LFX trading is regulated with ordinances and subsidiary legislation, rules,



codes and guidelines enforced by the SFC and HKMA.
Legislation:
1.
S & F (LFXT) (Arbitration) Rules
2.
S & F (Financial Resources) Rules
3.
S & F (Contract Notes, Statements of Account and Receipts) Rules
Guidelines and Others:
1.
Fit & Proper Guidelines
2.
Guidelines on Competence
3.
Guidelines on Continuous Professional Training
4.
Guidance Note on Prevention of Money Laundering and Terrorist Financing
5.
6.
7.



or Registered with the SFC.
8.
Suggested Control Techniques and Procedure for Enhancing a Firm’s
Ability to Comply with the S & F (Client Securities) Rules & the S & F
(Client Money) Rules
SFCO pointed SFC independent statutory body in May 1989
SFC came into operation on April 1st, 2003
Objectives of SFC:
1.
2.
3.
4.
5.
6.

Client Identity Rule Policy
Disciplinary Fining Guidelines
Mgmt, Supervision & Internal Control Guidelines for Persons Licensed by
to maintain & promote the fairness, efficiency, competitiveness,
transparency & orderliness of the S & F industry
to promote understanding by the public of he operation & functioning of the
S & F industry
to provide protection for members of the public investing in or holding
financial products
to minimize crime & misconduct in the S & F industry
to reduce systemic risks in the S & F industry
to assist the FS in maintaining the financial stability of hk by taking
appropriate steps in relation to the S & F industry.
Four operational divisions of the Organization of the SFC
1.
Corporate Finance
2.
Intermediaries & Investment Products
 Licensing Dpmt
 Intermediaries Supervision Dpmt
 Investment Product Dpmt
3.
Enforcement
Supervision of Markets
Functions of the SFC
1.
to maintain & promote the fairness, efficiency, competitiveness,
transparency & orderliness of the S & F industry
2.
to supervise, monitor & regulate the activities carried on by recognized
exchange companies, recognized clearing houses, recognized exchange
controllers or recognized investor compensation companies, or by persons
carrying on activities regulated by the SFC
3.
to promote & develop an appropriate degree of self regulation in the S & F
industry
4.

4.
5.
6.
7.
8.
9.
10.
11.
12.

to promote, encourage & enforce the proper conduct, competence &
integrity of persons carrying on activities regulated by the SFC
to encourage the provision of sound, balanced & informed advice regarding
transactions or activities related to financial products
to maintain & promote confidence in the S & F industry
to co-operate with and provide assistance to local or overseas regulatory
authorities or organizations
to promote understanding by the public of the S & F industry and of the
benefits, risks & liabilities associated with investing in financial products
to encourage the public to appreciate the relative benefits of investing in
financial products thru persons carrying on activities regulated by the SFC
to promote understanding by the public of the importance of making
informed decisions regarding transactions or activities related to financial
products and of taking responsibility therefore
to secure an appropriate degree of protection for members of the public
investing in or holding financial products, having regard to their degree of
understanding & expertise in respect of investing in or holding financial
products
to promote, encourage & enforce the adoption of appropriate internal
controls & risk mgmt systems by persons & registered institutions carrying
on regulated activities
13.
to suppress illegal, dishonorable & improper practices in the S & F industry
14.
to assist the FS in maintaining the financial stability of hk
15.
to recommend reforms of the law relating to the S & F industry
16.
to advise the FS on matters relating to the S & F industry
Power of the SFC
1.
acquire, hold & dispose of property of any description
make contracts or other agreements
2.
receive & expend moneys
4.
with the approval of the FS, borrow money on security or other conditions
5.
publish or make available materials indicating to persons who are, or who
carry on activities, regulated by the SFC to any other persons
6.
publish or make available materials indicating to the public any matter
relating or incidental to the performance of any of the functions of the SFC
There are no fewer than 8 members on the board of SFC & the majority must
be Non-executive directors.
SFC reports regularly to the FS & LegCo & must seek prior approval of FS if
expenditure exceeds more than 10%.
3.


