Hong Kong’s buy-side traders have responded to the due diligence requirements required by electronic trading rules that will come into effect at the beginning of 2014.
A template has been produced that all Hong Kong’s institutional dealing desks can use as a standard document to assess their sell-side service providers.
The template is being promulgated by the FIX Trading Community.
“This has been one of the strongest and most all-encompassing industry collaborations I have witnessed in my career in trading. It reminded me of the spirit of how FIX was conceived when buy-side market participants came together to solve problems requiring collaboration from counterparties and competitors,” said Emma Quinn, FIX’s Asia Pacific regional committee co-chair and head of Asia Pacific trading at Alliance Bernstein.
The rules being enacted by Hong Kong’s Securities and Futures Commission (SFC) have caused considerable concern among buy- and sell-side alike in Hong Kong.
The regulations demand that the buy-side understands the electronic offerings of the sell-side and, vice-versa, in the sense that the sell-side has to be assured that the buy-side traders are sufficiently knowledgeable about the electronic products that they are using.
Since the rules are principles-based, the concern of participants has been that they do not know what such subjective assessments call for. The rules have been written by the SFC’s enforcement division, instead of its policy department. That source of authorship has filled the market with a greater sense of foreboding. The worries about penalties that could arise from non-compliance and the withdrawal of electronic trading that might result from not abiding by the rules have been catalysts for the FIX document.
The template gives the buy-side an idea of the kind of questions it should be asking of its sell-side providers, rather than creating individual due diligence processes.
The template document that we have seen is 23 pages long. It deconstructs the code of conduct requirements clause by clause, summarises the requirements and considers in turn whether each point applies to buy-side firms.
It then gives an assessment of whether the buy-side is expected to need information from the sell-side in order to comply with the rule, and provides lists of illustrative questions to ask brokers.
For example section 18.5 of the rules, is on the subject of the adequacy of systems. The template interprets the intention of this rule is to ensure the integrity of the electronic trading system and to have appropriate contingency measures.
The template determines that this part does apply to buy-side firms carrying a Type 9 licence and that they do have to ask questions of the sell-side.
It proposes the following information should be sought:
“Outline the features (risk controls, supervisory controls, design elements and other features), of the electronic trading system designed to ensure the integrity of the system (including as to system reliability) security, capacity and contingency measures).”
Other areas covered include adequacy of systems, record-keeping, risk management and qualifications.