ON 16 January 2025, the SFC announced that all new virtual asset trading platform (“VATP”) applicants can now seek licences under its swift licensing process.

This new licensing approach requires VATP applicants to implement their policies, procedures, systems and controls before conducting an external assessment on these measures. The SFC will become a party to the engagement to supervise the overall external assessment process. This extension is made in light of the effectiveness of the SFC’s direct engagement and communication with deemed-to-be-licensed VATP applicants on the regulatory standards during its risk-based on-site inspections of all such applicants.

It should be noted that all VATP applicant submitting license applications after 18 December 2024 should refer to the new Circular (dated 16 January 2025) for the updated swift licensing process.

Key takeaways of the revamped swift licensing process are as follows:

the SFC continues to adopt its engagement and communication with the VATP applicants through the process as before;
the new VATP applicant has to submit its licensing application bundle to the SFC for assessment through WINGS, and to engage an external assessor (“EA”) to perform an external assessment;
after an initial assessment by the SFC of the key personnels of the applicant, and upon acceptance of the license application, the applicant will proceed to deploy its relevant systems and controls;
while the applicant is ready for an external assessment, a tripartite agreement with the SFC and the EA should be entered;
the SFC will scrutinize and be assured that the policies, procedure and system controls (“P&P”) of the applicants are suitably designed and implemented; in case of any findings or exceptions, these should be resolved during the external assessment process;
upon completion of the external assessment and all other outstanding matters such as capital injection, the SFC will grant a licence to the VATP applicant if it is satisfied that the applicant is then fit and proper to be licensed.

What to know about the revamped external assessment?

it is expected that there will be substantial changes to P&P of the VATP applicant from its conventional operational routines; as such it would be important to conduct external assessment only after the VATP deploys its systems and controls and evaluate itself if it fully adapts its P&P to ensure that they can operate as intended/ designed;
it is also important for the EA to assess if the P&P are suitably designed and implemented by the VATP applicant even though the P&P can operate as intended;
the SFC requires opinion from the EA that VATP applicant’s P&P are suitably designed and implemented to comply with the Guidelines specified for VATPs;
the SFC, the EA and the VATP applicant should agree on the terms and scope before commencing the assessment.

SIGNIFICANCE:

The SFC has just granted licences to four deemed-to-be-licensed VATPs in December last year under the newly introduced swift licensing process, the determination of the Commission to give a greenlight in the licensing process to the new applicants is quite obvious. Subject to the new circular in January 2025, new VATP applicants are only required to conduct one external assessment throughout the streamlined licensing application process.

2. Onshore RMB bonds accepted as margin collateral in OTC Clearing Hong Kong Limited

Effective 13 January 2025, the OTC Clearing Hong Kong Limited (“OTC Clear”) started accepting the Ministry of Finance and Mainland policy banks onshore bonds held under Northbound Bond Connect (“CGB”s) by offshore investors as margin collateral for Northbound Swap Connect (“NBSC”) transactions.

Under the arrangement, the SFC, the People’s Bank of China (“PBoC”) and the Hong Kong Monetary Authority (“HKMA”) reached a consensus that offshore investors can use CGBs as margin collateral for all other eligible derivative transactions cleared in OTC Clear.

In the Circular posted by HKEX dated 16 December 2024, the new eligible collateral can be used to cover initial margin requirements of NBSC , providing greater flexibility to international investors and enhancing their capital efficiency. Ever since its launch in May 2023, the Swap Connect has evolved with smooth operations and steady growth in trading volume, adding vibrancy to the region’s financial markets.

SIGNIFICANCE:

As Mr Rico Leung, the SFC’s Executive Director of Supervision Markets, has said, “Global institutional investors can benefit from further reduction in liquidity cost with more efficient use of their onshore RMB bonds as non-cash collateral when clearing with OTC Clear.” He further added that the new measures strengthen HK’s position as a leading global offshore RMB hub and advancing development of its fixed income market.

3. SFC expands listed structured fund offerings in Hong Kong

On 23 January 2025, the SFC sets out new regulatory requirements for product issuers, with a view to broadening the range of listed structured funds that may be offered to the public in Hong Kong, notably adding to their product mix Single Stock Leveraged and Inverse (L&I) Products and Defined Outcome Listed Structured Funds (“P&F”).

There has been growing interest among the product issuers in launching the P&F in HK amid their appeal to investors. The P&F offer investors who are looking for trading and hedging tools for popular individual stocks listed overseas, as well as for seeking price discovery tools for overseas exposure during Asian trading hours. One distinctive feature of the P&F is that they provide investors with a more customised investment exposure than the prevailing conventional products.

