Consultation Paper on Proposed Changes to Financial Resources Rules Released

The Securities and Futures Commission (SFC) has published a consultation paper on proposed changes to the Securities and Futures (Financial Resources) Rules (FRR) relating to capital and other prudential requirements for licensed corporations engaging in over-the-counter (OTC) derivatives activity. It also proposed certain changes to non-OTC derivatives related FRR requirements.

The SFC proposed these changes to enable licensed corporations to maintain their capital and liquidity at levels which are commensurate with the risks they undertake in relation to derivative businesses, and to encourage the adoption of more advanced risk management standards.

The Consultation Paper’s proposals cover such areas as:

  • minimum capital requirements for licensed corporations engaging in OTC derivatives;
  • capital treatments for market risks of OTC and other proprietary trading positions;
  • capital treatments for counterparty credit risks arising from OTC derivatives transactions;
  • introduction of an internal models (i.e. internal risk measurement models) approach to calculate the capital requirements for market risk for proprietary investments and counterparty credit risk arising from OTC derivatives transactions;
  • measures to address operational risks of licensed corporations engaging in certain types of regulated OTC derivatives activities or opting into certain capital approaches;
  • notification and reporting requirements related to OTC derivatives activity; and
  • miscellaneous technical changes to other areas of the FRR.

The SFC also proposed some changes to FRR treatments applicable to licensed corporations not involved in OTC derivatives activity, including:

  • lowering the haircut percentages for certain types of shares and funds; and
  • introducing measures to better facilitate third-party clearing by general clearing brokers.

The deadline for submission of comments on this Consultation Paper is 16 October 2015.

A copy of the Consultation Paper can be downloaded via the link below:


Consultation Paper on Review of the Environmental, Social and Governance Reporting Guide Released

The Stock Exchange of Hong Kong Limited (Stock Exchange) has published a “Consultation Paper on Review of the Environmental, Social and Governance (ESG) Reporting Guide (ESG Guide)”.

Having considered developments in both Hong Kong and international markets, the Stock Exchange made these proposals with the aim to (i) strengthen ESG disclosure requirements, (ii) encourage more widespread and standardized ESG reporting amongst issuers, and (iii) help issuers meet greater demand and expectations for non-financial information from investors and other stakeholders.

The key proposals include:

  • revising the ESG Guide to comprise two levels of disclosure, namely, “comply or explain” and recommended disclosure — the purpose of the Stock Exchange in adopting the “comply or explain” approach (as opposed to a mandatory approach) is not to prescribe hard and fast rules, but to afford issuers the space to develop their own practice and scope of reporting;
  • amending the Listing Rules to require issuers to state in their annual report or ESG report whether they have complied with the “comply or explain” provisions of the ESG Guide for the relevant financial year  — an issuer should publish the ESG report (if not included in the annual report) as close as possible to, but in any event no later than three months after, the publication of the issuer’s annual report;
  • revising the introductory section of the ESG Guide to provide more guidance on reporting and to be more in line with international standards;
  • re-arranging the ESG Guide into two subject areas, namely “Environmental and Social” — each subject area has various aspects, and each aspect sets out general disclosures and key performance indicators for issuers to report on in order to demonstrate their ESG performance;
  • upgrading the general disclosure under each aspect of the ESG Guide to “comply or explain” and aligning the wording with the directors’ report requirements under the Companies Ordinance (Cap. 622) (incorporated into Appendix 16 to the Main Board Listing Rules / Chapter 18 of the GEM (Growth Enterprise Market) Listing Rules);
  • upgrading the key performance indicators under the “Environmental” subject area to “comply or explain”; and
  • revising the wording of the recommended disclosure to include disclosure of gender diversity, so as to bring it more in line with international standards.

It is currently anticipated that, subject to responses to this consultation, the SFC will implement the revised Listing Rules and the new ESG Guide for financing years commencing on or after 1 January 2016.

The deadline for submission of comments on this Consultation Paper is 18 September 2015.

A copy of the Consultation Paper can be downloaded via the link below:

Stock Exchange’s Report on Review of Listed Issuers’ Financial Reports Published

The Stock Exchange has published a report (Report) containing key findings from its review of 100 periodic financial reports released by listed issuers during the period from October 2013 to April 2015.

