ComplianceOne Newsletter – March 2023
ComplianceOne Newsletter – March 2023
The topics discussed in this monthly newsletter are as follows:
1. Hong Kong Regulators Welcomed UBS AG's Acquisition of Credit Suisse AG
2. LME Warehouse Delivered Stones Instead of Nickel
3. OKX Expressed Interested in Virtual Asset Service Provider Licence in Hong Kong
4. SFC Published Quick Licensing Guides for Family Offices and Private Equity Firms
5. SFC Issued Quarterly Report to Highlight the Latest Development in the Financial Industry
6. HKEX Commenced to Test the New FINI Settlement Platform to Shorten the IPO Period
7. SFC Banned Citigroup Global Markets Asia Limited’s Former Responsible Officer for 10 Years
8. SFC Reprimanded and Fined City International Futures (Hong Kong) Limited for AML Breaches
9. SFAT Affirmed SFC Decision to Reprimand and Fine I-Access Investors Limited over System Failure
10. SFC Banned Wong Kwun Shing for Life for Stock Manipulation
11. Five More Arrested in SFC and ICAC Joint Operation against Sophisticated Ramp-and-dump Syndicate
12. Court Reaffirmed SFC’s Restriction Notices related to a Suspected “Ramp-and-dump” Scheme
MARKET NEWS
1. Hong Kong Regulators Welcomed UBS AG’s acquisition of Credit Suisse AG
The SFC and the HKMA welcomed the announcements made by the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB) on 20 March 2023 of the acquisition of Credit Suisse AG (CS) by UBS AG.
It was stated that the operations of CS merely comprised a branch under the HKMA and two licensed corporations under the SFC, and were maintained intact to continue as usual in its banking and trading services.
The total assets of CS amounted to about HKD100 billion which represented an insignificant portion of less than 0.5% of the entire banking sector in Hong Kong. The Hong Kong banking sector is resilient with strong capital and liquidity positions with total capital adequacy ratio of locally incorporated authorized institutions stood at 20.1% at the end of 2022, well above the international minimum requirement of 8%.
SIGNIFICANCE:
It was quite a big deal for two large Swiss Banks, one of UBS to take over its long-time rival Credit Suisse for about USD3.2 billion, to prevent CS from being liquidated which once was an emblem of pride of Switzerland.
Another point of interest was the controversial way the FINMA rescued this giant bank by writing down the USD17 billion of AT1 bond to zero value, an administrative tact dumbfounded many bondholders as the Swiss government was rescuing a renowned historical bank at the expense of its prestige in the long-established heritage of the banking industry!
2. LME Warehouse Delivers Stones Instead of Nickel
Nickel delivered by London Metal Exchange (LME) approved warehouse firm turned out to be stones, and nine warrants or 54 tonnes of nickel valued around USD1.3 million were cancelled.
The incidence shaken the confidence in nickel trades, and was shocking to traders in the LME system and over the world.
Warehousing sources said that the substitution of stones for nickel would have been discovered if the standard operating procedures of checking the weight of bagged nickel briquettes before warranting for delivery had been properly observed.
In the wake of the incidence, the LME, a subsidiary of the HKEX, reacted by immediately reminding the operators to strictly comply with the weighting requirements of all metals. Again, the LME postponed nickel trading during Asian hours by a week to March 27 after the reported incidence.
SIGNIFICANCE:
It is really ironical that a well-established LME system, now a full-owned subsidiary of the HKEX, a renowned exchange in an international financial centre as Hong Kong, would have come up with such embarrassing incidence; not to mention the nickel crisis in March last year where the trading of nickel had been suspended, unprecedented for decades ever since 1988 when prices jumped to a record above USD100,000!
3. OKX Expressed Interest in Virtual Asset Service Provider licence in Hong Kong
OKX, the second largest crypto exchange and a Web3 technology company, announced on 28 March 2023 that is would apply for a licenses of the virtual asset service provider (VASP) through its entity set up in Hong Kong, namely for the Type 1 & 7 licenses under the SFC regime of the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022 to be in effect from 1 June 2023.
Lennix Lai, OKX Managing Director of Global Institutional, had stated that regulation and licensing were key to the success of the crypto and Webs sector, and OKX found immense potential in Hong Kong in its strong determination to establish a robust regulatory framework and furnish a niche for licensing the virtual asset industry.
Another crucial character, Bing Zhao, OKX General Counsel, also reiterated the commitment of OKX to collaborate with the SFC through the application process, and was keen to demonstrate how conversant and versatile OKX was in fulfilling the robust standards under the prevailing licensing regime.