SFC is monitored & reviewed by PRP, SFAT & ICAC
Market Misconduct Tribunal handles insider dealing, market manipulation,
dissemination of false & misleading info & other forms of misconduct on a







civil route.
The Tribunal consists of a chairman & 2 other members.
HKMA was established on April 1st, 1993 & governed by Exchange Fund
Ordinance & the Banking Ordinance.
Functions of the HKMA
1.
to keep the hk dollar stable
2.
to manage the Exchange Fund – hk’s official reserves in a sound & effective
way
3.
to promote the safety of hk’s banking system developing hk’s financial
infrastructure to enable money to flow smoothly, freely & without
obstruction.
Policy Objectives of HKMA
1.
to maintain currency stability
2.
to promote the safety & stability of the banking system
3.
to enhance the efficiency, integrity & development of the financial system.
S & F (Unsolicited Calls – Exclusion) Rules
1.
2.
3.
4.
5.
6.
7.

a solicitor acting in his professional capacity
an accountant acting in his professional capacity
a licensed person
a registered institution
a money lender
a professional investor
an existing client
S & F (Recognized Counterparty) Rules
1.
a corp. licensed for dealing futures contracts
an equivalent corp. that deals in currency futures contracts
3.
a bank that is incorporated in a specified jurisdiction
4.
a corp. that has issued debt instruments
5.
an institution in respect of which the SFC is satisfied that recognition as a
counterparty. Eg, Bear Stearns Forex Inc, HSBC Broking Securities (Asia)
Ltd.
S & F (LFXT – Exemption) Rules
1.
a corp. that a) has a qualifying credit rating, wholly owned shares; b)
principal business not in LFX spot transactions or average principal amt is
not less than $7.8 million each financial year.
2.

2.
3.

a licensed person performs an act for the sale, purchase or transfer of a
listed currency warrants
a client of a licensed corp. performs an act for the sale, purchase, or transfer
of a listed currency warrants
4.
a corp. which is the issuer of any listed currency warrant
S & F (LFXT) (Arbitration) Rules, the dispute writing should include:
1.
a demand that the dispute be referred to arbitration
2.
the names & address of the parties
3.
a reference to the arbitration clause that the client is relying on
4.
a reference to the client contract
a brief summary of the dispute
S & F (Client Securities)
Client’s securities should be
1.
deposited in safe custody in a segregated a/c by the intermediary or
associated entity for the purpose of holding client securities of the
intermediary with
 an authorized financial institution
 an approved custodian
 another intermediary licensed for dealing in securities
5.


registered in the name of the client or the associated entity
Client’s securities collateral should be
1.
deposited in safe custody in a segregated a/c
2.
deposited in an a/c in the name of the intermediary or associated entity
3.
registered in the name of the client, the intermediary or the associated entity.
Sell/settle a sale order should have client oral or written direction.
Withdraw should have written direction or a standing authority from the client.
S & F (Client Money) Rules
2.




Within 1 business day deposit the money into a segregated a/c.





Within 1 business day gives written notice to SFC if it does not comply with
the Rules.
S & F (Associated Entities – Notice) Rules
Licensed corp. or registered institution should provide the following
information to SFC:

Its name & business name

Its CE #

The date it became an associated entity of the intermediary

The name of the intermediary
Non licensed or RI









Name & business name
Date & place of its incorporation
Address of office
Address of its principal place of business in hk
Its correspondence address
Tel # & fax # email & website
The date it became an associated entity of the intermediary
The name of the intermediary
Executive officers (any?) if yes, name of the officer, hkid, residential
address, correspondence address
Name of the person of the controlling entity, if individual, hkid, residential
address, correspondence address; if corp., business reg #, principal office
address, correspondence address

The address of each of the premises where books & records related to client
assets

The facts that gave rise to the corp. becoming an asso. Entity

Any matter that might render it insolvent

The name of the bank & # of the a/c
S & F (Financial Resources) Rules







Paid up share capital not less than $30M
Introducing agent, the min paid-up capital is $5M
RLC >=$15M or VRLC whichever is higher
VRLC = (5% of total adjusted liabilities + 1.5% of aggregate gross FX
position)
Write to SFC within 1 business day if
1.
LC < RLC*120%
2.
LC < LC (Last return)*50%
3.
misleading or false materially of last return
inability to meet calls or demand for payments or repayment from its
lenders for 3 consecutive business days
Penalty for non-compliance with specified amts requirement

A fine of $1M & 2 yrs imprisonment, if continuing offence, a further fine of
$100k everyday

On summary conviction to a fine at level 6 ($50k-100k) & 6 mths
imprisonment, if continuing offence, a further fine of $10k everyday
Fail to comply with other notification requirement

A fine of $200k & imprisonment 1 yr.

