Archive for year: 2016

Content

1. SFC reprimands and fines Morgan Stanley Hong Kong Securities Limited HK$18.5 million over internal control failures
2. Market Misconduct Tribunal finds Andrew Left of Citron Research culpable of market misconduct
3. Market Misconduct Tribunal finds no insider dealing in Warderly shares
4. SFC bans Wong Lap Yin for three years
5. SFC Fines Quam Capital Limited HK$800,000 over sponsor failures
6. SFC suspends Ko Cho Ting for two years
7. SFC bans and fine Lam Chun Yin and Yeung Chok Cheong
8. SFC suspends Ku Yuen Leung for 18 months

1. SFC reprimands and fines Morgan Stanley Hong Kong Securities Limited HK$18.5 million over internal control failures

On 24 August 2016, the SFC reprimanded and fined Morgan Stanley Hong Kong Securities Limited (“MSHK”) HK$18.5 million over internal control failures in several areas.

Background

An SFC investigation found that MSHK has failed to comply with the Management, Supervision and Internal Controls Guidelines for Persons Licensed by or Registered with the SFC (“Internal Control Guidelines”), the Code of Conduct for Persons Licensed by or Registered with the SFC (“Code of Conduct”) and its obligation as an exchange participant.

The SFC’s investigations found that MSHK failed to:

• adequately avoid conflicts of interest between principal and agency trading and obtain client consent for a facilitation execution when MSHK’s traders responsible for agency execution also traded the stocks contained in the client’s basket order on a principal basis in June 2013;
• comprehensively document the design and operation of the price checks and controls applied to orders executed through its electronic trading systems after the electronic trading provisions in the Code of Conduct took effect in January 2014;
• ensure compliance with the disclosure requirement in relation to approximately 29,000 short selling orders between January and November 2014;
• ensure compliance with the position limits, which resulted in one stock option contract exceeding the limit by more than 300 contracts on a trading day in February 2015;
• report the reportable Large Open Positions of two of its affiliate companies to the Exchange between December 2010 and December 2015 which lasted for a long period of time;
• keep positions held on a gross basis in accordance with the instructions of a client from April 2012 to December 2015; and
• follow the instruction of an asset manager to report the Large Open Positions on a delegated basis from June 2012 to March 2016.

Comments

Relevant codes, guidance and obligations

The Code of Conduct, which was revised in March 2016, set out the general principles in considering whether a licensed or registered person satisfies the fitness and properness requirement to remain licensed. The Code is developed and recognized by the International Organization of Securities Commissions and other principles the SFC believes to be fundamental to the undertaking of a licensed person’s business.

The Internal Control Guidelines, which has taken effect since April 2003, provides that key duties and functions shall be appropriately segregated, particularly those duties and functions which when performed by the same individual may result in undetected errors or may be susceptible to abuses which may expose the firm or its clients to inappropriate risks.

Conflicts of interest and client consent

Readers are reminded that, pursuant to paragraph 8 of Appendix to the Internal Control Guidelines, a licensed corporation should avoid apparent and potential conflicts of interest by establishing and maintaining adequate “Chinese Walls”, such as the separation of dealers handling discretionary orders from those handling principal accounts. Further, under General Principles 2 and 6 of the Code of Conduct, it is required to have a separate agency execution and principal trading and to obtain client consent for a facilitation execution.

Documentation of the electronic trading systems

Readers are reminded that, as a licensed corporation that conducts electronic trading of securities is required under paragraph 18 of the Code of Conduct to keep proper records on the design, development, deployment and operation of its electronic trading systems, and have controls that are reasonably designed to ensure its algorithmic trading system and trading algorithms operate in the interest of the integrity of the market.

Further, pursuant to paragraph 3.3.1 of Schedule 7 to the Code of Conduct provides controls should be reasonably designed to monitor and prevent the generation of or passing to the market for execution order instructions from its algorithmic trading system which may interfere with the operation of a fair and orderly market.

Moreover, paragraphs 1.3 and 3.4 of Schedule 7 to the Code of Conduct provide that a licensed corporation should, among other things, keep comprehensive documentation of the design and development of its electronic trading systems and the risk management controls of its systems, and ensure that the design and development of its algorithmic trading system and trading algorithms are documented in writing and that the documentation should show the rationale for the design, development and modification and their intended outcome.

