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1. Notable Circulars/News Issued by the SFC
In focus: LCs engaging in interest rate swaps
China's central bank, the People's Bank of China (PBOC), the SFC, and the HKMA announced the launch of Northbound Trading of Swap Connect on 15 May 2023. Swap Connect allows international investors to participate in the Mainland interbank financial derivatives market through a connection between financial infrastructure institutions in Hong Kong and the Mainland. Eligible products at the initial stage include interest rate swap contracts, with the quotation, transaction, and settlement currency in renminbi (RMB). In order to participate in Northbound Trading, Mainland investors must sign an agreement with China Foreign Exchange Trade System (National Interbank Funding Center) (CFETS) and be a Clearing Member of Shanghai Clearing House (SHCH) or a client of such a Clearing Member. International investors must apply to OTC Clearing Hong Kong Limited (OTC Clear) to become its Clearing Member or become a client of such a Clearing Member. CFETS and overseas electronic trading platforms recognised by the PBOC will jointly provide trading services, and SHCH and OTC Clear will jointly provide clearing and settlement services to Mainland and overseas investors through a central counterparties link.
*KWM Insight: You may also refer to our article Swap Connect: Key Legal Documentation Issues To Consider for further information.
1.2 AMENDMENTS TO ANTI-MONEY LAUNDERING AND COUNTER-FINANCING OF TERRORISM GUIDELINES
In focus: All LCs
The SFC revised the Anti-Money Laundering and Counter-Financing of Terrorism Guidelines for licensed corporations and associated entities (AML Guidelines). The revisions mainly incorporate provisions and guidance related to the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022, which has taken effect since 1 June 2023.
The revisions include updated definitions of politically exposed persons (PEPs) and beneficial owners of trust customers. The revised AML Guidelines also permit the disapplication of special requirements and additional measures for former non-Hong Kong PEPs who no longer pose a high risk of money laundering and terrorist financing. A new chapter provides guidance on the ML/TF risks associated with virtual assets and the AML/CFT regulatory requirements and standards for addressing such risks.
Licensed corporations and associated entities should review their AML/CFT policies and procedures in view of the revised AML Guidelines and take any necessary steps to ensure their continued compliance with all applicable requirements.
*KWM Insight: You may also refer to our article on the parallel guidelines issued by the HKMA, HKMA Releases Amended AML/CFT Guideline As Revised Law Comes Into Force – PEPs, VASPs, Trusts And More! for further information.
1.3 CIRCULAR ON IMPLEMENTATION OF NEW LICENSING REGIME FOR VIRTUAL ASSET TRADING PLATFORMS
TRANSITIONAL ARRANGEMENTS OF THE NEW LICENSING REGIME FOR VIRTUAL ASSET TRADING PLATFORMS
In focus: Virtual asset trading platforms
The implementation circular provides a number of important details of the new licensing regime for virtual asset trading platforms. In order to facilitate the launch, the SFC has published several guidelines setting out the regulatory requirements, and the VATP Licensing Handbook setting out the procedures on applying for a licence. A total of 17 FAQ pages on licensing matters and conduct-related matters have also been published, covering the following areas:
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Conduct related FAQs
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INDIVIDUAL
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Example
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1. Account opening |
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2. Anti-money laundering and counter-financing of terrorism |
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3. Client money |
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4. Conflicts of interest |
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5. Cybersecurity |
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6. Dealing with clients |
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7. Professional investors |
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8. Trading of virtual assets |
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9. Use of external electronic data storage |
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Licensing related FAQs
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INDIVIDUAL
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Example
uses 2
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10. Actively markets" under section 115 of the SFO and section 53ZRB of the AMLO |
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11. Competence requirements for individuals |
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12. Compliance with notification requirements |
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13. Conducting business outside Hong Kong |
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14. External assessment reports for licence applications |
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15. Measures for augmenting senior management accountability in Platform Operators |
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16. Premises for business and record keeping |
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17. SFC Regulatory Sandbox |
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The SFC has also launched a set of forms and returns on WINGS, which can now be accessed online.
The transitional arrangement circular sets out the details of the transitional arrangements that were previously mentioned in the virtual asset service providers consultation and consultation conclusions. The circular covers:
- eligibility for the transitional arrangements;
- deeming arrangement from 1 June 2024 onwards, covering the applications of responsible officers and licensed representatives; and
- timing, information to be contained and dual applications (for virtual asset service provide licence and SFC RA1 and RA7 licence.
Further details of selection criteria of external assessors and experience of responsible officers are included in FAQs on the SFC’s website.
*KWM Insight: You may also refer to our article Hong Kong SFC Issues Final Rules For Virtual Asset Exchanges for further information.
1.4 SFC UPDATES GUIDANCE TO PREPARE FOR HKD-RMB DUAL COUNTER MODEL
In focus: RA1 brokers providing short selling and stock lending services
To facilitate the launch of the HKD-RMB Dual Counter Model in the Hong Kong securities market on 19 June 2023, the SFC published a revised Guidance Note on Short Selling Reporting and Stock Lending Record Keeping Requirements. The note covers inter-counter transactions of securities in Hong Kong Dollar and Renminbi (RMB) that are of the same class and issued by the same issuer. The SFC believes that the updated dual counter model will promote RMB’s internationalisation, and minimise price differences between the two counters.
