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Authored by: Stephen Tisdall
On 25 November 2022, the Securities and Futures Commission (SFC) issued its Consultation Paper on Proposed Risk Management Guidelines for Licensed Persons Dealing in Futures Contracts (Consultation Paper). The SFC’s nineteen-page draft Risk Management Guidelines for Licensed Persons Dealing in Futures Contracts (Guidelines) are included as the Appendix to the Consultation Paper.
The Guidelines are intended to supplement existing risk management requirements for futures dealing activities, which are principally set out in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission; the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission; and the Suggested Control Techniques and Procedures for Enhancing a Firm’s Ability to Comply with the Securities and Futures (Client Securities) Rules and the Securities and Futures (Client Money) Rules.
As these existing risk management requirements are principally concerned with financial futures, the SFC considers it necessary to prescribe regulatory standards for the risk management of commodity futures trading.
SFC concerns
The SFC attributes the need for the Guidelines as arising out of two years of extreme market volatility in the financial and commodity futures markets associated with the Covid-19 pandemic, which resulted in losses incurred by futures investors and by their brokers, and which underscored the challenges which futures brokers face during times of market volatility. In particular, the SFC noted the effects of some clients being unable to meet margin calls, resulting in losses to them and, in some cases, resulting in their futures brokers requiring emergency funding or financial assistance to prevent them from defaulting on their obligations to clearing houses, or to enable them to comply with their obligations under the Securities and Futures (Financial Resources) Rules.
Unsatisfactory risk management practices that have been observed by the SFC include futures brokers:
Proposed obligations under the Guidelines
The Guidelines stipulate the areas in respect of which the SFC will expect compliance from licensed futures dealers, notably in respect of their:
The SFC is currently inviting interested parties to submit their comments concerning the Consultation Paper and the Guidelines on or before 31 January 2023.
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