Chapter 4 securities and futures regulations

Chapter 4
Securities and Futures
Regulations
The Presentation Slides for Teaching
Financial Regulations and Compliance Practices
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E-mail : quanrisk@gmail.com
Copyright © 2021 CapitaLogic Limited

Declaration
 Copyright © 2021 CapitaLogic Limited.
 All rights reserved. No part of this presentation file may be
reproduced, in any form or by any means, without written
permission from CapitaLogic Limited.
 Authored by Dr. LAM Yat-fai (林日辉),
Chief Data Scientist, CapitaLogic Limited,
Adjunct Professor of Finance, City University of Hong Kong,
Doctor of Business Administration,
CFA, CAIA, CAMS, CFE, FRM, PRM, MCSE, MCNE.
Copyright © 2021 CapitaLogic Limited 2

A model financial
regulatory framework
Ordinance
Regulator
Licensing Policy Supervision
Advisory
committees
Enforcement
Industry
associations

Outline
 Securities and Futures Ordinance
 Securities and Futures Commission
 Licensing
 Policy
 Supervision
 Enforcement

CAP 571
Securities and Futures Ordinance
 An ordinance to consolidate and amend the laws
relating to
 financial products, the securities and futures market and the
securities and futures industry
 the regulation of activities and other matters connected with
financial products, the securities and futures market and the
securities and futures industry
 the protection of investors
 other matters incidental thereto or connected therewith, and
for connected purposes

Parts of the SFO (1)
Part Topic
1 Preliminary
2 Securities and Futures Commission
3
Exchange companies, clearing houses, exchange controllers, investor
compensation companies and automated trading services
4 Offers of investments
5 Licensing and registration
6
Capital requirements, client assets, records and audit relating to
intermediaries

Major parts of the SFO (2)
Part Topic
7 Business conduct, etc. of intermediaries
8 Supervision and investigations
9 Discipline, etc.
10 Powers of intervention and proceedings
11 Securities and futures appeals tribunal
12 Investor compensation

Major parts of the SFO (3)
Part Topic
13 Market mis-conduct tribunal
14 Offences relating to dealings in securities and futures contracts, etc.
15 Disclosure of interests
16 Miscellaneous
17 Repeals and Related Provisions

Major functions and domains of
Securities and Futures Ordinance
 Function
 Regulated Activities
 Securities and futures regulator
 Licensing
 Regulatory duties
 Domain
 Securities market
 Securities industry
 Financial products
 Investor protection

Financial institutions
covered by the SFO
 Securities firms
 Banks carrying on
Regulated Activities
 Insurance companies
carrying on Regulated
Activities
 Investment banks
 Private banks
 Fund houses
 Assets management
companies
 Exchanges
 Clearing houses
 Listed companies
 Credit rating agencies

Regulated Activities (1)
1. Dealing in securities
 Trading stocks, options, bonds, mutual funds and unit trusts for
clients
 Placing and underwriting of securities
2. Dealing in futures contracts
 Trading index futures, commodities and other futures for clients
3. Leveraged foreign exchange trading
 Trading foreign exchange for clients on a margin basis
4. Advising on securities
 Giving investment advice to clients relating to the sale/purchase of
securities
 Issuing research analysis and reports on securities

5. Advising on futures contracts
 Giving investment advice to clients relating to the sale/purchase of
futures contracts
 Issuing research analysis and reports on futures contracts
6. Advising on corporate finance
 Acting as sponsor for listing applicant in an initial public offering
 Advising on the Codes on Takeovers and Mergers and Shares
Repurchases
 Advising listed companies on compliance of Listing Rules
7. Providing automated trading services
 Operating an electronic trading platform for matching client orders

8. Securities margin financing
 Providing financing to clients for their purchase of stocks in return
for clients' stocks as collaterals
9. Asset management
 Managing a portfolio of securities or futures contracts for clients on
discretionary basis
 Managing funds on discretionary basis
10. Providing credit rating services
 Preparing reports on the credit worthiness of corporations, countries
and bonds

Outline
 Licensing
 Policy
 Supervision
 Enforcement

Securities and Futures Commission

Intermediaries Division
 Licensing Department
 License corporations and individuals seeking to conduct business in Hong
Kong in the Regulated Activities for which a licence is required under the SFO
 Issue guidelines and circulars concerning the competence and suitability of
corporations and individuals to remain licensed
 Deal with issues relating to the continuing suitability of licensed corporations
and individuals to be licensed
 Intermediaries Supervision Department
 Conduct off-site reviews and on-site examination to (i) ascertain and supervise
intermediaries’ business conduct and compliance with relevant regulatory
requirements and (ii) assess and monitor the financial soundness of
intermediaries
 Process applications for approval, waiver or modification of various
requirements relevant to intermediaries
 Maintain communication with intermediaries and the industry on relevant
policy and regulatory issues