Disclosure of short selling orders

Readers are reminded that pursuant to General Principles 2 and 7 of the Code of Conduct, which require licensed corporation to act diligently and to comply with the applicable regulatory requirements.

Compliance with contract limits

Readers are reminded that a licensed corporation is expected to put primary responsibility on its traders to ensure compliance with the position limits. Being the execution broker, the relevant licensed corporation should have adequate controls to prevent orders that have the effect of exceeding the position limit from being passed to the HKEx and shall not relying primarily on traders to ensure trading will be stopped or the position will be reduced when the limit is approaching.

Reporting of Large Open Positions

Readers are reminded that, as required by the HKEX, any HKFE Participant / Options Exchange Participant holding positions in excess of the reporting level for its own account or for any of client shall file a written report (i.e. Large Open Position report) no later than noon of the next business day after the positions are opened or accumulated, and continue to file a Large Open Position report for as long as the HKFE Participant / Options Exchange Participant holds positions in excess of the reporting level.

Client instructions

Readers are reminded that, under the Guidance Note on Large Open Position Reporting Requirements, a person holding or controlling a reportable position in accounts at more than one Exchange Participant can ask all of its brokerages to report positions in each of the accounts to the HKEx even though positions in the individual accounts may not have reached the reportable level.

Conclusion

In respect to the above-mentioned breaches, MSHK agreed to engage an independent reviewer to conduct a forward looking review of its internal controls. This indicates that the SFC is particularly concerned about compliance with the Internal Control Guidelines.

For a copy of the statement of disciplinary action, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR83&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR83

2. Market Misconduct Tribunal finds Andrew Left of Citron Research culpable of market misconduct

The Market Misconduct Tribunal (“MMT”) has found that Mr Andrew Left of Citron Research disclosed false or misleading information inducing transactions and so engaged in market misconduct under Securities and Futures Ordinance (“SFO”) following proceedings brought by the SFC.

Background

On 21 June 2012, Left published a report on Citron Research’s website (www.citronresearch.com) that contained false or misleading information about Evergrande Real Estate Group Limited (“Evergrande”). The report stated that Evergrande was insolvent and had consistently presented fraudulent information to the investing public.

The Citron report spoke of Evergrande “intentionally and systematically” hiding important financial information from investors, and claimed Evergrande insolvent. Evergrande’s stock price declined by as much as 8.3% in the morning after the report was circulated in the market. Left short-sold 4.1 million Evergrande shares prior to the release of the report and covered the position after the report is released. This caused the SFC to commence an investigation into the case.

Comment

The MMT found that Left used sensationalist language in his report that Evergrande was insolvent and engaged in accounting fraud. It found these allegations were false and misleading and likely to alarm ordinary investors. Left had made these allegations recklessly or negligently with no understanding of the Hong Kong accounting standards that applied and without checking them with an accounting expert or seeking comment from Evergrande.

The MMT will hear from both the SFC and Left as to orders to be imposed on Left on a date to be agreed.

Readers are reminded that pursuant to Section 277 of SFO, a person shall be regarded as having engaged in market misconduct if he discloses, circulates or disseminates false or misleading information as to a material fact which is likely to induce another person to deal in securities in Hong Kong, knowing that, or is reckless or negligent as to whether, the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact. By publishing false and misleading information in the public domain, Left is alleged to have committed market misconduct within the meaning of Section 277 of SFO.

For a copy of the MMT’s report, please refer to:

http://www.mmt.gov.hk/eng/reports/Evergrande_Report.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR84

3.  Market Misconduct Tribunal finds no insider dealing in Warderly shares

The MMT has decided that the listing matters concerning Warderly International Holdings Limited (“Warderly”) did not involve insider dealing.

Background

The MMT has handed down its decision that Lo Hang Fong, a former Company Secretary of Warderly, and Luu Hung Viet Derrick, a lender and potential investor of Warderly, had not engaged in insider dealing in the shares of Warderly in 2007.

The SFC is studying the report.

Comments

The SFC’s allegations were that Lo and Luu were aware of Warderly being in a perilous financial position with banks withdrawing credit facilities when they sold the company’s shares in 2007 and avoided a total loss of HK$12,564,516 and that Lo and Luu knew the financial crisis facing Warderly was material, highly price sensitive and not generally known to the market.

