The Securities and Futures Commission (SFC) has issued a consultation paper on regulation of alternative liquidity pools (ALPs or dark pools), available on its website www.sfc.hk. The consultation paper is open for comment until 25 April 2014.
Currently, the SFC imposes conditions on the licences of Hong Kong ALP operators on a case-by-case basis. The SFC proposes to standardise and enhance the regulatory obligations for Hong Kong ALP operators and set out those regulatory obligations in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
The SFC proposals affect both ALP operators and licensed corporations that route client orders to an ALP (such as brokers and asset managers that operate a central dealing desk in Hong Kong). The SFC proposals include:
- Limit access to ALPs to institutional investors only. The proposed definition of “institutional investor” covers primarily financial institutions such as banks, insurers, brokers and asset managers. It does not include, among others, unlicensed family offices and non-financial corporations (even if they have dedicated, experienced investment personnel e.g. as part of their corporate treasury function).
- Minimum disclosures to ALP users (ALP Guidelines), including information on trading and operational matters, user restrictions, user priority, order routing and execution methodology, transaction pricing, order cancellation and aggregation of orders. An ALP operator will need to publish its ALP Guidelines on its website.
- Priority to agency orders over proprietary orders initiated by ALP operators and their affiliates. The proposed definition of “proprietary order” is broad and expressly includes client facilitation orders.
- Minimum requirements for maintaining system adequacy and additional control, record keeping and reporting requirements. These requirements are similar to the requirements for electronic trading systems that became effective on 1 January 2014.
- Monthly disclosure by each ALP operator to the SFC of the volume of trades conducted by the ten largest users of its ALP.
- Obligations on licensed corporations that route client orders to an ALP to:
- Only do so if the orders are placed or originated by an institutional investor;
- Notify clients of the ALP Guidelines; and
- Obtain client acknowledgement that the ALP Guidelines have been brought to the client's attention and client consent to use of the ALP for order execution.