The key areas where the Stock Exchange considered that issuers could continue to improve their financial disclosure are as follows:

  • Issuers should note that in addition to the disclosure requirements in accounting standards, the Listing Rules have disclosure requirements relating to financial information, in particular those set out in Appendix 16 to the Main Board Rules and their GEM Rules equivalent. Issuers should pay attention to the recent Listing Rules amendments with reference to the Companies Ordinance, in particular paragraph 28 of Appendix 16 to the Main Board Rules and their GEM Rules equivalent;
  • Issuers should ensure that additional information is presented in annual and interim reports when there are significant events or material balances and transactions;
  • Issuers should improve the quality of disclosure of the judgments made and estimates used in applying their accounting policies. The information should be clear, easy to understand and entity-specific;
  • Issuers should note that when they are not early adopters of new or revised accounting standards that have been issued but are not yet effective, they should state this and provide known or reasonably estimable information needed to assess the possible impact that application of the new or revised standards will have on the issuers’ financial statements in the period of their initial application;
  • Issuers should ensure that robust asset impairment review processes are in place, and more should be done to improve the quality of disclosure, particularly where the recoverable amount is based on value in use, so that investors and other users have confidence in the reported asset values;
  • Issuers should provide entity-specific information rather than boilerplate text in preparing financial risk information to enable investors and other users to understand what management thinks are the key financial risks and how they have adequately managed those risks; and
  • Issuers should follow the accounting disclosure requirements regarding “fair value measurements” which are designed to help investors and other users assess the valuation techniques and inputs used in fair value measurements, particularly those based on significant unobservable inputs, and the effect on financial statements.

The Report concludes that the information provided in financial reporting should be “relevant and material”.  Accordingly, issuers should ensure that their communication is clear and concise by reducing non-relevant and non-material disclosures.

A copy of the Report can be downloaded via the link below:


SFC Commenced First Market Misconduct Tribunal Proceedings for Late Disclosure of Inside Information

The SFC has begun proceedings in the Market Misconduct Tribunal (MMT) against AcrossAsia Limited (AcrossAsia), its Chairman and its Chief Executive Officer in relation to failure of AcrossAsia to disclose highly sensitive inside information as soon as reasonably practicable.  This was the first set of MMT proceedings in relation to the disclosure obligations imposed on listed companies under the Securities and Futures Ordinance (Cap. 571) (SFO) since they became effective on 1 January 2013.

The SFC’s allegations arose from the litigation over AcrossAsia’s failure to repay the money owed to its subsidiary, PT First Media Tbk (PT First Media). Enforcement proceedings by PT First Media against AcrossAsia ensued, which included insolvency-related proceedings in Indonesia against AcrossAsia in December 2012. These proceedings sought to suspend AcrossAsia’s obligation for payment of debts temporarily to enable a composition plan to be presented to PT First Media, and to appoint an Indonesian judge and administrators to manage AcrossAsia’s assets.

Despite receiving copies of the relevant court documents relating to the proceedings on 2 January 2013, AcrossAsia did not disclose such information to the public until 17 January 2013 after the Indonesian court made the insolvency-related orders against AcrossAsia on 15 January 2013.

The SFC alleged that the issue of the insolvency-related proceedings in Indonesia together with their contents was specific information regarding AcrossAsia, highly price sensitive and not generally known to the public at the material time because these proceedings threatened AcrossAsia with loss of control of its major asset, including its stake in PT First Media in Indonesia, and could lead to AcrossAsia being put into liquidation.

A copy of the SFC’s notice commencing the MMT proceedings can be downloaded via the link below:

Securities House Reprimanded and Fined for Failure to Timely Report Significant Misconduct by Former Trader

The SFC has reprimanded and fined Nomura International (Hong Kong) Limited (Nomura HK) HK$4.5 million for failing to report significant misconduct by a former trader in a timely manner.

The background of the case was that on 11 June 2013, Nomura HK informed the SFC that a trader, Mr X, was seconded from Nomura Securities Co., Ltd. in Japan (Nomura Japan) to Nomura HK, and that Mr X incurred a US$3.3 million trading loss during his secondment (11 June Report).  The 11 June Report stated that Mr X had already been repatriated to Japan, that a review of Mr X’s trades was being undertaken, and that Nomura HK would report to the SFC should any issues be identified.

However, the SFC subsequently found that at the time of the 11 June Report, Nomura HK already knew that Mr X had admitted to making false entries in Nomura HK’s risk management system to conceal the real risk exposure of his trades and to providing false information to Nomura HK.  Yet, none of these matters was disclosed to the SFC immediately when they should have been (under paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the SFC).

