. The SFC reiterated that the policy objective of the proposal was to enhance investor protection by limiting retail investors’ exposure to unauthorised advertisements of investment products intended for professional investors and by reducing the risk of the professional investor exemption being abused by advertisements.
Part 3: Amendments to the insiders dealing provision of the SFO:
Most respondents supported for these proposed amendments and the SFC would proceed with the amendments to the insider dealing provisions of the SFO accordingly.
3. SFC and CSRC reached Consensus on Introducing Block Trading under Stock Connect
On 11 Aug 2023, the SFC and the China Securities Regulatory Commission (CSRC) jointly announced that they had reached a consensus on the introduction of block trading (manual trades) under Stock Connect.
Block trading provides an alternative trading mechanism to enable market participants to execute large-sized transactions, and such an introduction under the Stock Connect will enable southbound and northbound investors to participate in the block trading facilities currently available in the Hong Kong and Mainland markets respectively.
The block trading arrangements for Stock Connect will be developed based on the existing operational models and regulations in each market with appropriate adjustments.
SIGNIFICANCE:
As Ms Julia Leung, Chief Executive Office of the SFC, had said: “block trading is an important trading mechanism to achieve best execution of large-sized transactions and minimise the price impact on the market”. From a markert participant’s point of view, block trading arrangements can help maintain price stabilities by avoiding large orders placed directly to the market which may exhibit substantial influence on the market prices.
The Hong Kong Monetary Authority (HKMA), the SFC and the Insurance Authority (IA) jointly published on 25th August 2023 a new Fintech Promotion Roadmap (the “Roadmap”) which contains a series of initiatives to be undertaken by the three regulators over the next 12 months to give further impetus to Fintech adoption in the financial services Sector.
HKMA has all along been actively promoting the “All banks go Fintech” initiative under the “Fintech 2025” strategy, and a Tech Baseline Assessment was conducted. The assessment highlights substantial potential developments in Fintech areas like Wealthtech, Insurtech and Greentech as well as the Artificial Intelligence (AI) and Distributed Ledger Technology (DLT).
To further expedite Fintech adoption in the wider financial services sector, the new Fintech Promotion Roadmap will provide practical recommendations at different stages of the Fintech adoption journey, from sourcing to implementation. These initiatives will present excellent opportunities for financial institutions to share practical insights, exchange innovative ideas across sectors and expand your institution’s Fintech network.
SIGNIFICANCE:
The Fintech and AI has penetrated into our daily walk of life with the widely used in retail banking and mobile devices, any institutions having intention to develop technology-oriented business must equip themselves with relevant and competent staff to “catch the train” in order not to be left out from the market.
5. Reminder to Intermediaries on the Over-the-counter Securities Transactions Reporting Regime (OTCR)
Relevant Regulated Intermediaries (“RRIs”) are reminded that the OTCR will become effective on 25th September 2023. Those that have not yet completed the testing and preparation for reporting under the OTCR are urged to do so before the effective date.
RRIs have to submit the OTCR through the OTCR WebApp or the OTCR SFTP submission channels on WINGS depending on their licensed status. RRI are strongly advised to take a look at the quick start for reference to proceed whereas technical details are available from the updated version of the OTCR Technical Information Paper for specifications and configurations.
6. SFC Warned Investors about Improper Practices of Unlicensed Virtual Asset Trading Platforms
The SFC has observed some unlicensed virtual asset trading platforms (VATPs) engaging in improper practices recently, and a statement had been published on 7th August 2023 warning VATPs of the potential legal and regulatory consequences of these improper practices and reminded investors to be wary of the risks of trading virtual assets on unregulated VATPs. Some crucial observations as stated as below.
Falsely claiming to have submitted an application to the SFC
Some unlicensed VATPs claim to have submitted licence applications to the SFC when in fact they have not done so. These untrue and misleading claims give the public a false sense of assurance that the VATP is in compliance with the SFC’s regulatory requirements, and is considered as an offence by the SFC.
