ComplianceOne Newsletter – June 2023
The topics discussed in this monthly newsletter are as follows:
No "light-touch regulation" in Hong Kong new crypto rules
SFC updated guidance to prepare for HKD-RMB Dual Counter Model
HKEX’s New IPO Settlement Platform (FINI) to be launched in October
HK Aiming to invite 200 family offices domiciled in Hong Kong by the end of 2025
130 Sustainability-Linked Bonds and ESG ratings of hundreds of listed companies displayed on the STAGE
The SFC Annual Report 2022-23
SFC banned Xie Yanxiong for life for fraudulence and misrepresentation
Taiping Securities (HK) Co Limited was fined $1.3 million for internal control failures over employee dealings
Four people charged following SFC and Police joint operation against securities fraud and illegal short selling
SFC obtained disqualification orders against former directors of National Agricultural Holdings Limited
MARKET NEWS
1. No "light-touch regulation" in Hong Kong new crypto rules
As Hong Kong has been advocating to global arena of its determination to develop HK as an international financial hub for virtual assets; in an interview at Bloomberg, the HKMA Chief Executive Eddie Yue Wai-man said that, “We will let them create the ecosystem here and that actually brings a lot of excitement. But that doesn’t mean light-touch regulation.”
Hong Kong has started marching into a new licensing regime for virtual assets service providers with effect from 1 June, and is preparing to grant the access to retail-investor participation for trading major tokens like Bitcoin and Ether. Apart from the regulatory guidelines published by the SFC, further guidelines for banks on serving crypto clients are still under progress.
Despite negative news like bankruptcy of FTX exchange, and the high profile demonstration of the US officials to crack down on digital-asset business with enforcement actions, Hong Kong has been lowering its crypto guardrail to a “reasonable and sustainable level” from previous tight environment before.
Aside from permits for virtual-asset platforms, a mandatory licensing regime for stablecoins — a type of crypto token that’s meant to hold a constant value — is due by 2023-2024.
SIGNIFICANCE:
Though regulatory bodies are showing that the surveillance of virtual asset landscape in Hong Kong is analogous to regulatory regime in other regions, and are by no means lenient compared with others, it cannot be denied that Hong Kong is one of the few jurisdictions where the government proactively participating in the nourishment and development of regulatory regime to foster the nascent growth of virtual assets business.
It is also noted that the government is facilitating the onerous due diligence process of virtual asset exchanges to open bank accounts with local banks in Hong Kong which has always been a tough issue for many new participants or awaiting licensees in the virtual assets licensing regime.
2. SFC updated guidance to prepare for HKD-RMB Dual Counter Model
The SFC published on 6 June 2023 a revised guidance on short selling reporting and stock lending record keeping to prepare for the launch of the HKD-RMB Dual Counter Model in the Hong Kong securities market on 19 June 2023.
The Guidance Note on Short Selling Reporting and Stock Lending Record Keeping Requirements has been updated to cover inter-counter transactions of securities under the Dual Counter Model; and practical and operational examples can be found in the Frequently Asked Questions for Short Position Reporting as well.
Suffice to say that the Guidance Note clarified that as HKD and RMB counters for the same security are of the same class, the following inter-counter transactions fall within the current framework:
when an investor buys a security at one counter first and sells at another, the sale is considered an ordinary sale, and
when a Dual Counter Model market maker sells a security at one counter and buys it at another, the inter-counter transaction falls under the current exemption, subject to certain conditions.
SIGNIFICANCE:
As Ms Julia Leung, the SFC Chief Executive Officer, had said, “the SFC supports dual counter trading, which will help promote the renminbi’s internationalisation and use as an investment currency.” With such dual counter in place, it provides an effective and efficient mechanism for market makers with improved market liquidity and helps minimise price differences between the two counters.
3. HKEX’s New IPO Settlement Platform (FINI) to be launched in October
HKEX announced on 28 June of the launch of FINI, its innovative IPO settlement platform, in October this year, which significantly shortened the time between the pricing of an IPO and the trading of shares from five business days (T+5) to two business days (T+2).
HKEX Chief Executive Officer Nicolas Aguzin said: “By digitalising, streamlining and modernising IPO settlement workflows, FINI will shorten the time between IPO pricing and the start of trading, enhancing market efficiency and strengthening the competitiveness and attractiveness of Hong Kong’s IPO market.”
Following the successful completion of the FINI External User Testing earlier in June, HKEX will arrange market practice sessions and market rehearsals in July and August, to simulate interactive, end-to-end IPO settlement operations under FINI, paving the way for full migration to FINI in October. The new platform will also introduce a new public offer pre-funding model to help alleviate the scale of funds that are locked up in over-subscribed IPOs.
4. HK Aiming a target to invite 200 family offices domiciled in Hong Kong by the end of 2025
The Financial Secretary, Paul Chan, delivered a speech on 12 June in the launch of a family office network, proclaiming a plan to develp Hong Kong as a premier hub for family offices and a target of 200 family offices to be established by the end of 2025 has been on schedule.
On the government side, legislations have been passed to enhance the competitiveness of the tax system for family offices, and with concerted efforts from various regulatory bodies like the SFC and HKMA, to fuel the momentum for accelerating the development.
SIGNIFICANCE:
Having recovered for the 2019 social movement and the global epidemic of COVID-19, the HKSAR government has been endeavoring to start off the engine for moulding Hong Kong not only as international financial centre as it is used to be, but also a pioneer around the world for the nascent virtual asset licensing regime and a premier hub for the growth of family offices.