In the circumstance, the SFC concluded that Nomura HK’s fitness and properness to be a licensed person had been called into question.  The SFC, therefore, decided to take the above disciplinary action.

The SFC was of the view that Nomura HK, and, indeed, all other intermediaries, had a duty to report misconduct and suspected misconduct to the SFC immediately upon discovery, not after they have completed their own internal investigations into the matter.  Delay in reporting might help the wrongdoer to perpetuate his/her misconduct, and might jeopardize the investigations of law enforcement agencies.

A copy of the SFC’s Statement of Disciplinary Action can be downloaded via the link below:

Licensed Corporation Fined HK$15 Million for Dark Liquidity Pool Related Failures

The SFC has fined BNP Paribas Securities (Asia) Limited (BNPP Securities Asia) HK$15 million for failures in relation to its dark liquidity pool trading services, known as the BNP Internal Exchange (BIX).

The disciplinary action follows an SFC investigation in which the SFC found that:

  • BIX did not operate as represented in the materials provided to clients.  BNPP Securities Asia represented that orders would be executed in accordance with order price priority, e.g., a buy order with higher price would have priority over a buy order with a lower price.  In reality, however, BIX failed to give priority to higher priced orders and matched orders based on order sizes — this potentially affected all BIX auctions with two or more orders at different order prices and did affect some BIX auctions;
  • BNPP Securities Asia suspended BIX services in April 2011 upon the discovery that order matching was not conducted according to order price priority.  BIX services were not fully restored until seven months later and the SFC was not informed of the suspension until 21 months later — this constituted a breach of BNPP Securities Asia’s licensing condition;
  • BNPP Securities Asia’s business plan for its licence application for providing automated trading services stated that client consent would be obtained before their orders were placed to the BIX for matching.  However, client orders intended for execution on the Stock Exchange were automatically enabled on the BIX without BNPP Securities Asia seeking positive client consent.  The SFC was not notified about the change of BNPP Securities Asia’s business plan as required — this constituted a breach of the Securities and Futures (Licensing and Registration) (Information) Rules; and
  • BNPP Securities Asia failed to (i) maintain sufficient trade records relating to BIX that identified the specific auction in which each order participated, and (ii) document coherently the matching logic and to explain the matched trades — this means it was difficult to calculate the precise impact of the failure to implement a trade execution process where order priority is based on price.

In determining this disciplinary action, the SFC took into account that:

  • BNPP Securities Asia co-operated with the SFC in resolving the SFC’s concerns;
  • Since 2012, BNPP Securities Asia had obtained consent from clients before allowing their orders to be matched in the BIX;
  • BNPP Securities Asia had taken steps to rectify the matching logic in the BIX in 2011;
  • BNPP Securities Asia agreed to engage an independent reviewer to conduct a forward-looking review of the operation of the BIX; and
  • BNPP Securities Asia had an otherwise clean disciplinary record in relation to its business in Type 7 regulated activities.

A copy of the SFC’s Statement of Disciplinary Action can be downloaded via the link below:

SFC’s Decision to Revoke Approval of Responsible Officer over Internal Control Failures Affirmed

The Securities and Futures Appeal Tribunal (SFAT) has affirmed the decision of the SFC to revoke the approval of Ms Miranda Sham Sze Wai to act as a responsible officer over findings that she was involved in serious internal control deficiencies at Ping An of China Securities (Hong Kong) Company Limited (Ping An) between August 2010 and April 2011.

The SFC’s decision followed an earlier disciplinary action against Ping An, which was reprimanded and fined HK$6 million.  SFC found that Ping An failed to:

  • establish anti-money laundering internal control procedures;
  • actively identify and report to the SFC and the Joint Financial Intelligence Unit (JFIU) suspicious transactions in a timely manner;
  • provide anti-money laundering training to its staff;
  • establish and follow appropriate and effective procedures to protect client assets in effecting payments;
  • effectively communicate and enforce its internal policies on employee dealings;
  • enforce its account opening procedures in relation to address proofs; and
  • have in place an effective compliance function.

The SFC alleged that Ms Sham, who was in charge of Ping An’s compliance function at the relevant time:

  • should have identified and reported to the SFC and the JFIU suspicious transactions in a timely manner but failed to do so;
  • failed to establish anti-money laundering internal control procedures for Ping An and provide anti-money laundering training to its staff; and
  • failed to establish and follow appropriate and effective procedures to protect client assets in effecting payments, did not communicate and enforce Ping An’s internal policies on employee dealings and account opening procedures.