During the proceedings, the legal issue presented before MMT was to determine whether the concerned events in the case amounted to “relevant information which would if generally known to persons accustomed to or likely to deal in the listed securities of Warderly would be likely to materially affect the price of the listed securities” at the time Lo and Luu dealt in their shares.

The MMT considered reports produced by three different experts among whom one of them deemed the information as relevant while the other two took a contrary view. The MMT however deemed the opinions from the expert who is for the view that the concerned information is relevant as entirely persuasive based on the reasons that he failed to take into consideration various external factors, erred in his calculation and failed to convince the MMT as to the materiality of the information’s effect on price.

Alternatively, the MMT adopted the opinions of the other two experts in that the information regarding the dire financial situation of Warderly was firmly in the public domain given the poor annual report, the poor interim report and the published issue of the writs for non-payment of bank debts. The MMT also acknowledged the opinion that Warderly was seen to be a shell company and its value was to be evaluated as its potential to be reinvested and so rendered the concerned events in the case as entirely superfluous information.

In conclusion, the MMT held that based on the above grounds the concerned events in the case did not constitute relevant information which was if generally known would be likely to materially affect the price of the shares at the time of dealing and decided that no market misconduct had been identified in this case.

For a copy of the MMT’s report, please refer to:

http://www.mmt.gov.hk/eng/reports/Warderly.International.Holdings.Limited.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR77

 

 

 

8. SFC suspends Ku Yuen Leung for 18 months

The SFC has suspended the licence of Ku Yuen Leung, an account executive of BOCOM International Securities Limited (“BOCOM”), for 18 months from 23 August 2016 to 22 February 2018 for engaging in manipulative activities.

Background

The disciplinary action follows an SFC investigation which found that between 5 and 26 November 2010, Ku created a false or misleading appearance in the market with respect to the shares of Agricultural Bank of China Limited (“ABC”) by placing large-sized bid orders for ABC shares to drive up the prices of five related call warrants.

All the bid orders in ABC shares which were cancelled immediately after Ku sold the related warrants at inflated prices for profit were apparently not driven by genuine demand but intended to influence the market making decision of their liquidity providers.

Ku made a gross profit of HK$15,500 from trading the warrants.

Comments

In deciding the sanction, the SFC is of the view that Ku’s misconduct has undermined the integrity of the market and that he is not a fit and proper person to remain licensed.

Ku, who had applied to the Securities and Futures Appeals Tribunal (“SFAT”) for a review of the SFC’s sanction, was granted leave to withdraw his appeal on 23 August 2016.

Readers are reminded that all corporations (licensed or unlicensed) and licensed individuals are straightly prohibited from market manipulation under section 274 of SFO.

For a copy of the statement of disciplinary action, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/openAppendix?refNo=16PR82&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR82

 

The article is for general information purpose only and is not intended to constitute legal or other professional advice.

For enquiries, please email: [email protected] or call at +852-3487 6903.
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1. SFC bans Chan Hau Wing for two years
2. SFC Research paper – Half-yearly Review of the Global and Local Securities Markets
3. Hong Kong’s fund management business holds steady in 2015
4. SFC commences MMT proceedings against former senior executive of ENN Energy over alleged insider dealing

1. SFC bans Chan Hau Wing for two years

On 13 July 2016, Chan Hau Wing is banned from re-entering the industry for two years by the SFC over unauthorized trades in a client’s account.

Background

The SFC has banned Mr Chan Hau Wing from re-entering the industry for two years from 13 July 2016 to 12 July 2018 for conducting unauthorized trades in a client’s account (“Account”) and acted contrary to the internal policy of Yue Xiu Futures Company Limited (“Yue Xiu Futures“).

The SFC’s investigation found that in the early hours of 8 February 2014, Chan was given a client order to buy 13 futures contracts in crude oil but he mistakenly placed a sell order.  Instead of reporting the trading error to the management of Yue Xiu Futures in accordance to the company’s internal policy, Chan sought to reduce the trading loss by trading in the client account without any trading authorization from the client.

Chan did not report the matter to Yue Xiu Futures until the afternoon of 10 February 2014 after the client made enquiries with Yue Xiu Futures about the trades conducted in the Account.

Chan’s conduct, which fell short of the standard set out in the Code of Conduct, cast doubt on his fitness and properness to be a licensed person.