SIGNIFICANCE:
While jurisdictions over the world are tightening their grips on crypto exchanges, HK is taking a contrarian and proactive approach to formulate a licensing regime for attracting potential VASP applicants, and through their participation the efforts to develop Hong Kong as a financial virtual asset hub has been further leveraged.
4. SFC Published Quick Licensing Guides for Family Offices and Private Equity Firms
The SFC published quick reference guides on 22 March 2023 to help family offices, private equity firms, hedge fund managers and overseas and Mainland industry professionals better understand the SFC’s licensing regime.
“By providing useful, important and frequently sought information to prospective licence applicants via the quick reference guides, the SFC encourages more family offices and private equity businesses to operate in Hong Kong,” said Mr Keith Choy, the SFC’s Interim Head of Intermediaries.
SIGNIFICANCE:
As stated in the circular, the SFC has actually been working on the licensing regime of family offices and private equity firms long before with consultations since 2020 as shown in the circulars below:
(1) Circular on licensing obligation of family offices (7 Jan 2020)
(2) Circular to private equity firms seeking to be licensed (7 Jan 2020)
(3) Family Office FAQ (8 Sep 2020)
5. SFC Issued Quarterly Report Highlight the Latest Development in the Financial Industry
The SFC published its latest Quarterly Report on 7 March 2023 which summarised key developments from October to December 2022 amidst increasing business activity.
It was reported with a great number and wider variety of investment products were authorised or registered; twelve new open-ended fund companies were also registered during the quarter.
As at 31 December, the assets under management of Hong Kong-domiciled funds increased 11% from three months earlier, to US$165.2 billion, and the number of firms licensed for asset management grew to 2,069!
The report also showed the priority policy areas of the SFC in advocating the climate-related risks in fund governance as well as the authorization of the first two virtual asset futures exchange-traded funds in Hong Kong.
SIGNIFICANCE:
One thing encouraging here is that despite the challenging financial environment during the COVID-19 months, there were still 1,470 license applications filed to SFC during the quarter most of them pertaining to individuals while the rest to corporations.
6. HKEX Commenced to Test the New FINI Settlement Platform to Shorten the IPO Period
HKEX (00388.HK) announced that it will commence FINI (Fast Interface for New Issuance) external user testing on 1 March 2023, to prepare for the official rollout of FINI later this year.
HKEX is striving to achieve an intended launch of FINI to June, far behind its initial schedule in the fourth quarter last year. The FINI is a new platform which streamlines and digitalises Hong Kong’s IPO settlement process, reducing the time gap between an offering being priced and the new share be listed for trading on the Exchange from existing “T+5” to “T+2” (the IPO pricing time), in aspiration to align with other exchanges towards a T+1 settlement.
Materials and guidelines for user acceptance test (UAT) have been circulated to market participants to get ready for the coming rehearsals. Data provided by the Exchange showed that market participants, banks, sponsors and intermediaries were assigned with designated time slots for testing due to large number of registrations and had already started the rehearsal.
SIGNIFICANCE:
Despite a long-awaited launch of the FINI, it is never too late as it demonstrates the commitment of the HKEX to adhere to innovation as it always declares, and the keen responses from market practitioners validate the HKEX is heading a right direction.
ENFORCEMENT NEWS
7. SFC Banned Citigroup Global Markets Asia Limited’s Former Responsible Officer for 10 Years
The SFC had banned Mr Philip John Shaw, a former responsible officer (RO), board member and Head of Pan-Asia Execution Services of Citigroup Global Markets Asia Limited (CGMAL), from re-entering the industry for 10 years from 4 March 2023 to 3 March 2033.
The disciplinary action followed the SFC’s earlier sanctions against CGMAL for serious regulatory breaches and internal control failures which, in the view of the SFC, were attributable to Shaw’s failure to discharge his duties as an RO and senior management.
SIGNIFICANCE:
“The disciplinary action against Shaw also underscored the SFC’s determination to hold errant senior management accountable for their firms’ failures. This is imperative for driving changes in the culture and behaviour of intermediaries,” added by Mr Christopher Wilson, the SFC’s Executive Director of Enforcement. As stated in the news, with Shaw’s incompetence as an RO and his connivance with misconduct of his subordinates, a culture of chasing revenue at the expense of client interests and basic standards of honesty within CGMAL had been engendered.
