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1. Notable Circulars Issued by the SFC
In focus: All LCs
The SFC commenced a thematic review in 2018 covering data risk management of LCs. This circular highlights the standards of risk governance, controls and monitoring which the Securities and Futures Commission (“SFC”) expects of licensed corporations (“LCs”) in their data risk management practices.
Regarding data risk governance, the SFC expects LCs to put in place a sound risk governance framework for managing data risks, which should cover structure protocols for handling data risk incidents and reporting obligations.
Regarding data lifecycle controls and monitoring, the SFC’s expected standards covered data collection practices, data classification, data usage, data retention, and data transfer and disposal. Where LCs use third-party service providers, the SFC expects the LCs to perform proper due diligence and ongoing monitoring to ensure that the service provider is able to safeguard the data and comply with the applicable legal and regulatory requirements.
1.2 MANAGEMENT OF OPERATIONAL AND REMOTE BOOKING RISKS OF TRADING ACTIVITIES
In focus: RA1 brokers & RA9 asset managers that engage in trading activities
Based on the same thematic report, the SFC has issued another circular providing guidance to LCs on risk governance, controls, and monitoring related to operational and remote booking risks arising from trading activities.
Regarding operational risk management for trading activities, the SFC has identified operational risk incidents as a cause for significant losses to LCs and their clients. The SFC expects LCs to have a sound operational risk governance framework with clear definition of roles, responsibilities and accountability and a regular review mechanism. Appropriate operational controls and monitoring practices, such as proper pre-trade/post-trade controls and appropriate follow up of trade exceptions, should also be implemented.
The SFC observed that some LCs have remote booking models of risks, whereby trading risk would be transferred to offshore affiliates and costs, profits or losses will be shared within the group. Upon reviewing the practices of these groups, the SFC has set out its expected standards and good practices for these LCs to have a sound risk governance framework for remote booking arrangements, e.g. conducting frequent meetings with the offshore affiliates, having appropriate risk limits and proper system controls.
2. Consultations Issued by the SFC
In focus: Depositories of SFC authorised collective investment schemes
The SFC issued consultation conclusions on the proposed amendments to legal and regulatory requirements for the upcoming regulatory regime for depositaries of SFC-authorised collective investment schemes. The regime will be introduced as a new regulated activity, RA13, which is expected to come into effect on 2 October 2024 with a transitional period running from 24 March 2023.
In focus: Share registrars of listed companies, OFCs and RA1 Brokers
Following the consultation on implementing an uncertificated securities market in Hong Kong in 2019/2020, the SFC is now consulting further on the proposed subsidiary legislation. The consultation proposes to introduce several new subsidiary legislations and amend existing ones, including the Securities and Futures (Open-ended Fund Companies) Rules.
In focus: OTC derivative market participants
This consultation sets out the SFC and the HKMA’s proposed changes to the mandatory clearing regime, which is currently governed by the Securities and Futures (OTC Derivative Transactions – Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules (Clearing Rules).
In focus: OTC derivative market participants
This consultation is in respect of the annual review of the list of Financial Services Providers which will become effective on 1 January 2024.
3. Notable Enforcement News
3.1 SFC BANS PETER LAW CHI KIN FOR 10 YEARS AND FINES HIM HK$535,500
SFC BANS WONG KWUN SHING FOR LIFE
In focus：RA1 LCs and RIs
The two cases involve licensed persons participating in a stock manipulation scheme. Law was involved in persuading his clients and friends to purchase shares of a company listed on the GEM of the SEHK in return for HK$535,000. Wong coordinated, arranged, and facilitated the transactions and gave false or misleading answers to conceal his involvement in the scheme when he attended an interview with the SFC. The cases send a deterrent message to the industry that the SFC will not tolerate such misconduct.
In focus：RA1 LCs and RIs
The SFC has banned former Citigroup Global Markets Asia Limited (“CGMAL”) executive, Philip John Shaw, from the industry for 10 years following CGMAL's regulatory breaches and internal control failures. The SFC found that Shaw's failure to discharge his duties as a senior management member and responsible officer was a contributing factor in CGMAL's breaches and failings. The SFC's findings indicate that Shaw introduced a mechanism to facilitate bulk generation of mislabelled IOIs and made misrepresentations to clients, among other misconduct. As such, he had failed to maintain appropriate standards of conduct and adhere to proper procedures by CGMAL. The SFC's disciplinary action against Shaw underscores the regulator's commitment to holding errant senior management accountable for their firms' failures.
3.3 COURT REAFFIRMS SFC’S POWER OF ISSUING RESTRICTION NOTICES
In focus：RA1 LCs and RIs
The Court of First Instance has dismissed a judicial review application against the SFC concerning restriction notices related to an ongoing investigation into a suspected "ramp-and-dump" scheme. The applicants, Mr Chen Wencan and Ms Su Jiaqi, challenged the restriction notices issued by the SFC to freeze their assets in various trading accounts held with certain licensed corporations, arguing that the relevant sections in the SFO are not prescribed by law and a disproportionate interference with their property rights and therefore unconstitutional. However, the Court found no significant differences between this case and a previous similar application and reaffirmed the SFC's statutory powers to issue restriction notices.
3.4 FIVE MORE ARRESTED IN SFC AND ICAC JOINT OPERATION AGAINST SOPHISTICATED RAMP-AND-DUMP SYNDICATE
In focus：RA1 LCs and RIs
The SFC and the Independent Commission Against Corruption (ICAC) arrested five key members of an active syndicate involved in ramp-and-dump market manipulation. The syndicate made illicit gains of HK$191 million through a complex shareholding network of HK-listed companies by corrupt means. The arrestees included qualified accountants and senior executives of a number of Hong Kong-listed companies.
The SFC has since issued several other enforcement news regarding the progress of ramp-and-dump scheme investigations.
In focus：RA1 LCs and RIs
The SFC has fined I-Access Investors Limited (I-Access) HK$600,000 for breaching the Code of Conduct. The breach originated from an internal system test conducted by the HKEX in 2015, which involves sending test data to market participants. I-Access failed to exclude the test data from ordinary market data that was delivered to clients, triggering incorrect stop loss sell orders and their executions on the next trading day. I-Access failed to promptly notify affected clients or make appropriate compensation offers to them.
The SFC found I-Access fail to act with due skill, care and diligence, and in the best interests of its clients. in breach of the Code of Conduct. On appeal, the Securities and Futures Appeals Tribunal upheld SFC's disciplinary action against I-Access.
Any reference to “Hong Kong” or “Hong Kong SAR” in this article shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.