Mr Wilfred Yiu, Co-Chief Operating Officer & Head of Equities of the HKEX stated that up to end of May this year, the Sustainable & Green Exchange (STAGE) has displayed more than 130 Sustainability-Linked Bonds and ESG ratings of hundreds of listed companies in Hong Kong. Mr Yiu also said in a forum that the number of ESG ETFS listed on HK continued to grow, and there was a total of 11 ESG ETF amounting in market capitalization of HKD 2.5 billion dollars, with turnover approaching HKD 6 million dollars.
Beside the First Carbon Futures ETF listed last year, through the Stock Connect came another new China A Low Carbon Index ETF and the first Greater Bay Area Climate Transition ETF listed in Hong Kong in March this year.
Mr Yiu further pointed out that the Exchange’s ESG reporting requirements had incorporated certain key recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), proposing for the issuers to prepare for the mandatory TCFD-aligned climate-related disclosures by 2025.
6. The SFC Annual Report 2022-23
The SFC published its Annual Report 2022-23 on 21 June 2023, which sets out its achievements in the past year as well as its vision for nurturing high-quality market growth and upholding world-class regulation to advance Hong Kong’s position as a leading international financial centre.
Some key achievements included:
the introduction of Swap Connect;
launch of a new lsiting regime for specialist technology companies with limited or no revenue or track record;
the investor identification regime for Hong Kong (HKIDR);
the Hong Kong Dollar-Renminbi (RMB) Dual Counter Model for the secondary market trading of a first batch of stocks;
the regulatory requirements for the new licensing regime for virtual asset trading platforms effective in June;
the proposed risk management guidelines for licensed persons dealing in futures
Mr Tim Lui, Chairman of SFC, said, “We are committed to strengthening market resilience and integrity and expanding the breadth and depth of our financial markets as a premier gateway to Mainland China.” The Chief Executive Officer, Ms Julia Leung, also said, “We strive to promote sustainable and responsible development of our financial markets whilst safeguarding investor interests and managing market risks through our robust regulation, vigilant supervision and resolute enforcement action.”
SIGNIFICANCE:
The transition from 2022 to 2023 was fraught with many challenging changes lauched by the regulatory bodies and its determination to crack down on the investment fraud and social media ramp and dump scams which were detrimental to the integrity of the financial market Hong Kong has strived to uphold.
Nowadays, maintaining in compliance is not merely an obligation to be fulfilled, but more of a challenge to be encountered amid such avalanche of regulatory innovations formulated and launched by the HKSAR government while orchestrating a regulatory landscape to accomodate the latest developments in the international financial markets.
ENFORCEMENT NEWS
7. SFC banned Xie Yangxiong for life for fraudulence and misrepresentation
The SFC had banned Mr Xie Yangxiong, a director of Wansom Asset Management (Hong Kong) Limited (WAML) and Wansom Securities (Hong Kong) Limited (WSL), from the industry for life.
It was found in the SFC investigation that Xie, who had access and control of bank accounts of WAML and WSL, was providing false information of both firms to SFC in support of their license applications in July and August 2018. In the case, Xie deliberately made deposits in the bank accounts of WAML and WSL, and then withdrew the same amount afterwards.
With the withdrawn funds into consideration, the liquid capital condition of both WAML and WSL would fail to meet the regulatory requirement for their licenses to be granted. Further that Xie also failed to ensure that WAML and WSL should have notified the SFC of their liquid capital deficits within one business day of their liquid capital falling below the required level. The SFC was of the view that the misconduct of WAML and WSL was the direct result of Xie’s consent or connivance, and his conduct cast serious doubt on his fitness and properness to be a “regulated person”!
SIGNIFICANCE:
Given the fact that Xie was also the sole owner of the entity which wholly owned WAML and WSL. Although Xie was not a licensed person under the Securities and Futures Ordinance (SFO), he came within the definition of a “regulated person” under section 194(7)(c) of the SFO which includes a person who is or at the relevant time was involved in the management of the business of a licensed corporation.
The SFC had reprimanded and fined Taiping Securities (HK) Co Limited (TSCL) $1.3 million for internal control failings in relation to employee dealings between 1 January 2016 and 30 November 2018.
It was found in the investigation that TSCL failed to put in place adequate and effective internal controls over monitoring of employee dealings, and the senior management, compliance department and responsible officers (RO) did not have a clear understanding of their roles and duties as well.
The SFC also found that TSCL failed to communicate its personal dealing policy applicable during the relevant period to all employees and ensure their compliance with it.
Four suspects appeared at the Eastern Magistracy on 23 June 2023 charged with offences of fraud with alternative charge of illegal short selling following an earlier joint operation of the SFC and the Police against fraudulent activities in securities transactions and illegal short selling.
Suspicious trading activities during an intensive investigation of suspected ramp-and-dump activities were discovered which were found to involve suspected money laundering and other fraudulent activities, the case was referred to the Police.
The SFC had obtained disqualification orders in the Court of First Instance against a former executive director Mr Liu Yong, and two former independent non-executive directors, Ms Kathy Chiu Kam Hing and Mr William Fan Chung Yue of National Agricultural Holdings Limited (NAH).
Liu was disqualified for three years while Chiu and Fan for 20 months from being any director, liquidator, or receiver or manager of any corporation in Hong Kong including NAH or any of its subsidiaries and affiliates.
The Court proceedings followed the SFC’s investigations into allegations of a series of misconduct orchestrated by NAH’s controlling shareholder Parko (Hong Kong) Limited (Parko), the former chairman Mr Chen Li-Jun and three other senior officers of NAH (Chen and others) from 2015 to 2017.
The orders were made having regard to the findings that Liu, Chiu and Fan had neglected or omitted to identify or rectify the misconduct of Chen and others. They also failed to raise concerns, queries or seek necessary information in relation to the significant and questionable transactions discovered in SFC’s investigation as above.
For more details, please click on the title of the topic above.
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