VATPs which do not comply with the SFC’s requirements
The transitional arrangements under the new regime were designed to provide reasonably sufficient time for VATPs which provided virtual asset services in Hong Kong before 1 June 2023 to prepare for compliance with the legal and regulatory requirements applicable to licensed VATPs. Yet, it has come to the attention of the SFC that some unlicensed VATPs set up new entities to provide virtual asset services in Hong Kong where the services and products offered by some of these new entities may not be in compliance with the new regulatory regime. Some examples are advertisements providing virtual assets services to retail investors in the disguise of virtual asset “depost”, “savings” or “earnings” which are not allowed under the new regime.
Unlicensed VATPs’ established entities operating in Hong Kong
The SFC also reminds that any other established entities of unlicensed VATPs which are operating a business in Hong Kong of providing virtual asset services will also be subject to the new virtual asset service provider regime to be licensed as well.
SIGNIFICANCE:
The SFC has taken this opportunity to warn investors that some unlicensed VATPs are misleading the public by claiming to have submitted licence applications to the SFC when in fact they have not done so. Some other unlicensed VATPs may have publicly announced an intention to apply for a licence from the SFC. Given the high profile approach of the HKSAR before to advocate itself as a pioneer in virtual assets licensing regime, the protection of investors amid the transitional period is an obligation on priority list to the regulatory bodies.
ENFORCEMENT NEWS
On 21st August 2023, the SFC had reprimanded and fined Changjiang Corporate Finance (HK) Limited (CJCF) HK$20 million for serious and extensive failures in discharging its duties as the sponsor in six listing applications.
The license of CJCF has been partially suspended to the extent that the firm shall not act as a sponsor for listing applications on the SEHK of any securities, for one year from 18th August 2023 or until the SFC is satisfied with the controls and procedures of CJCF.
The investigation of the SFC reveals systemic records keeping failures of CJCF, and thus failed to demonstrate that it had exercised professional scepticism by querying the reliability of information provided by the listing applicants and their experts, and verifying the statements disclosed in their respective Application Proof prospectuses
SIGNIFICANCE:
The SFC is of the view that CJCF’s conduct fell substantially below the standards expected of it as a sponsor and breached the requirements under Chapter 17 of the Code of Conduct and other regulatory requirements.
It was published on 22nd August 2023 that the SFC had reprimanded and fined China Industrial Securities International Brokerage Limited (China Industrial) HK$3.5 million for internal control failures relating to monitoring of suspicious trading activities and recording of client order instructions.
Findings of the SFC investigation showed that China Industrial had failed to effectively implement its internal policy on post-trade monitoring and ensure all unusual transactions flagged by its post-trade surveillance system (Alerts) were properly examined; even worse was that the findings and outcomes thus examined were not adequately documented or to have in place effective compliance procedures to ensure proper implementation of the internal policy on post-trade monitoring during the Relevant Periods.
In addition, China Industrial also failed to diligently supervise its account executives and take adequate and timely follow-up actions against those in breach of the internal policy on recording of telephone orders and report immediately to the SFC after it became aware of its account executives’ breaches of the regulatory requirements on recording of telephone order instructions.
Announced on 9th August 2023, the Market Misconduct Tribunal (MMT) has found that Mayer Holdings Limited (Mayer) and nine of its former senior executives failed to disclose inside information as soon as reasonably practicable as required under the SFO following remitted proceedings after the Court of Appeal allowed appeals by Mayer and its directors against an earlier determination by the MMT.
In the remitted proceedings, upon assessing the cumulative impact of the undisclosed pieces of specific information regarding suspicious transactions and the resignation of auditors that would have had on the potential buyers and sellers of Mayer shares at the material time, the MMT was satisfied that the undisclosed information would have been likely to have had a material effect on the share price of Mayer and therefore found that the undisclosed specific information constituted inside information.
It was also found by the MMT that Mayer had no written guidelines and/or internal control policies on the statutory requirements to disclose inside information which resulted in the breach of the disclosure requirement imposed on it under the SFO. As for the other nine former senior executives, the MMT also found that they had also breached the disclosure requirement imposed on them under the SFO, in that their intentional, reckless or negligent conduct resulted in the breach of the disclosure requirement by Mayer. The MMT will determine the sanctions against Mayer and its former senior executives in a later hearing on a date to be fixed.
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