On summary a fine at level 5 ($25k to 50k), 6 mths imprisonment
4.



S & F (Keeping of Records) Rules-a/cting, trading & other records

Explain & reflect the financial position

Enable profit & loss a/cs & balance sheets








a/c of all client assets that it receives or holds
enable all movements of such client assets to be traced thru its a/cting
systems &/or stock holding system
reconcile on a monthly basis
demo compliance with provisions in S&F (Client Money) Rules, S&F
( Client Securities) Rules
enable it to establish whether it has complied with S&F (FRR)
Specials for LFXT

Keep records to show in relation to each recognized counterparty which
conducts any transaction

Each business day record market value of each open position at end of the
day for the corp.’s a/c & the a/c of each client & recognized counterparty
Records for LFX contract

The bid & offer prices quoted to client

The price at which the contract is executed

The bid & offer prices at the time of execution of the contract as quoted &
disseminated to the public, or to subscribers, by a reputable financial
information services org.

Interest rate differentials which are charged or paid by the trader for being
long or short, 1 currency against another on each business day
Record Retention Period

Not less than 2 yrs (except for those records showing particulars of any
orders & instructions)

Under the S&F (Keeping of Records)Rules, records should be kept for not
less than 7 yrs


Notification of non-compliance

Writing to SFC within 1 business day
S & F (A/C & Audit) Rules

Financial statements & other documents, audit’s report shall be prepared no
later than 4 mths after financial year end
1.
a set of audited a/cs
2.
returns according to FRR
3.
a business & risk mgmt questionnaire

Auditor’s report: (containing a statement by auditor)
1.
failure to comply with prescribed requirements
matters adversely affects to a material extent to the financial position
3.
failure to comply with the S&F (FRR)
S&F (Contract Notes, Statements of A/C & Receipts) Rule
2.




Contract notes no later than the end of the 2nd business day, content
includes:
1.
the name of the intermediary
2.
the name & a/c of the client
3.
the date & time of receipt of the client’s order & of execution of the
LFX contract
4.
the currencies, amts, whether it is a sale or purchase, the price & the
interest rates
5.
the amt of margin deposit required
Statements of a/c
1.
daily stmt no later than the 2nd business day
2.
monthly stmt no later than the end of the 7 business day after the end
of the monthly a/c period
Stmt contents include:
1.
the outstanding balance & net equity in that a/c at the beginning & the
end of the period
details of all relevant contracts
3.
all floating profits & losses of open positions & the revaluation prices
4.
the min margin requirement for all open positions held
5.
the amt of margin excess or shortfall
Receipts
1.
if receives any client assets or security
2.
no later than the end of 2nd business day
3.
no need receipt if direct deposit into bank a/c of the intermediary
2.

4.



contract note or stmt also serves as a receipt
S&F (Licensing & Registration) (Information) Rules

Any changes should write to SFC within 7 business days
S&F (Miscellaneous) Rules

Including the manner of service & execution document

The requirement of display of licenses or certificates of reg.

The circumstances need to returned to the SFC for cancellation or
amendment

Certain persons as within the meaning of “auditor”
S&F (Fees) Rules

Carry on Type 3 for a corp. is $129,730
For a representative is $2,420

For a responsible officer is $2,950 for each regulated activity
Licensing of Intermediaries (CH18)


Fit & Proper Guidelines

Guidelines on Competence
Fitness & Properness

Financial status or solvency

Educational or other qualifications or experience regard to the nature of
functions to be performed

Ability to carry on the regulated activity competently, honestly & fairly


Reputation, character, reliability & financial integrity
Continuing req. SFO to take disciplinary actions if

Guilty of misconduct

SFC is of the opinion that the person is not a fit & proper person to be
/remain the same type of regulated person
A range of sanction

Revocation or suspension of the license or reg of all or part of the regulated
activities

Revocation or suspension of approval granted as a responsible officer



Public or private reprimand

Prohibition from apply for a license or reg.