The SFC has published its Annual Report 2022-23, setting out some of its achievements in the past year and future plans for enforcement, market growth and regulation. The report outlines the SFC's sustainability efforts and commitment to carbon neutrality before 2050. In line with previous annual reports, the annual report provides a number of key statistics, including number of authorised collective investment schemes, listing applications, licence applications and disciplinary actions taken, which shed light on the Hong Kong financial market landscape.
2. Consultations Issued by the SFC
2.1 CONSULTATION PAPER ON PROPOSED AMENDMENTS TO THE CODES ON TAKEOVERS AND MERGERS AND SHARE BUY-BACKS
In focus: RA6 Takeovers Code advisors
The SFC issued Consultation Paper on the proposed amendments to the Codes on Takeovers and Mergers and Share Buy-backs. The proposed amendments cover a wide spectrum of matters, including:
- voting and acceptances by shareholders and the definition of “close relatives”;
- guidance on the application of the chain principle[1];
- enhancements to streamline and improve efficiency during an offer;
- effects of statements made during an offer;
- procedural matters in partial offers and requirements for comparable offers;
- green initiatives to enhance efficiency and to reduce environmental impact associated with code documents; and
- other miscellaneous amendments.
In focus: Virtual asset trading platforms
Following the consultation in February 2023 on proposed regulatory requirements for virtual asset trading platform operators licensing regime, the SFC published the consultation conclusions. The consultation conclusions cover the SFC’s decisions in respect of retail access, regulatory requirements, virtual asset derivatives, anti-money laundering matters and cold wallet thresholds etc, cumulating in the implementation circular and the transitional arrangement circular mentioned in section 1.3 above. The licensing regime for virtual asset trading platform operators launched on 1 June 2023.
3. Notable Enforcement News
3.1 SFC COMMENCES MMT PROCEEDINGS AGAINST FORMER BANK EMPLOYEE OVER ALLEGED INSIDER DEALING
In focus: LCs and RIs
The SFC commenced proceedings in the Market Misconduct Tribunal (MMT) against Mr Wu Kam Shing (Wu) for alleged insider dealing under section 270 of the SFO. Wu worked with a team of staff in respect of a loan transaction to finance a privatisation offer of a listed company.
Wu is alleged to be in possession of inside information in relation to the privatisation. He and his spouse are alleged to have purchased a substantial amount of shares of the listed company shortly before the date of its privatisation, and subsequently sold the shares, earning a profit of approximately HK$3 million.
In focus: RA1 LCs and RIs
The SFC reprimanded and fined China On Securities Limited (China On) $6 million for its failures as placing agent in a share placement.
China On was appointed to procure placees to subscribe for 45% shares of total issued share capital of Hon Corporation Limited (Hon Corp). China On was found to have acted outside the scope of authority authorised by the then majority shareholder (Vender) of Hon Corp, that it entered into bought and sold notes with transaction prices inconsistent with the placing price agreed with the Vendor, transferred shares before requiring, or ensuring the ability of the placees to make payment, and executed third party instructions to transfer share for free without verifying the instruction with the Vendor.
Despite insufficient evidence to support a finding of dishonesty, the SFC found that China On’s conduct disregarded the interest of the Vendor and concluded China On was grossly negligent, if not reckless, in breach of the Code of Conduct.
3.3 LICENCE APPLICANT CONVICTED OF PROVIDING FALSE INFORMATION TO THE SFC
In focus: LCs and RIs
The Eastern Magistrates’ Court convicted Mr Sze Chun Wai (Sze) for making false and misleading representations in support of his licence application to the SFC. Sze failed to disclose that he had been prohibited by a regulatory body from employment following a disciplinary action in 2016. Following his guilty plea, he was fined HK$8,000 and the SFC investigation costs.
The SFC expects high integrity in licence applicants to provide accurate, true and complete information. It is a criminal offence for any applicant to knowingly, or recklessly make a false or misleading representation in a material particular to the SFC.
3.4 SFC BANS XIE YANGXIONG FOR LIFE FOR PROVIDING MISLEADING FINANCIAL INFORMATION
In focus: RA1 LCs and RIs
Mr. Xie, being the sole director and regulated person for Wansom Asset Management (Hong Kong) Limited (WAML) and Wansom Securities (Hong Kong) Limited (WSL), was found to have manipulated liquidity information provided in respect of WAML and WSL by withdrawing the cash reserves required for the licence applications shortly after the SFC granted licence approvals. This resulted in liquid capital deficits varying from HK$1.58 million to HK$3 million for three months which were not notified to the SFC. In deciding to ban Xie for life, the SFC took the view that Xie’s honesty and integrity was impugned.
The disciplinary action delivers a strong deterrent message on the SFC’s zero tolerance policy on misleading conduct.
Any reference to “Hong Kong” or “Hong Kong SAR” in this article shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.
This publication is for general information purposes only and should not be construed as legal advice.
Reference
[1] The chain principle regulates the circumstances in which a mandatory general offer obligation under the Takeovers Code may arise where, as a result of acquiring statutory control of a company (the first company), a person or group of persons may in turn obtain or consolidate control over a second company because the first company holds 30% or more of the voting rights of the second company.
