Newsletter – July 2016

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.

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