In deciding the sanction, the SFC took into account all relevant circumstances, including that Chan had no previous disciplinary record with the SFC. The affected client had been compensated by Yue Xiu Futures.

Comments

Chan is licensed under the Securities and Futures Ordinance to carry on Type 2 (dealing in futures contracts) regulated activity and was accredited to Yue Xiu Futures until March 2014.  Chan is currently not licensed by the SFC nor registered with the Hong Kong Monetary Authority.

Readers are reminded that, under the General Principle 2 (diligence) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), a licensed person should act with due skill, care and diligence in conducting business activities.

Paragraph 7.1 of the Code of Conduct also provides that licensed person should not effect a transaction for a client unless before the transaction is effected the client, or a person designated in writing by the client, has specifically authorized the transaction.

In order to comply with the rules above, licensed persons are advised to obtain client’s approval prior to conduct any trades in client’s account.

For a copy of the statement of disciplinary action, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR68&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR68

2. SFC Research paper – Half-yearly Review of the Global and Local Securities Markets

On 15 July 2016, the SFC published the Half-yearly Review of the Global and Local Securities Markets.

Background

The SFC summarises on the major statistics and performances of the Global and Local securities market during the past first half of 2016:

• During the first half of 2016, the Hong Kong market fell amid volatile global and Mainland markets. Worries about the global economic outlook heightened, reflecting uncertainties about US interest rate hikes. Concerns over the slowdown of the Mainland economy as well as volatile renminbi and stock market weighed on sentiment in the Hong Kong market. In Hong Kong, the Hang Seng Index (“HIS”) and the Hang Seng China Enterprises Index (“HSCEI”) fell 5.1% and 9.8% respectively following the decline in the Mainland market. Volatility in the renminbi and commodity prices added to the losses. Uncertainties about the timing of the US interest rate hikes as well as concerns about rising credit risks and increasing bad debts in the Mainland weighed on the market. Sentiment was affected by uncertainties about Brexit. Expectations over central banks’ stimulus measures and speculation of the launch of Shenzhen-Hong Kong Stock Connect trimmed some losses.
• In the US, the Dow and the S&P 500 (“S&P”) rose 2.9% and 2.7% respectively, while the Nasdaq fell 3.3%. In early 2016, economic data and corporate earnings in the US were weaker than expected. The US market recovered as rate hike concerns receded in March. Investors were more optimistic that the US economy would be able to withstand the impact of higher rates. The UK referendum voted to leave (Brexit) the European Union (“EU”) on 23 June. This heightened volatility not only in the UK but across global financial markets. The market rebounded later as investor sentiment improved on easing concerns about Brexit.
• In Europe, the FTSE rose 4.2%, whilst the DAX and CAC fell 9.9% and 8.6% respectively. In early 2016, the markets dropped amid continued uncertainties over the global economic outlook and worries about deflation. Declining oil prices triggered concerns about a rise in bad debts at banks which were more exposed to energy companies. In March, the markets rose supported by stimulus measures by the European Central Bank (“ECB”). In June, the markets became volatile again amid concerns over Brexit. However, losses were recouped later on easing worries about Brexit and hopes of more stimulus by central banks to support the market and economy. In particular, the UK market rebounded given the support by a weaker British pound, which might translate into stronger overseas revenues.
• In Asia, the Nikkei 225 Index in Japan dropped 18.2% during the first half of 2016. The Japanese market fell on lingering worries over weak global and domestic economic outlook and sliding commodity prices. A stronger yen also aggravated losses. The performance of other major regional markets was mixed during the first half of 2016, ranging from a 2.3% loss in Malaysia to a 12.2% gain in Thailand.
• In the Mainland, the Shanghai Composite Index (“SHCOMP”) and the Shenzhen Composite Index (“SZCOMP”) dropped 17.2% and 14.5% respectively in the first half of 2016. There were concerns about a weaker renminbi and the uncertain economic outlook. Investors were also worried that the government might adopt prudent monetary policies in spite of a sluggish economic outlook. Concerns over default risks in the corporate bond sector also weighed on the market.

