ComplianceOne Newsletter – February 2022
ComplianceOne Newsletter – February 2022
In this month’s newsletter, we will talk about:
1. The Decreasing Market Share of Category C Broker with respect to the Report from HKEX
2. I-Access Investors Limited (一通集團有限公司) Announced its Decision of Business Closure
3. SFC Concludes the Consultation on Regulating Trustees and Custodians of Public Funds [Type 13 Regulated Activity]
4. Proposed regulatory regime for VA service providers
5. SFC issues the Quarterly Report
6. SFC Reprimands and Fines South China Commodities Limited $4.8 million for Regulatory Breaches
7. Court Orders Insider Dealers to Pay $12.9 Million to Investors
MARKET NEWS
1. HKEX Exchange Participants’ Market Share Report
The Hong Kong Exchanges and Clearing Limited (HKEX) EP’s Market Share Report demonstrated a continual decrease in the daily turnover, recorded with a month-over-month drop of 9.84% to HKD10.85 billion. The total turnover last year was 37.14 trillion, with a monthly average of HKD3.09 trillion.
For the EPs, Category A (position 1st to 14th ) accounts for 60.36% of the total market share; Category B (position 15-65) accounts for 33.69; while the lowest Category C (position below 65) accounts only for 5.95%, slightly dropped below 6%. According to data published in JAN 2022, there were 570 securities brokers in CAT C (as compared with a total of 635 securities brokers), it has come to the situation where CAT C brokers are on the verge of struggling to maintain a continuity of business.
Significance: With an economy already serious impaired by the lethal epidemic, people at large are generally economizing on the expenses lest to say being sacked; and with the increasing demand for IT technology amid the online trading and Work From Home (“WFH”) with remote access arrangements, coupled with the necessity to cater for the flexibility of duty rotations in case of infected personnel; all are squeezing the already limited availability of resources of the CAT C brokers, particularly with the phenomenon of increasing operating costs far beyond their forecast. A determination of the employees and senior management team to explore more opportunities in other related areas like wealth management, sales of funds is of top priority, not to exclude the possibility to start a new career path in other industries.
2. I-Access Investors Limited (一通集團有限公司) Announces its Decision of Business Closure
According to the formal announcement, I-Access Investors Limited (I-Access) will terminate all online investment services on 31 March (Thursday) this year. I-Access is famous as a discounted securities broker, which charges only HK$5 per trade. The reasons are that as the number of infected staff increases, it poses a shortage in human resources which adversely affects the daily normal operations of the company. Therefore, the Board of Directors of I-Access unanimously decided to close business before the situation gets worse.
All clients with outstanding margin loans have to settle the amount by 18 March 2022, while clients with securities holdings have to either take their shares physically, or to give SI to transfer to other brokers.
For clients with futures accounts, they can either hold the positions until maturity in March 2022, or to close position anytime beforehand 30 March 2022.
Significance: The incidence of I-Access may be just a beginning of a series of business closures of the licensed corporations. The epidemic poses serious uncertainty to the forecast of operation disruption and economic drawdown to a scale where normal business continuity plan is not be able to address.
The Securities and Futures Commission (SFC) recently released consultation conclusions and began a further consultation on a proposal to regulate depositaries (i.e., top-level trustees and custodians) of SFC-authorised collective investment schemes (CIS).
Back to 2019, the SFC had launched a consultation proposing to introduce a new regulated activity, Type 13 Regulated Activity (RA 13), to put depositaries of SFC-authorised CIS under the SFC’s direct supervision. Feedbacks from respondents were generally supportive of the proposal, with some seeking clarification of the proposed licensing scope and conduct requirements.
Significance: As commented by Mr Ashley Alder, the SFC’s Chief Executive Officer, “The RA 13 regime will enhance the regulation of public funds in Hong Kong by regulating how depositaries safeguard scheme assets and oversee scheme operations. The new regulatory framework is in line with those in other leading international markets and is an important part of the SFC’s efforts to develop Hong Kong as an international, full-service asset management centre.
4. The HK Government Proposed a Regulatory Regime for Virtual Asset Service Providers
Considering the rapidly changing landscape of Virtual Assets ( "VA" ), the FATF has recommended in its guidelines that, for the purpose of regulation, VA should be defined using a functional approach. Accordingly, under the proposed licensing regime for VA service providers, the Government has proposed to define VA having regard the definition adopted by the FATF which will require that the asset must be a medium of exchange accepted by the public for payment, settlement of debts or investment, and that it can be transferred, stored or traded electronically.
Any VA, so long as it meets the definition and does not fall into the exempted categories to be specified in the Ordinance (e.g. digital currency issued by central bank, airline miles, credit card rewards, etc. that are closed loop and limited use tokens that cannot be transferred, traded or exchanged), will be covered in the definition of VA.