Supervision of Markets Division
 Facilitate the development of and encourage participation in
Hong Kong markets by liaising with local and overseas
participants
 Strengthen Hong Kong’s market infrastructure
 Supervise and monitor activities of the exchange controller,
exchanges and clearing houses
 Authorize automated trading services providers
 Regulate approved share registrars
 Co-ordinate market contingency planning
 Supervise the Investor Compensation Company Limited and
manage the investor compensation fund
 Conduct market-related research to assist in formulating
policies

Corporate Finance Division
 Administer the dual filing arrangement under the
Securities and Futures Ordinance to enhance the quality
of disclosure by listing applicants and listed companies
 Administer the Codes on Takeovers and Mergers and
Share Repurchases to afford fair treatment of shareholders
and to provide an orderly framework for takeovers and
share repurchases transactions in Hong Kong
 Oversee the listing related functions and responsibilities
of The Stock Exchange of Hong Kong Limited (SEHK)
 Review and recommend changes to the Listing Rules
administered by the SEHK

Investment Products Division
 Develop and implement guidelines and
circulars to set up a platform for authorization
applications of investment products so as to
facilitate market growth and product
innovation
 Regulate and authorize investment products
offered to the public
 Monitor disclosures and continuing
compliance of authorized investment products

Enforcement Division
 Enforce the Securities and Futures Ordinance
 Discipline dishonest intermediaries who are in breach
of the SFO
 Monitor the trading of Hong Kong's securities and
futures market and inquire into irregularities
 Inspect books and records of listed companies if
impropriety is suspected
 Report suspected market mis-conduct to the Financial
Secretary
 Co-operate with domestic and overseas regulators in
local and overseas investigations

Hong Kong Exchanges
and Clearing Limited (HKEx)
Hong Kong Exchanges
and Clearing Limited
(HKEx)
The Stock Exchange
of Hong Kong Limited
(SEHK)
Hong Kong Futures
Exchange Limited
(HKFE)
The SEHK Options
Clearing House Limited
(SEOCH)
HKFE Clearing
Corporation Limited
(HKCC)
London Metal Exchange
Hong Kong Securities
Clearing Company Limited
(HKSCC)

Outline
 Licensing
 Policy
 Supervision
 Enforcement

Corporate licences
 Licensed corporation (LC)
 A company that engages in the business of any
Regulated Activities in Hong Kong, e.g,
 Securities firm
 Fund house
 Stock exchange
 For a firm carrying on several Regulated
Activities, a separated licence must be
authorized by the SFC for each Regulated
Activities

Licensed corporation
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1 2 3 4 5 6 7 8 9 10
Regulated Activity
2018 2019 2020

Individual licences
 Licensed Representative (LR)
 A person employed by a licensed corporation
 To carry on a Regulated Activity for the licensed
corporation
 Responsible Officer (RO)
 A Licensed Representative with sufficient authority
within the a licensed corporation to take responsibility
for the Regulated Activity
 For each Regulated Activity, a separated licence
must be authorized by the SFC

Licensed representative
0
5,000
10,000
15,000
20,000
25,000
1 2 3 4 5 6 7 8 9 10
Regulated Activity
2018 2019 2020

Responsible Officer
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1 2 3 4 5 6 7 8 9 10
Regulated Activity
2018 2019 2020

Registered institution
 A bank regulated by the HKMA
 For each of Regulated Activities 1, 2, 4, 5, 6, 7, 9
or 10 , a separated licence must be authorized by
the SFC
 Regulated Activities 3 and 8 are exempted from
the SFO
 Regulated under the Banking Ordinance by the
HKMA
 Corporate and individual licences both NOT required

Registered institution
0
20
40
60
80
100
120
1 2 3 4 5 6 7 8 9 10
Regulated Activity
2018 2019 2020

Manager-in-charge

Licensing examination – regulatory papers

Licensing examination – practical papers

Outline
 Licensing
 Policy
 Supervision
 Enforcement

Policy framework
 Amendments to the SFO
 Subsidiary legislations
 Other relevant ordinances
 Guidelines
 Circulars
 Codes of conduct
 Domestic op-operations
 International co-operations
 Professional development
 Statistics
 Investor education

Amendments to the SFO

Some subsidiary legislations
to the SFO
 CAP 571N
 Securities and Futures (Financial Resources) Rules
 CAP 571D
 Securities and Futures (Professional Investor) Rules
 CAP 571AL
 Securities and Futures (OTC Derivative Transaction –
Reporting and Record Keeping Obligations) Rules
https://www.elegislation.gov.hk/index/chapternumber?QS_CAP_
NO=571&p0=1&TYPE=1&TYPE=2&TYPE=3&LANGUAG
E=E&CAP_NO_FR=571

Other related ordinances and rules
 CAP 615
 Anti-Money Laundering and Counter-Terrorist
Financing Ordinance
 CAP 622
 Companies Ordinance
 Main Board Listing Rules
 Growth Enterprise Market Listing Rules