In balancing the potential benefits and risks associated with exposure to these complex and novel products, the SFC has in place enhanced regulatory framework with additional safeguards and measure for protecting HK investors. For example, with respect to Single Stock L&I Products, only those referencing a highly liquid mega-cap stock listed on a major overseas exchange is accepted by the SFC, and is subject to a maximum leverage factor of 2X to -2X only.

SIGNIFICANCE:

With the protective constraints on Single Stock L&I Products imposed by the SFC, it excludes overseas listed stocks which may be dually listed in Hong Kong and stocks listed on any Mainland exchange which are not overseas exchanges; while only a lower leverage factor is accepted aiming to reduce exposure to any single stock volatility. For details of additional requirements, reference can be made to the circular post the same day.

Market News

4. InvestHK brought a record-breaking number of new companies to Hong Kong in 2024

On 20 January 2025, the Invest Hong Kong (“InvestHK”), a government department of Hong Kong Special Administrative Region (HKSAR) which aims to strengthen Hong Kong’s status as the leading international business location in Asia, announced that the department achieved a record-breaking year of foreign direct investment (“FDI”) in 2024, assisting 539 overseas and Mainland companies to set up their business in Hong Kong, which represents a 41% increase compared with 2023, further reflecting the appeal of HK as a leading business hub in the region.

The strong FDI performance was driven by investment in diversified and high-valued industries which is estimated to bring to HK over HKD67.7 billion, a record high of near 10 % increase over 2023’ around 6,864 job opportunities are expected to be created during the first year of operation.

Taking a look at the figures, the top five locations of origins of these new companies ranked in order are Mainland China, United States, France, The United Kingdom and Singapore; the results reflect full confidence in HK from these enterprises in selecting the city as their base to capture the unique opportunities brought by HK as a “super connector” and a “super value-adder”.

Furthermore, more than 800 applications were received through the New Capital Investment Entrant Scheme (“New CIES”) by the end of 2024 since its launch last March, bringing around HKD24 billion of investments to the city.

SIGNIFICANCE:

As Ms Alpha Lau, Director-General of Investment Promotion, has said, “It demonstrates HK's resilience and adaptability and businesses' strong confidence in the city as the preferred base to expand in the region.”

5. Enhancing sponsors’ expertise to drive GEM advancement

At the seminar “Hong Kong Capital Market – The Future of GEM” organised by theAssociation of Hong Kong Capital Market Practitioners, Dr Kelvin Wong, Chairman of the SFC, delivered a keynote speech entitled Enhancing Sponsors’ Value Proposition to Drive GEM Advancement. He emphasised the importance of GEM to small and medium enterprises (SMEs) and Hong Kong’s listing market development. He also discussed how the sponsors of initial public offerings (IPOs) should enhance their value proposition by leveraging their unique roles to strengthen the corporate governance and resilience of companies for their longer-term success. The key points of the speech are as follows:

Importance of a robust GEM to SMEs and listing market

the secondary board of GEM has served as a source of long-term capital for SMEs to pursue innovation, value creation and business growth, testifying hundreds of both local and Mainland SMEs. SMEs are the backbone of the HK economy and accounted for 98% of the total number of businesses, and employing around 44% of the workforce.

GEM enhancements in 2024

there were three GEM lPOs in 2024 raising a total of HK$235 million with a total initial market capitalisation of HK$720 million at listing;
under the new streamlined transfer mechanism, three GEM issuers’ applications to transfer to the Main Board had been received by the HKEX;
the average sponsor fees increased to HK$6.8 million in 2024, up by 25% compared to 2020.

Enhancing sponsors’ value proposition

the roles of sponsors and corporate financial advisors are essential in helping their clients ensure regulatory compliance and navigate the complexities of the IPO journey, and in conducting due diligence on the listing applicant’s business to ensure fulfilment of the SFC’s stringent standards, their recommendations are conducive to the sustainable development of companies long after their IPO;
sponsors should also critically assess the commercial viability of a company’s business model and ensure the disclosure of accurate and sufficient information to investors.

Facilitating corporate sustainability and governance beyond the IPO

sponsors can help shape a culture of good corporate governance by discussing the internal control inadequacies with the listing applicant’s board of directors and recommending remedies;
finding of research indicates that strong value proposition of reputable sponsors can always bring smaller under-pricing at IPO and lower price volatility post IPO;
sponsors can conduct a range of investor relation initiatives and ensuring continuous equity coverage by research analysts, exposing the newly listed companies to persistent scrutiny by public eye through which is then transformed into a driving force for the companies to improve their operations, accountability, disclosure standards, corporate governance, as well as shareholder returns post IPO.

Importance of governance to long-term corporate success

it must be emphasised corporate governance is crucial to the long-term success of corporates post IPO. Research findings also indicated a high correlation between corporate governance and a company’s profitability and sustainability, a competent board of directors, robust internal controls and management systems as well as effective risk management are indispensable elements for success.