8. SFC Reprimanded and Fined City International Futures (Hong Kong) Limited for AML Breaches
The SFC has reprimanded and fined City International Futures (Hong Kong) Limited (CIFHKL), now known as VERCAP Financial Services Limited, $100,000 for failures in complying with anti-money laundering and counter-terrorist financing (AML/CFT) and other regulatory requirements between March 2016 and October 2018.
The SFC’s investigation found that CIFHKL did not conduct any due diligence on the customer supplied systems (CSSs) used by its clients for placing orders. Other key findings were:
(1) amounts of deposits made into two client accounts were incommensurate with their declared financial profiles; but no proper follow-up enquiries or assessment of ML/TF risks been made;
(2) no effective ongoing monitoring system to detect suspicious transactions and trading patterns typical of ML/TF risks;
(3) internal systems and controls were inadequate and ineffective, and failed to ensure compliance with the AML Guideline.
SIGNIFICANCE:
It seems amount to a "rule of thumb" that the use of CSS definitely poses uncontrollable and unavoidable ML/TF risks, and camouflages suspicious transactions under its system which the LC could have no access to monitor or assess for its compliance.
9. SFAT Affirmed SFC Decision to Reprimand and Fine I-Access Investors Limited over System Failure
The SFC had reprimanded and fined I-Access Investors Limited (I-Access) $600,000 for breach of the Code of Conduct after the Securities and Futures Appeals Tribunal (SFAT) upheld the SFC’s disciplinary action against it
The SFC’s disciplinary action arose from I-Access’s response to an internal system test conducted by HKEX on 6 April 2015. It was found that I-Access in turn disseminated such data in its own system when they should have been disregarded, resulting in the incorrect triggering of 27 stop loss sell orders by 12 clients and their executions on the following trading day.
SIGNIFICANCE:
It was ridiculous and frivolous that a LC having infringed the interests of the clients, and did not take the initiative to promptly notify the affected clients of the incident and make imminent remedial compensations.
The SFC is of the view that I-Access was in breach of the Code of Conduct by failing to act with due skill, care and diligence, and in the best interests of its clients.
10. SFC Banned Wong Kwun Shing for Life for Stock Manipulation
The SFC has banned Mr Wong Kwun Shing, a former licensed representative of Convoy Asset Management Limited (CAML), from re-entering the industry for life; having found that he was involved in a stock manipulation on the Growth Enterprise Market of HKEX.
Apart from actively navigating and facilitating the manipulation process with the manipulators and clients’ orders through his ex-colleague to prop up the prices of the target shares, Wong would also collect the cash rebates from the manipulators and pay his ex-colleague for onward distribution to his clients. It ended up with the clients of his ex-colleague suffering huge losses.
SIGNIFICANCE:
Even worse was that Wong obfuscated the true story by giving false and misleading answer amid the SFC investigation. Such misfeasance of Wong rendered him a life-long ban to the industry which was the price he had to pay!
11. Five More Arrested in SFC and ICAC Joint Operation against Sophisticated Ramp-and-dump Syndicate
Five key members of an active ramp-and-dump syndicate were arrested in a follow-up joint operation of the SFC and ICAC, involving illicit gains of HKD191 million.
The five arrestees were key members of the syndicate, including qualified accountants and senior executives of a number of Hong Kong-listed companies.
Whereas another eight people, including a suspected ringleader and other key members of the syndicate, were arrested on suspicion of corruption in an earlier joint operation mounted in November 2022.
Amid the intensive investigation by the SFC and the ICAC, another criminal offences including perverting the course of public justice and obstructing the SFC’s investigations.
SIGNIFICANCE:
The concerted efforts of the SFC and the ICAC in the joint operation demonstrated to the public again the determination to tackle corruption and market misconduct, and zero tolerance of any wrongdoers and illegal acts which are core values to uphold the integrity of the financial markets which Hong Kong cannot afford to relinquish.
12. Court Reaffirmed SFC’s Restriction Notices related to a Suspected “Ramp-and-dump” Scheme
The Court of First Instance has dismissed a judicial review application against the SFC relating to restriction notices issued in an ongoing investigation into a suspected “ramp-and-dump” scheme.
The judicial review application sought to challenge the restriction notices issued on 9 February 2021 by the SFC to freeze assets of two individuals in various trading accounts held with certain licensed corporations, which were supposedly to be related to a suspected“ramp-and-dump” scheme.
As Mr Christopher Wilson, the SFC’s Executive Director of Enforcement, had said: “We welcome the Court’s decision reaffirming the SFC’s statutory powers to issue restriction notices to freeze suspects’ assets held with licensed corporations. This enables the SFC to take front-loaded actions to protect investors and the public interest.”
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