HK Securities & Futures Commission (SFC)

Question 1

What are the automated trading participant obligations in HK?

Answer 1

For automated trading participants, requirements include the following (s 97):

• comply with the rules approved by the SFC;
• ensure as far as is reasonably practicable that there is an orderly, informed and fair market in relation to all transactions carried out;
• ensure that the securities or futures contract, the sale or purchase of which is to be negotiated or concluded, belongs to a class of securities or futures contracts specified by the Commission for this purpose;
• ensure the transaction to be novated, cleared, settled or guaranteed by means of or through the member belongs to a class of transactions specified by the Commission for this purpose;
• permit the Commission to enter at any reasonable time the member’s premises to inspect the electronic facilities of the member;
• provide and maintain automated systems with adequate capacity, facilities to meet contingencies or emergencies, security arrangements and technical support for the provision of the services;
• notify the Commission of any changes to the information and particulars required by the Commission;
• pay relevant fees.

Question 2

What is the penalty for providing automated trading services without authorisation?

Answer 2

Section 101

If a person contravenes s 95(1) without reasonable excuse, they commit an offence and are liable:

(a) on conviction on indictment of a fine of HK$5,000,000 and 7 years imprisonment, and for continuing offences, a further fine of $100,000 for each day the offence continues; or
(b) on summary conviction of a fine of $500,000 and imprisonment for 2 years, and in the case of a continuing offence, to a further fine of $10,000 for every day the offence continues.

Question 3

What is the general reporting obligation for OTC derivative transactions in HK under the SFO?

Answer 3

Unless the Commission has provided an exemption under s 101H:

Section 101B(1)

A prescribed person must report an OTC derivative transaction:

(a) to the Monetary Authority; and
(b) in accordance with the reporting rules.

Section 101E

(1) A prescribed person must keep, in accordance with the record keeping rules, records relating to an OTC derivative transaction.

Section 101F

The penalty for contravening these obligations include the SFC filing a summons with the HK Court, which can (if no reasonable excuse is provided) impose a financial penalty not exceeding $5,000,000

Question 4

What is the general clearing obligation for OTC derivative transactions in HK under the SFO?

Answer 4

Unless the Commission has provided an exemption under s 101H:

Section 101C

(1) A prescribed person must clear an OTC derivative transaction:
(a) with a designated CCP; and
(b) in accordance with the clearing rules.

Section 101F

The penalty for contravening these obligations include the SFC filing a summons with the HK Court, which can (if no reasonable excuse is provided) impose a financial penalty not exceeding $5,000,000

Question 5

What is the general trading obligation for OTC derivative transactions in HK under the SFO?

Answer 5

Section 101D

(1) A prescribed person must execute an OTC derivative transaction:
(a) only on a designated trading platform; and
(b) in accordance with the trading rules.

Section 101F

The penalty for contravening these obligations include the SFC filing a summons with the HK Court, which can (if no reasonable excuse is provided) impose a financial penalty not exceeding $5,000,000

Question 6

What is the SFC’s enforcement powers under section 194 of the Securities & Futures Ordinance (SFO)?

Answer 6

“regulated person” means, at the relevant time, a licensed person, an RO, or a person involved in the management of the business.

s 194(1)
Subject to s 198, where:

(a) a regulated person is, or was at any time, guilty of misconduct; or
(b) the Commission is of the opinion that a regulated person is not a “fit and proper person” to be or remain the same type of regulated person,

the Commission may exercise the following powers as it considers appropriate in the circumstances:

(i) where the regulated person is a licensed person:
- revoke their license, in whole or part
- suspend their license

(ii) where the regulated person is an RO of a licensed corporation:
- revoke their approval to be an RO; or
- suspend their approval to be an RO;

(iii) publicly or privately reprimand the regulated person;

(iv) prohibiting:
- applying to be licensed or registered;
- applying to be approved as an RO;

s 194 (2)
Subject to ss 198 and 199, for the same preconditions as 1(a) and (b) above, the Commission may separately / in addition, order the regulated person to pay a max penalty:

(i) HK$10,000,000; or
(ii) 3 x the profit gained or loss avoided by the regulated person as a result of the misconduct, or other conduct which leads the Commission to form the opinion.

(3) The Commission, in determining if a regulated person is a “fit and proper person”, may take into account past / present conduct of the regulated person;

Question 7

What is the most important criteria of the SFC when it considers applicants for corporate or RO licensees?

Answer 7

Part V of the SFO

The most important criteria for granting a corporate or RO license by the SFC is it must be satisfied the applicant is a “fit and proper person” to be licensed for the regulated activity: s 116(3) & 120(3).

Section 129 sets out the matters to be taken into account by the SFC in determining an applicant’s fitness and properness, including the applicant’s:

• financial status;
• qualifications and experience;
• ability;
• reputation;
• character;
• reliability;
• financial integrity.

The SFC’s “Fit and Proper Guidelines” and “Guidelines on Competence” made under s 339 of the SFO also provide further guidance.

For licensed corporations, their ability to comply with financial resources rules and the adequacy of their insurance coverage in respect of prescribed risks is also relevant: s 116(3)