Sponsor failures and good practices

since sponsor’s rigor of due diligence is pivotal in sustaining HK’s reputation as an international fund-raising hub, the SFC is committed to combating sponsor misconduct with zero tolerance; always alert that any weakening in investors’ confidence would increase difficulties and costs for companies to raise capital.

6. HashKey Exchange's trading volume increased by 85% in 2024

As investors’ interests in virtual assets remain keen, the HashKey Exchange, one of the licensed VATPs in Hong Kong, continues to records with robust growth with its trading volume exceeding HKD 600 billion last year, marking an 85% year-on-year increase. As commented by Mr. Xiao Feng, Chairman and CEO of the parent company HashKey Group, the company is expected to reach breakeven by 2025.

Currently, HashKey Exchange offers four cryptocurrencies for retail investors: Bitcoin (BTC), Ethereum (ETH), Avalanche (AVAX), and Chainlink (LINK). Its Chief Risk Officer Mr. Ru Haiyang anticipates more cryptocurrencies will be made available to cope with increasing interests at retail level. The introduction of derivative contracts, options or leveraged trading are still under communication with the regulatory bodies.

SIGNIFICANCE:

As HaskKey Exchange remains bullish on Bitcoin, the most popular and actively traded crypto to retail investors, trading volume is expected to grow sustainably in 2025.

7. Hong Kong joins LME global warehouse network

The London Metal Exchange (“LME”) has confirmed, on 20 January 2025, its approval of HK as an LME warehouse location, HK will now join the LME’s existing network of 32 locations over the USA, Europe and Asia.

Matthew Chamberlain, LME CEO, said, “The addition of Hong Kong to our global warehousing network is an exciting development, providing warehouse facilities closer to the metals hubs of Mainland China than ever before.

The driving factors for such approval are:

(i) Hong Kong provides the natural hub for connectivity to the Chinese market which is the world’s largest consumer of metal;

(ii) there are keen interests from warehouse, landlords and metal owners in seeing HK as a metal delivery point;

(iii) China is a largest net consumption area which is in vicinity to HK;

(iv) established local fiscal and regulatory system and access to good transport network are in place in HK.

SIGNIFICANCE:

At the initial stage, HK is permitted to store LME-registered aluminium alloy, primary aluminium, copper, lead, nickel, tin, and zinc, and it will become an active warehouse location three months after the approval of the first warehouse company.

This approval marks another cornerstone in the development of metal trading industry in HK since the HKEX acquired the LME in 2012 for USD2.2 billion.

Enforcement News

8. Hang Seng Bank Limited is fined $66.4 million for misconduct in selling investment products

The SFC reprimanded and fined Hang Seng Bank Limited (“HSB”) $66.4 million for serious regulatory failures in relation to the bank’ s sale of collective investment schemes (“CIS”) and derivative products and overcharging its clients and making inadequate disclosure of monetary benefits to them during various periods over the course of nine years between February 2014 and May 2023.

A snapshot of the findings:

(1) Sales practices in relation to CIS

111 client accounts were found to have executed 100 or more CIS transactions during the material period from 1 June 2016 to 30 November 2017;
46 clients were solicited into conducting excessively frequent transactions which contradicted to their investment perspectives/ horizon;
HSB’s internal controls were deficient in monitoring the sales of CIS by their relationship managers.

(2) Sales and distribution of derivative products

from 17 February 2014 to 19 December 2018, it was found that 388 clients with no knowledge of the nature and risk of derivative products had purchased derivative funds in 629 transactions; while some products were of higher risk levels than the client’s tolerance levels.

(3) Overcharging and inadequate disclosure of monetary benefits

retained monetary benefits from client transactions in breach of regulatory standards;
charged higher transaction fees from clients;
failed to adequately disclose trailer fee arrangements to clients;
HSB received at least HKD22.4 million in excess benefits/ fees from these transactions from the clients.

SIGNIFICANCE:

The SFC is of the view that the misconduct of HSB was serious and systemic, and its failure to act with due care and diligence, further aggravated by the lack of proper monitoring of sales distributions and compliance with disclosure requirements, all amounted to the adverse influence on the best interests of its clients.

9. Associate Director of SFC charged by ICAC with conspiracy to pervert course of justice

The ICAC announced on 9 January 2025 that Deng Yingxia (“DENG”), a then Associate Director of the SFC, was charged by the ICAC with conspiracy to pervert the course of public justice by allegedly providing advice to subjects of an SFC investigation into suspected market manipulation in relation to a listed company on how to conduct themselves in the probe, including destroying potential evidence.

The ICAC investigation stemmed from a corruption complaint. After investigation, the

ICAC arrested DENG in an operation jointly carried out with the SFC in April 2024.