Prohibition from applying for approval as a responsible officer or to be act
as a resp. officer

Prohibition from having his name entered in the register maintained by
HKMA

Order the payment of a pecuniary penalty
Competence Req.


Corporation: Organizational Structure











Corporate governance
Business profile & risk profile
Risk mgmt & control strategy
Risk mgmt policy & procedures
Reporting & control functions
Internal audit & compliance functions
Internal control system
Conflict of interest
Info tech support
Personnel
Qualified staff
2.
Training policies
Individual
1.

Has a good understanding of the regulatory framework

Ethical standards

Knowledgeable of financial products & markets
Responsible officer

Academic/industry qualification

Industry experience 3 yrs

Mgmt exp. 2yrs


Regulatory knowledge
Representative

Academic qualification

Industry qualification

Regulatory knowledge
Code of conduct

Honesty & fairness

Diligence

Capabilities



Info about clients

Info for clients

Conflicts of interest

Compliance

Clients assets

Responsibility of senior mgmt
Risk disclosure stmt should be included in the client agreement

Declaration by staff






Acknowledgement by client
Client identity guidance notewho is control the transaction, who is beneficial,
who is related.
LFXT additional requirements
Part 1-general conduct of business req.

Client agreement

Stmt of client info

Discretionary a/c – separate written agreement

Client orders

Payment to clients within 1 business day

Client’s margin 5% & 3%



No credit on margin
Restricted use of margin collateral
Personal trading by staff
Advertisement

Taping – keep at least 3 mths

Trading practices

Record of client’s complaints
Handling discretionary a/c, licensed person should obtain a signed copy of a power of
attorney or other doc by which trading authority is given or restricted.

Whenever net equity falls > 30% in 1 month, notify the client the net equity, amt loss
& amt of income, should not initiate new contracts, assigns senior mgmt to review &
approve every contract executed once in every 3 business days, should not maintain a
trading position if “lock position” unless requested by client.

Part 2 – specific guidelines

Client relations

Should know client’s investment objectives, strategy & financial position

Set trading limits for each client

Ensure adequate lines of communication with clients
Maintain client’s info confidentially

Notify clients & the SFC immediately if decides to withdraw
Trading procedures

Prices quoted & interest rates should be fair & reasonable

Oral agreements are considered binding
Staff trading & other activities

Trading limits should be set for rep. or employees who are allowed to trade

Staff trading should not be prejudicial to the interest of clients





Policy on outside employment
Mgmt control

Ensure employees are qualified & well trained & they are to act
professionally at all times

Internal control to capture, monitor & control risks, to protect it from
financial loss arising from theft, fraud & other dishonest acts or omissions

Formulate operating procedures, contingency plans to cater for disasters &
emergencies, in a comprehensive operations manual and regular reviews

Set out in writing the policies & practices which staff can follow

A comprehensive framework of limits to control the overall foreign
exchange








Senior managerial staff are located in the trading room to ensure the
efficient & proper functioning of the trading room
Access to the trading room is restricted to authorized personnel only
All open positions are monitored & revalued continuously
Daily reports comparing actual positions against internal limits prepared &
reviewed by mgmt, excesses & irregularities reported to senior mgmt.
Trades are processed promptly
All positions are reconciled with back office records
Internal audit functions to ensure accuracy & completeness of transaction
Effective segregation of duties
Effectiveness & accuracy of reporting of excesses, irregularities & potential
exposures
Market integrity – communication is clear & understandable to clients
Continuous professional training (CPT) – objectives

To maintain & enhance tech. knowledge & prof. expertise

To provide reasonable assurance to investors

To maintain & enhance hk’s international reputation for high prof. standards
Obligations of corp. – keep records of CPT activities min 3 yrs
Obligations of ind. – each type min 5 CPT hrs per yr except for Type 7







Prevention of money laundering & terrorist financing

Stages
1.
placement
2.
layering – foreign exchange most likely happen in this stage
3.
integration
Relevant & related legislation

The drug trafficking ordinance (recovery of proceeds)

The organized & serious crimes ordinance




The united nations (Anti – terrorism measures) ordinance
Policies & Procedures expected of licensed corp.

