News & Insights

Hong Kong SFC licensing and compliance hints – June 2023

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Authored by: Connie Chan

Information related to virtual asset-related activities required in revised financial return form, analysis of client assets for associated entity and audit questionnaire

On 25 May 2023, Hong Kong’s Securities and Futures Commission (SFC) issued a circular publishing the revised versions of the financial return form, analysis of client assets for associated entity and audit questionnaire. The revised forms / questionnaire require additional information on virtual asset-related activities, and need to be used in respect of any period ending on or after 1 December 2023. We list out below three additional pieces of information that will need to be provided to the SFC:

  1. Breakdown of client virtual asset storages into hot wallets, cold wallets and other locations. Virtual Asset Trading Platform Operators licensed by the SFC and their associated entities will need to provide the market value of client virtual assets deposited in hot wallets (i.e. private keys are kept online), cold wallets (i.e. private keys are kept offline) and other locations as of the date of financial year end in the analysis of client assets for associated entity.

  2. AUM using virtual asset / virtual asset derivatives strategies. In addition to indicating the AUM using hedge fund, private equity, passive index tracking and “other” strategies, Type 9 licensed firms will need to provide their AUM using “virtual asset / virtual asset derivative strategies (including virtual assets which constitute securities)” in the revised financial return form.

  3. Proprietary positions in virtual assets. Licensed firms will be required to provide the market value in respect of their proprietary positions in virtual assets in the financial returns. In addition, if the market value of an individual proprietary position in virtual assets is over 10% of the firm’s excess liquid capital, product details (e.g. product name, product nature, market value) will also need to be provided to the SFC.

A reminder on ongoing liquid capital monitoring and the consequences of misleading the SFC: another disciplinary action on window-dressing liquid capital positions

The SFC recently banned the director of two former licensed firms from the industry for life in connection with his role in window-dressing the firms’ liquid capital positions. The director orchestrated the fund movements in the bank accounts of the two former licensed entities to window-dress their liquid capital positions prior the grant of their licences, by depositing funds into and subsequently withdrawing the same funds from the bank accounts. After obtaining the licences, the director also withdrew funds from the bank accounts for his own use which resulted in their liquid capital deficits, and failed to ensure that the firms notified the SFC on the liquid capital deficits within the specified timeframe.

The various breaches committed by the concerned individual should be a stark reminder that the SFC does not tolerate attempts to mislead the regulator, as well as licensed firms’ ongoing obligation to comply with the requirements in the Securities and Futures (Financial Resources) Rules (Financial Resources Rules).

A licensed firm’s “liquid” capital must always exceed its “required” liquid capital under the Financial Resources Rules and it must formally notify the SFC “as soon as reasonably practicable and in any event within one business day of becoming aware”, if, amongst other things, its liquid capital ever falls below 50% of the liquid capital reported in its last submitted return or 120% of the required minimum amount.

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