Guidelines, circulars and codes
 Guidelines
 http://www.sfc.hk/web/EN/rules-and-
standards/codes-and-guidelines/guidelines/
 Circulars
 http://www.sfc.hk/edistributionWeb/gateway/EN/ci
rcular/intermediaries/supervision/
 Codes of conduct
 http://www.sfc.hk/web/EN/rules-and-
standards/codes-and-guidelines/codes/

Domestic co-operations
 MoU entered with the HKMA, IA, and MPFA
 Frontline regulator for the selling process of investment
products
 SFC for securities firms
 HKMA for banks
 IA for insurance companies
 Principal regulator of the investment products
 HKMA – investment products linked to currency rate and/or
interest rate and sold in banks
 SFC – investment products linked to currency rate and/or interest
rate and sold in LCs
 SFC – other investment products sold in banks or LCs

International co-operation

Professional development

Statistics

Investor education

Outline
 Licensing
 Policy
 Supervision
 Enforcement

Intermediaries supervision framework
 Supervisory profiling
 Financial return
 Prudential survey
 Offsite review
 Onsite examination
 Annual tripartite
meeting
 Control self-assessment
 Mystery shopper
 Questionnaire

Financial return
 Financial return
 Subject to Securities and Futures (Financial
Resources) Rules
 https://efrr.sfc.hk/public/jsp/forms.jsp

Mystery shopper
 An agent
 pretends to be a customer
 claims to buy investment products
 audio records the details of selling process
 For reporting and analysis of
 common issues
 sound practices

Annual questionnaires
 Audit questionnaire
 http://www.sfc.hk/web/EN/files/IS/forms/IS_audit_questionaire.pdf
 Account disclosure document
 http://www.sfc.hk/web/EN/pdf/Forms/add_english_20120803.pdf
 Auditor to submit the questionnaires within 4 months after the
end of the financial year of a licensed corporation
 Business and risk management questionnaire
 https://wings.sfc.hk/brmq/?type=LC

Outline
 Licensing
 Policy
 Supervision
 Enforcement

Investigation
 Fact finding
 Collect evidences
 Interview witnesses
 Seek expert opinions
 Analyze evidential data
 Work out missing components
 Express in official reports facts found
 Work together with the police
 Liaise with overseas securities regulators

Judgment
 Whether a person has violated any rule(s) set
out in the SFO?
 If yes, which rule(s)?
 Why?
 How severe?
 Level of penalty matching the severity

Discipline action
 Fine
 Request to replace the RO
 Private sanction
 Public sanction
 Suspension of licence
 Revoke of license
 Criminal litigation
 Civil litigation

Securities and Futures
Appeals Tribunal
 Established under the SFO
 To review the discipline decisions made by the
SFC
 To ensure reasonableness and fairness
 One judge as chairman
 Two members from a pool of 26 qualified
persons

SFC Advisory Committee
 To advise the SFC on matters of policy
regarding the performance of its functions
http://www.sfc.hk/web/EN/about-the-
sfc/organisational-chart/external-
committees/advisory-committee.html

Regulatory committees
and nominations committee
 Academic and Accreditation Advisory Committee
 Committee on Real Estate Investment Trusts
 Disciplinary Chair Committee
 Investor Compensation Fund Committee
 Nominations Committee
 Products Advisory Committee
 Public Shareholders Group
 Securities Compensation Fund Committee
 SFC (HKEC Listing) Committee
 SFC (HKEC Listing) Appeals Committee
 Share Registrars’ Disciplinary Committee
 Share Registrars’ Disciplinary Appeals Committee
 Takeovers and Mergers Panel
 Takeovers Appeal Committee

Hong Kong Securities Association
 To represent the interests of securities firms
 To work closely with the government, SFC and HKEx and
related authorities for the betterment of the industry as a whole
 To protect the reasonable interests of the members in a
balanced and equitable manner
 Provide consultation and advice to the SFC on the workings of
the market
 To ensure legitimate interests and concerns of the market
participants are taken into consideration in the formulation of
policies or regulations.
 Accredited by the SFC to conduct Continuous Professional
Training courses

Hong Kong Investment Funds Association
 To represents the fund management industry in Hong Kong
 To foster the development of the fund management industry in Hong
Kong
 To enhance the professional standards of the industry to ensure that
they are in line with international best practices
 To maintain Hong Kong's competitiveness as the major fund
management center in Asia
 To work actively with related regulatory bodies and industry
participants to ensure proper representation of members' views in
the development of rules and regulations governing the industry
 To prompt investor education as key to promoting the concept of
fund investing and engages in promotional activities to ensure
ongoing education of the community on fund related issues

Reference
 HKSI, 2021. Study Manual for Paper 1 –
Fundamentals of Securities and Futures
Regulation.

Chapter 4 securities and futures regulations

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