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Hong Kong’s SFC Proposes Risk Management Rules for Futures Brokers

by Arnab Shome
  • The regulator proposed several mechanisms to mitigate future dealing risks.
  • It will accept the industry feedback until 31 January 2023.
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Hong Kong’s Securities and Futures Commission (SFC) launched a consultation paper on Friday, proposing risk management guidelines for licensed futures brokers.

The guidelines primarily require futures brokers to include qualitative requirements for controlling and managing critical risks of futures dealing activities. If approved, brokers need to set prudent client risk limits and further comply with additional requirements relating to commodity futures.

Additionally, the Hong Kong-regulated brokers would be needed to conduct due diligence reviews of executing or clearing agents and put in place more stringent mechanisms to safeguard client assets. They also need to implement controls around trading in futures markets and hold assets for clients outside Hong Kong.

Moreover, the proposals brought strict rules around margin calls. The futures brokers would need to collect outstanding margin calls for clients who failed to meet two margin calls by the settlement deadline in a period of 30 days. Brokers need to follow in-house liquidation policies and need to set up thresholds for concessionary margining.

A Justified Move

The consultation paper came after a 'fact-finding exercise' conducted by Hong Kong’s regulator in 2021. On top of that, the guidelines were prepared by collecting feedback from a broad spectrum of market participants.

In another survey of 50 licensed trading services providers, the regulator found severe shortcomings in the operations of many companies.

“Recent shocks in the financial and commodity futures markets have underscored the challenges futures brokers face in times of market volatility,” said SFC’s Deputy Chief Executive Officer and Executive Director of Intermediaries, Julia Leung.

“The proposed risk management guidelines aim to provide timely guidance to futures brokers to help them better manage the risks relating to their business.”

Meanwhile, the Hong Kong watchdog is aligning its regulations around cryptocurrencies. In October, the SFC confirmed its intentions to launch a consultation paper with proposed guidelines and regulatory rules for cryptocurrencies or, as officially called virtual assets. Furthermore, it considers allowing retail access to virtual assets through exchange-traded funds.

Hong Kong’s Securities and Futures Commission (SFC) launched a consultation paper on Friday, proposing risk management guidelines for licensed futures brokers.

The guidelines primarily require futures brokers to include qualitative requirements for controlling and managing critical risks of futures dealing activities. If approved, brokers need to set prudent client risk limits and further comply with additional requirements relating to commodity futures.

Additionally, the Hong Kong-regulated brokers would be needed to conduct due diligence reviews of executing or clearing agents and put in place more stringent mechanisms to safeguard client assets. They also need to implement controls around trading in futures markets and hold assets for clients outside Hong Kong.

Moreover, the proposals brought strict rules around margin calls. The futures brokers would need to collect outstanding margin calls for clients who failed to meet two margin calls by the settlement deadline in a period of 30 days. Brokers need to follow in-house liquidation policies and need to set up thresholds for concessionary margining.

A Justified Move

The consultation paper came after a 'fact-finding exercise' conducted by Hong Kong’s regulator in 2021. On top of that, the guidelines were prepared by collecting feedback from a broad spectrum of market participants.

In another survey of 50 licensed trading services providers, the regulator found severe shortcomings in the operations of many companies.

“Recent shocks in the financial and commodity futures markets have underscored the challenges futures brokers face in times of market volatility,” said SFC’s Deputy Chief Executive Officer and Executive Director of Intermediaries, Julia Leung.

“The proposed risk management guidelines aim to provide timely guidance to futures brokers to help them better manage the risks relating to their business.”

Meanwhile, the Hong Kong watchdog is aligning its regulations around cryptocurrencies. In October, the SFC confirmed its intentions to launch a consultation paper with proposed guidelines and regulatory rules for cryptocurrencies or, as officially called virtual assets. Furthermore, it considers allowing retail access to virtual assets through exchange-traded funds.

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