New SFC rules shift responsibility to intermediaries
The Hong Kong securities regulator has added new compliance and risk management rules for brokers and stricter standards for systems reliability and maintenance, in a report welcomed by the industry.
The Securities and Futures Commission (SFC) revealed the results of an eight-month consultation on enhanced electronic trading rules for the Hong Kong market, with changes coming into effect on 1 January.
Key to the amendments is an attempt to clarify the proposal that intermediaries are "ultimately responsible" for orders executed on behalf of clients. The SFC maintains that intermediaries will not be held "strictly liable" for client misconduct, but that they will be expected to meet any settlement and financial obligations on behalf of their clients.
The industry has broadly welcomed the report's findings, and Jessica Morrison, head of APAC market structure for Deutsche Bank believes the rules will not greatly alter current industry processes.
"We are very encouraged to see the clarification made by the SFC with regard to the role of the intermediary," Morrison said. "The new rules will mean limited changes for firms which were already operating to best practice but will ensure base line standards are in place to preserve market integrity."
The 41-page report, released on 22 March, reiterates the requirement that intermediaries run pre-trade risk checks and conduct post-trade monitoring. One change to the Code of Conduct is a requirement that brokers ensure their staff and users are "suitably qualified" to use their trading platforms, including a demand that intermediaries provide training where necessary.
In addition to clarifying liability, the SFC will begin to require stricter standards for risk management at intermediaries and their service providers, as it relates to managing risk arising from algorithmic trading.
Specifically, the SFC will institute a requirement that intermediaries perform due diligence on all work done by third-parties who develop algorithms for them.
Furthermore, intermediaries must review on an annual basis whether the third-party provider has the requisite expertise and staffing to handle regulatory issues as they arise.
In response to concerns this may decrease the number of algorithmic providers willing to service the Hong Kong market, the SFC said intermediaries should "consider the appropriateness" of working with those providers.
SFC chief executive Ashley Alder said intermediaries "must have appropriate policies, procedures and controls in place to ensure their electronic trading activities will not pose undue risks to the market."
Intermediaries will also be required to undertake more systematic testing regimes, which the regulator acknowledged was only recently made possible by the introduction of a production-level testing environment by Hong Kong Exchange and Clearing Limited for both the cash and derivatives markets.
Brokers will also be required to report service disruptions to the SFC and keep a record of service delays.