It was alleged that between July 15 and 27, 2022, DENG had conspired with a subject of a Market Manipulation Investigation (relating to China Gas Industry Investment Holdings Company Limited (01940.HK)), she met with that person and other subjects of the investigation, and advised them how to answer possible questions posed by the SFC as well as advising them to destroy potential evidence.

SIGNIFICANCE:

The SFC was committed to render full assistance to the ICAC during investigation of the case. The ICAC, which stands itself out as emblem of upholding the integrity of HK’s financial market, shares the same mission of the SFC; their concerted effort to combat misconduct in the case is a good example to testify to the public that HK remains as a hub of justice and integrity.

10. The first solicitor convicted of breaching secrecy provision by the SFC

A Hong Kong practicing solicitor, Mr Tse Yin Fung (“TSE”), was convicted today at the Eastern Magistrates’ Courts for violating the secrecy provision under the Securities and Futures Ordinance (“SFO”) following a prosecution brought by the SFC, and was fined HKD25,000 together with the payment for investigation costs of the SFC.

In the case, TSE, acting as the legal representative of an individual, received confidential information regarding a restriction notice that the SFC had disclosed to that individual, which was subject to the secrecy provision under the SFO. After receiving the confidential information, TSE disclosed the information to two other individuals on 9 February 2021.

SIGNIFICANCE:

This case marks the first occasion in which a Hong Kong practicing solicitor has been convicted of an offence for contravening the secrecy provision under the SFO. No matter what intention or reason TSE had, as a legal professional, he should maintain the highest standard of professional conduct amid conducting his entrusted duty for his client.

11. Enforcement action against FingerTango Inc. and its former directors by concerted efforts of SFC and HKEX

On 16 January 2025, the SFC and the Stock Exchange of Hong Kong Limited (“Exchange”) have joined hands in an enforcement action that resulted in the Exchange’s disciplinary actions against a Mainboard-listed FingerTango Inc. (“Finger”) (06860.HK) and its eight former directors for misconduct and breach of their duties towards the company and its subsidiaries. Meanwhile, the SFC also sought disqualification and compensation orders from the Court of First Instance (“CFI”) for the same alleged misconduct.

Snapshot of the legal action:

the investigation was concerned with the directors’ misconduct in relation to problematic investments and loans to external parties;
at the time of listing, all then directors, including independent non-executive directors, resolved to adopt a policy that would allow certain investment decisions to bypass board approval;
since then, Finger used the proceeds from its IPO to:
(i) invest HKD450 million in a fund without knowledge of the board;
(ii) partially redeemed the fund and invested another HKD250 million in loan notes (“2019 Loan Notes”); which later turned to be default with a loss of HKD258.75 million;
(iii) between May 2020 and March 2021, another 20 loan agreements were entered by Finger and its two subsidiaries with 15 borrowers, totalling HKD500 million (the “2020-21 Loans”), which turned out later with a loss of HKD424 million in default;
in the light of the above findings, the SFC expanded the scope of misconduct to include the 2020-21 Loans, with focus on the former directors’ failure to carry out proper procedures and due diligence before entering into loan agreements;
SFC is of the view that the losses resulting from the 2019 Loan Notes and 2020-21 Loans were attributable to breaches of the duties of the former directors of Finger, rendering them liable to the compensate the company and its subsidiaries for the incurred losses.

SIGNIFICANCE:

As SFC’s Executive Director of Enforcement, Mr Christopher Wilson, had commented that corporate directors have the obligations to oversee the activities of management and ensure adequate internal control policies and procedures operate effectively. A lax policy adopted by the directors cannot be considered as an excuse to alleviate their responsibilities. It also conveys the message to the directors and audit committees that they should be mindful of their duties to prevent loss or misuse of listed corporations’ assets.

12. MMT sanctions chauffeur and wife for insider dealing before a takeover announcement

The Market Misconduct Tribunal (“MMT”) had ordered Ms Choi Ban Yee (“CHOI”), the wife of a chauffeur, Mr Sit Yuk Yin (“SIT”), who worked for the family of the chairman of Tian An China Investments Company Limited at the material time, to disgorge illicit profit gained from insider dealing in the shares of Asiasec Properties Limited, formerly known as Dan Form Holdings Company Limited (“Dan Form”) (00271.HK), before a takeover involving the companies was announced.

The MMT was satisfied that SIT was in possession of inside information about the takeover by 13 September 2016 before the announcement was made on 22 September 2016, and he procured his wife to trade the Dan Form shares for a profit of HKD106,968. As a result of the judgement, the MMT imposed against CHOI and SIT cold shoulder orders for 16 months, cease and desist orders and to pay the costs incurred by the government and the SFC.

[End of ComplianceOne Newsletter –January 2025]

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