In its decision, the SFAT reiterated the importance of the role of a responsible officer, who is an officer within a licensed corporation with primary responsibility for the corporation’s compliance with all applicable standards of conduct (including statutory requirements under the SFO and codes promulgated by the SFC). 

A copy of the SFAT’s Reasons for Determination can be downloaded via the link below:

SFC Recovered HK$23 Million for Investors from Restoration Order against Insider Dealer

The SFC announced that a total of HK$23 million had been paid out to investors affected by the wrongdoing of the insider dealer, Mr Du Jun.

The background was that on nine occasions between 15 February and 30 April 2007, Mr Du, a former managing director of Morgan Stanley Asia Ltd (Morgan Stanley), purchased a total of 26.7 million shares of CITIC Resources Holding Limited (CITIC Resources) for HK$86 million while he was a member of Morgan Stanley’s team advising Hong Kong-listed CITIC Resources on a proposed deal to acquire oil fields assets in China.  Mr Du was convicted of insider dealing by the court.  A restoration order was also made by the court to the effect that Mr Du had to pay HK$23.9 million to 297 investors as a result of his insider dealing.  The purpose of restoration orders, which are not compensation orders, is to make insider traders financially accountable to those with whom they trade and to restore those counterparties to the same position, in financial terms, as they were in before the insider dealing.

A copy of the SFC press release can be downloaded via the link below:

Ernst & Young’s Appeal over Audit Working Papers Discontinued

The SFC announced that Ernst & Young (EY) had discontinued its appeal against court orders compelling production to the SFC of specified accounting records in its possession.

The appeal by EY related to orders made by the Court of First Instance in 2014 stemming from work carried out by EY in relation to the proposed listing of Standard Water Limited (Standard Water) on the Stock Exchange in 2012. At that time, the Court of First Instance claimed that EY had deliberately withheld information from the SFC and ordered EY to produce specified accounting records relating to its work as the reporting accountant and auditor of Standard Water to the SFC. The SFC was satisfied that all requested records had been produced in compliance with the court orders, and agreed that the appeal had become academic.

The SFC reminded Hong Kong audit firms that accounting or audit working papers relating to work carried on by Hong Kong accounting firms should be produced to the SFC in response to requests made under the SFO, even if the requested documents were being held on behalf of Hong Kong auditors by their Mainland affiliates or agents. It was the obligation of the auditor to identify records held in the Mainland and to seek clearance for their production to the SFC.

A copy of the SFC’s press release can be downloaded via the link below:


Privacy Commissioner Revised Information Leaflet on Cloud Computing

The Office of the Privacy Commissioner for Personal Data (Privacy Commissioner) published a revised Information Leaflet on “cloud computing” (Information Leaflet) to advise cloud users on privacy concerns, the importance of fully assessing the benefits and risks of cloud services and the implications for safeguarding personal data privacy.

There is no universally accepted definition of cloud computing.  For the purpose of the Information Leaflet, it is referred to as a pool of on-demand, shared and configurable computing resources that can be rapidly provided to customers with minimal management efforts or service provider interaction.

The revised Information Leaflet contains the following two highlights:

  1. Advice to organisations (data users) on what assurance or support they should obtain from cloud service providers to protect the personal data entrusted to them, e.g.:< >For cloud providers that have data centres distributed across multiple jurisdictions, data users should choose cloud providers that would allow them to choose/specify locations/jurisdictions where there is adequate legal/regulatory privacy protection of personal data;For cloud providers that engage sub-contractors, data users should obtain formal contractual assurance from the cloud provider that the same level of protection (both technical and administrative) and compliance controls (monitoring and remedial actions) are equally applicable to their sub-contractors;For cloud providers that offer only standard services and contract terms, if the standard security level or the personal data protection commitment by the cloud provider fails to meet customer requirements, data users should ask for customised service/contract terms that meet such requirements;Data users must ensure that their contracts with the cloud providers allow their fulfilling obligations under the Personal Data (Privacy) Ordinance (including enabling customers to access their personal data, request correction or deletion, and resolve issues and complaints; limiting the use of personal data for the purpose  which the data was collected etc.); andData users should find ways to verify data protection and security commitments made by cloud providers.The implications of the first international standard, the “ISO 27018 Code of practice for personally identifiable information (PII) protection in public clouds acting as PII processors” on cloud computing.

A copy of the revised Information Leaflet can be downloaded via the link below: