Today, the SFC released consultation conclusions to address conduct risks that regulated entities face when dealing with group affiliates and other connected persons. As a result, as of September 2019, some licensed corporations will be subject to risk mitigation requirements.
According to the statement from the securities regulator, the risk mitigation requirements: “cover trading relationship documentation, trade confirmation, valuation, portfolio reconciliation, portfolio compression and dispute resolution.”
Specifically, licensed corporations that are contracting parties to non-centrally cleared OTC derivative transactions or regulated asset management firms, will be subject to these requirements.
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SFC Requirements to Come into Effect Next Year
In addition, companies which provide client clearing services for OTC derivative transactions will be subject to the following requirements – segregation, portability, and disclosure. These amendments to the Code of Conduct will be gazetted on Friday, December 14, 2018, with the risk mitigation requirements to come into effect from September 1, 2019.
Furthermore, licensed persons will need to ensure client-facing affiliates introduced by them to enter into OTC derivative transactions with clients are authorized in a similar way as an OTC derivative dealer in Hong Kong.
Commenting on the announcement, Ashley Alder, the SFC’s Chief Executive Officer said: “These requirements enhance Hong Kong’s regulatory regime for OTC derivatives activities by protecting investors and strengthening the management of conduct and financial risks in dealings with related parties.”
The initial consultation on OTC derivatives regime for Hong Kong was published on December 20, 2017, and closed on February 20, 2018. According to the SFC, respondents to the consultation, which included asset management firms, market participants and more, “generally agreed” with the proposed requirements.
The code of conduct requirements regarding the risks that are posed by group affiliates and connected persons will come into effect six months after the gazettal of the Code of Conduct amendment, the statement said.