The Securities and Futures Commission (SFC) is the statutory regulatory body set up to regulate Hong Kong’s securities and futures markets. The SFC inherits investigative, remedial and disciplinary powers from the Securities and Futures Ordinance (SFO) and subsidiary legislation.
In an effort to ensure that Hong Kong’s markets retain their integrity and are in line with international best practice on market operation, the SFC has moved to enhance the ‘Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission’. These enhancements follow a two-month consultation period on the regulation of electronic trading, the conclusions of which were published by the SFC in March 2013. These follow a similar trend to international regulations and standards such as the SEC’s Market Access Rule and System Compliance and Integrity rules, IOSCO’s Principles of Electronic Trading and the ESMA guidelines on systems and controls in an automated trading environment in Europe.
The new rules came into effect on 1st January 2014.
Scope and content
The general responsibilities outlined by the SFC apply to licensed intermediaries and Type 9 licensed fund managers. A primary requirement of the regulation is “Responsibility of Orders” which states that a licensed or registered person is responsible for the settlement and financial obligations of orders sent to the market through their electronic trading systems and for implementing policies and controls to supervise the orders in accordance with applicable regulatory requirements, regardless of whether these are sent by them or by their clients.
The following are provided as general requirements of those engaging in electronic trading under the jurisdiction of the SFC:
- Management and supervision
- System adequacy
- Capacity and contingencies
In particular, the SFC has focused on DMA and algorithmic trading, with specific regulation around:
- Risk management (DMA)
- Client eligibility (DMA)
- Staff and user qualifications/proficiency (algo)
- Testing (algo)
- Risk management (algo)
- Record keeping (algo)
The SFC’s amendments to the Code of Conduct will directly affect both Hong Kong licensed firms (e.g. brokers) and Hong Kong licensed fund managers who conduct electronic trading. Indirectly affected will be any users of electronic trading systems provided by a Hong Kong SFC licensed broker (e.g. non Hong Kong registered buy-sides trading through a Hong Kong broker).
Last updated 18th March 2014