In addition, the Securities and Futures Commission (SFC) has also reminded investors of the risks of trading VA through statements and circulars from time to time, including for instance a statement issued in July 2021, reminding investors that when investing in VA, they should pay attention to the use of unregulated trading platforms. The SFC and the HKMA have also issued circulars to the banking and securities sectors to give guidance on the arrangements for intermediaries in the banking and securities sectors to provide VA-related services.
5. The SFC issues Quarterly Report
The Securities and Futures Commission (SFC) announced in the report that the income for the quarter was $535 million, 13% lower than the previous quarter and 27% lower than the same quarter last year. Whereas the average daily turnover in Hong Kong’s securities market was $134 billion, 21% lower than the $170 billion recorded in the previous quarter. The expenditure for the quarter was $461 million, slightly lower than last quarter and the same quarter last year; and with a recorded surplus of $74 million for the quarter.
Key figures for the quarter report include:
· The number of licensees and registrants totaled 48,657, of which 3,210 were licensed corporations.
· The SFC vetted 40 new listing applications, including two from companies with weighted voting rights structures and one from a pre-profit biotech company.
· The SFC authorized 45 unit trusts and mutual funds (including 27 Hong Kong-domiciled funds), four mandatory provident fund pooled investment funds and 48 unlisted structured investment products for public offering in Hong Kong. It registered 21 new open-ended fund companies.
· 61 in-depth inspections of licensed corporations were conducted to review their compliance with regulatory requirements.
· The SFC made 1,284 requests for trading and account records triggered by untoward price and turnover movements.
· It issued section 179 directions to gather additional information in 14 cases and wrote to detail its concerns in one case as part of its review of corporate disclosures.
· Five licensed corporations and nine individuals were disciplined, resulting in total fines of over $23 million.
ENFORCEMENT NEWS
6. SFC Reprimands and Fines South China Commodities Limited $4.8 million for Regulatory Breaches
The Securities and Futures Commission (SFC) has reprimanded and fined South China Commodities Limited (SCCL) $4.8 million for failures in complying with anti-money laundering and counter-terrorist financing (AML/CFT) and other regulatory requirements between June 2017 and October 2018.
The SFC’s investigation found that SCCL did not conduct any due diligence on the Customer Supplied Systems (CSSs) used by 19 clients for placing orders during the material time. As a result, SCCL was not in a position to properly assess and manage the money laundering and terrorist financing (ML/TF) and other risks associated with the use of such CSSs by its clients.
In addition, the SFC identified that the amounts of deposits made into four client accounts were incommensurate with their declared financial profiles. SCCL claimed that it was not aware of these anomalies which in view of the SFC that SCCL failed to demonstrate that it had conducted proper enquiries on the deposits.
The SFC further found that SCCL’s failure to put in place an effective ongoing monitoring system to detect suspicious trading patterns in client accounts resulted in its failure to detect 3,783 self-matched trades in nine client accounts.
Significance: This is the third brokers that was reprimands by the SFC because of failures to monitor trading activity via Customer Supplied Systems (CSSs) in the past several months.
The licensed corporations ("LC") should be more prudent in granting the right to their clients for using their own CSS instead of the BSS provided by the LC itself. The due diligence process and the detection/monitoring of orders placed through these CSS used by the clients could not be effectively implemented; particularly with the co-incidence of large deposits incommensurate with the declared wealth status of the clients concerned. The findings of large amount of self-matched trades further exemplify the risk of identifying the ultimate persons who placed the orders as well as the ultimate beneficial owners behind the CSS.
7. Court Orders Insider Dealers to Pay $12.9 million to Investors
The Court of First Instance has ordered that illicit profits of insider dealing in shares of TeleEye Holdings Limited (TeleEye) of $12,949,875 made by Ms Wei Juan and Mr Huang Yi, associates of Ms Yik Fong Fong, be paid to 63 investors.
The funds will be paid out to court appointed administrators, Mr. Tsui Chi Chiu and Mr. Leonard Chan King Wai of Ernst & Young Transactions Limited, and distributed to the affected investors in proportion to the number of shares they sold to Wei or Huang between 29 February and 12 April 2016.
The Securities and Futures Commission (SFC)’s Executive Director of Enforcement, Mr. Thomas Atkinson, said: “The broad effect of the orders will be to restore investors who transacted with Wei and Huang to their pre-transaction positions to the extent possible…. This case sends a clear message that the consequences of wrongdoing, including the costs of restoration or remediation, should be met by wrongdoers and not be borne by innocent investors or the market.”
Significance: It demonstrates to the practitioners in the financial industry of the determination of the SFC and its zero tolerance to insider dealings which severely undermine the pillars of Hong Kong as an international financial center; more explicitly, the paramount philosophy that the wrong-doers should bear the costs and consequences of their wrong-doings, not the innocent investors at large.
For more details please click on the title of the topic above.
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