Issue a stmt of policies & procedures for dealing with money laundering &
terrorist financing

Prevention of money laundering & terrorist financing guidance note issued
by the SFC is understood by all staff members

Regularly review the policies & procedures

Develop staff members awareness & vigilance
Client identity Rule Policy within 2 business days

At the close of trading day

The following business day
General considerations of seriousness of conduct

Conduct that is intentional or reckless

Conduct that damages the integrity of the securities & future market
Causes loss to, or imposes cost on others

Provides a benefit to the firm or individual engaged in that conduct or any
other person
Less serious

Negligent conduct

Results in a tech. breach, cause little or no damage no cost to others

Produces little or no benefit to anyone






Specific considerations

The nature & seriousness of the conduct

The amt of profits accrued or loss avoided

Other circumstances such as the size, financial resources, the degree of
cooperation with the SFC, exp. & position etc.

Other relevant factors such as any similar cases, any other regulatory action
taken by other competent authorities etc.
Compliance with the S&F (Client Securities) Rules & the S&F (Client $) Rules

SFC has issued a note called Suggested Control Techniques and Procedures
for enhancing a Firm’s ability to comply with the rules.
Provisions of client instructions

When a client gives a firm a standing authority or direction on how his asset
are to be handled.

When a client asks a firm to amend his particulars

When a client asks a firm to withhold his mail for collection by himself or a
designated third party.
Clients’ standing authorities/directions

According to the requirement sets out in the Client Assets Rules
The valid period & the dates about the renewal or revocation of standing
authorities
Updating of client particulars (including client contract details)

Dual control on any amendment of client particulars

Input amendment should be reviewed & authorized

Undelivered contract notes/stmts should follow up to ensure correct contact
detail
Controls for complying with the Client Money Rules

Direct deposit of funds by client, promptly advise its settlement dpmt
directly






Issue of cash cheque/3rd party cheques, should obtain client’s signed written
instructions & a responsible staff member gives written approval
Unidentified receipts-if not matching client, but with client $, should
transfer to a segregated a/c.

Maintenance of segregated a/c – update of ledger a/cs, reconciliation of
balances on client and bank ledger a/cs

Bank reconciliation & review-monthly basis, bank stmt. Material or long
overdue should be monitored & documented.
Internal Control Guideline

Management & Supervision
mgmt commitment & involvement
2.
effective & regular communication
3.
clear reporting line & responsibilities
4.
well defined policies & procedures
5.
qualified & exp. Mgmt & supervisory staff
Segregation of duties & functions
1.
between policy formulation, supervisory & other internal review or
advisory function (including compliance & internal audit) &
operational duties
1.

among operational functions including sales, dealing, accounting &
settlement
3.
between sales & dealing functions & research function
4.
compliance & internal audit report directly to mgmt
Personnel & Training
1.
ensure employees are fit & proper to perform their duties
2.
provide employees with adequate & updated policies & procedures
3.
Adequate training
2.


Information mgmt
info mgmt by qualified & exp. staff
2.
suitable mgmt systems
3.
clearly defined reporting requirement & timely reporting
4.
documentation & regular review of system design & implementation
5.
appropriate & effective EDP & data security policies & procedures
6.
effective record retention policies
Compliance
1.
appropriate & effective compliance function should be established &
maintained
2.
compliance function carried out by competent & exp. staff
1.

3.
4.
5.


Audit
1.
independent & objective internal audit function
2.
well-defined internal & external audit roles & responsibilities
3.
performed by persons with necessary competence & exp.
4.
adequate planning, control & recording of all audit & review work as
well as timely reporting
Operational Controls
1.
2.
3.
4.
5.
6.
7.

complete coverage of all areas
proper client compliant policies & procedures
timely reporting of non-compliance
processes to obtain & confirm client identity & other info
precise terms & conditions for handling discretionary a/c
actual or potential conflicts of interests should be handled properly
client orders are handled fairly & equitably
prevention or detection of errors, omissions, fraud & other
unauthorized or improper activities
appropriate & effective procedures to protect the firm’s & its clients’
assets
regular reconciliation of records
Risk Mgmt
1.
appropriate & effective mgmt policies
2.
risks are maintained at acceptable & appropriate level
3.
trading & position limits for proprietary trading should be established,
monitored & reviewed
4.
periodic comprehensive review
5.
regular exposure & timely excess reporting
6.
mgmt defines risk policies & oversees risk mgmt function