• In the US, the timing of interest rate hikes remains uncertain. The US dollar may continue to strengthen, weighing on commodity prices. This may result in capital outflows from emerging markets, some of which rely strongly on commodity exports. Investors are also concerned about the impact of rising interest rates on the US and global economy. As higher volatility will likely continue in overseas and regional markets, the Hong Kong market may be affected.
• In the Mainland, investor sentiment is fragile given mixed economic data and the volatile renminbi exchange rate. There are concerns that the renminbi might further depreciate amid worries about the Mainland’s economic slowdown. Dimmed hopes for proactive government stimulus measures will likely continue to weigh on the market. Investors are also cautious about high bad debts and rising credit default risks which can affect the Mainland banking sector. All of these will continue to affect the outlook of the Hong Kong market, which is closely linked with the Mainland market.
• In Europe, economic recovery remains fragile and worries over deflation persist. It is uncertain as to what extent the supportive policy would be able to offset the impact of any future US interest rate hikes on the economy. If economic growth stalls, the financial health of some indebted EU nations may be affected. In addition, Brexit has complicated the situation and created further political and economic uncertainties in Europe. This heightened uncertainty of the global economic outlook will add more volatility to global and local markets.

The SFC predicts that the performance of the Hong Kong market will continue to be affected by a combination of risks related to the Mainland and uncertainties in overseas markets.

For a copy of the research paper, please refer to:

http://www.sfc.hk/web/EN/files/SOM/RS%20Paper/EN/RS%20paper%2059.pdf

3.  Hong Kong’s fund management business holds steady in 2015

On 22 July 2016, the SFC published the annual Fund Management Activities Survey (FMAS) with findings indicating steadiness in the fund management business in Hong Kong last year.

Background

The SFC released its annual Fund Management Activities Survey which shows that the combined fund management business in Hong Kong decreased slightly by 1.6% year-on-year to HK$17,393 billion as of 31 December 2015.

The survey’s findings indicate that funds sourced from overseas investors accounted for 68.5% of Hong Kong’s fund management business (excluding real estate investment trusts (REITs)). During the year, aggregate private wealth management business including both the private banking business and private client funds, which form part of the asset management and fund advisory business, increased by 4.3% to HK$4,775 billion.

Below is a breakdown of the performance of different market players during 2015:

• Licensed corporations registered a year-on-year decrease of 6.2% in their aggregate asset management and fund advisory business to HK$12,123 billion, representing the largest proportion of the combined fund management business.
• Registered institutions recorded a 12.1% increase in their aggregate asset management and private banking business to HK$4,602 billion.
• Insurance companies reported a 3.5% increase in their assets under management to HK$468 billion.

Some other findings of the survey:

• Asset management business decreased by 4% to HK$12,259 billion.
• The proportion of assets managed in Hong Kong increased consistently over the past three years and reached 55.7% of the asset management business.
• More than 58% of the assets managed in Hong Kong were invested in equities.
• The market capitalisation of SFC-authorized REITs remained steady.

The FMAS report also notes that the SFC is actively pursuing strategies to enhance the market infrastructure for the asset management business in Hong Kong. Following on the implementation of the Mainland-Hong Kong MRF scheme, the SFC will continue to explore similar cooperation arrangements with other jurisdictions. Other initiatives include introducing a new legal and regulatory framework for open-ended fund companies, developing online and alternative fund distribution platforms, and working closely with the industry to broaden the types of fund products.

The FMAS has been conducted annually since 1999 to help the SFC assess the state of the industry for policy and operational planning. This year, a total of 621 institutions responded to the survey on a voluntary basis. They included 555 licensed asset management and fund advisory corporations, 45 registered financial institutions and 21 insurance companies.

Comments

Respondents of this survey fall into three categories: (i) asset management and fund advisory companies licensed under section 116 or 117 of the Securities and Futures Ordinance (“SFO”); (ii)   registered institutions under section 119 of the SFO, which are authorized financial institutions as defined in section 2(1) of the Banking Ordinance; and (iii) insurance companies registered under the Insurance Companies Ordinance providing long term business. Readers shall refer to the appendices at the below link for summary of some key findings from the SFC in graphs.

For a copy of the survey, please refer to:

http://www.sfc.hk/web/EN/files/ER/Reports/2015%20FMAS%20Report_English_Final_20160720.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR71

 

The article is for general information purpose only and is not intended to constitute legal or other professional advice.

For enquiries, please email: [email protected] or call at +852-3487 6903.
To subscribe, update your email address or unsubscribe, please email [email protected]