Asia’s buy-side wants a greater level of communication from Hong Kong’s Securities and Futures Commission (SFC), when electronic trading rules come into force on 1 January 2014
“It would be fantastic for the SFC to provide some feedback from on how they perceive the industry’s response to the new rules and what areas the SFC would like the industry to focus on,” said Fidelity’s head of Asia trading, Matt Saul, speaking in his capacity as chairman of the Asia Traders Forum.
When the SFC published its electronic trading proposals earlier this year, the new rules surprised the market. They required the sell-side to make a judgement about the buy-side – in terms of their ability to use electronic trading tools such as algorithms – and for the buy-side to make judgements of the sell-side, in a far more explicit manner than in other jurisdictions.
There was a spike of concern about how the buy-side would manage that process and what would be needed, and initial worries that it might be too much for the buy-side to manage. At the time, that sense was exacerbated by the SFC rules being expressed as general principles, rather than as requirements that were precisely spelled out.
However, that principle-based approach did ultimately find favour with the buy-side, giving them the impetus to focus on outcomes rather than for the SFC laying down a process of bureaucratic box ticking.
“The risk with a prescriptive approach is that participant may follow the “letter of the law” but perhaps might not embrace the spirit of what the regulator is trying to achieve,”said Saul. The Asia Traders Forum and other local industry bodies, such as ASIFMA, AIMA and HKIFA, participated in producing a template in October that helps fund managers in their due diligence processes.
He added that the true test will come next year when market participants start being held to their due diligence, if the regulator investigates to see that firms have made substantive improvements.
As a result of the due diligence obligations, traders might initially use a smaller roster of sell-side algorithmic providers,
“Whilst the regulator doesn’t actually stipulate what the level of effort is required for the due diligence, there is no doubt that a fair bit of due dilligence will be required. Given the initial uncertainty about what might be deemed appropriate, firms will likely are going to focus on fewer providers,” he said.