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The Securities and Futures Commission (SFC) has recently published a consultation paper (Consultation) that proposes refinements to the scope of regulated activities and new conduct requirements relating to over-the-counter (OTC) derivatives. These changes are intended to take effect on or before the commencement of the Hong Kong licensing regime for OTC derivative-related activities. The Consultation is open for comment until 20 February 2018.
Refinements to scope of regulated activities
The Securities and Futures (Amendment) Ordinance 2014 made the following changes to the Hong Kong licensing regime:
The Consultation proposes a number of changes to the Hong Kong licensing regime that are beneficial to asset managers:
Asset managers should note that they will need to be licensed for type 11 RA if they operate a central dealing desk in Hong Kong for their group’s OTC derivative trading activities.
The Consultation also proposes additional exemptions from the licensing regime for corporate treasury activities of “non-financial groups”, for certain trade compression services and certain overseas clearing members of overseas central counterparties.
Other licensing-related requirements
The Consultation proposes that:
New conduct requirements for non-centrally cleared OTC derivatives
The Consultation proposes new conduct requirements, as set out in the table below:
|
New conduct requirements: |
Applicable to: |
1. |
Risk mitigation measures relating to trading relationship documentation, trade confirmations, valuations, portfolio reconciliations, portfolio compression and dispute resolution |
|
2. |
Measures to address risks posed by transactions with group affiliates and other connected persons |
|
3. |
Record-keeping |
|
4. |
Segregation, portability and clearing confirmation |
|
5. |
Client money and client securities |
|
The SFC’s Code of Conduct imposes a requirement that client agreements include a “suitability clause” to the effect that any financial products sold or recommended must be reasonably suitable for the client. This requirement will extend to the sale or recommendation of OTC derivative products when the new OTC derivatives licensing regime commences.
The SFC intends to make the new conduct requirements for risks posed by transactions with group affiliates and other connected persons effective within six months after gazettal of the amended Code of Conduct. The other conduct requirements will be effective when the new OTC derivatives licensing regime commences.
[1] Note: If another group company is responsible for executing the transactions, the required requirements do not apply directly, but the SFC expects the licensed corporation to review whether appropriate procedures are in place to achieve a similar outcome.
[2] For other discretionary mandates, the nature and extent of risk mitigation measures and the party that will be responsible for them will be a matter for agreement between the asset manager and its client.
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