- 1 - LICENSING MATTERS

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1 - 1 - s about LICENSING MATTERS 1. What are incidental activities which can be conducted by a securities margin financier? 2. Can a financier allow its clients to draw cash where it can be supported by the admissible value of collateral on hand? 3. Please explain in more detail what the SFC looks at to determine whether the business is conducted in Hong Kong as against overseas. 4. What is the penalty for unregistered financiers carrying on SMF in HK? An example would be the liquidation of client positions in case of default. If in doubt about a specific activity, speak to the SFC and seek clarification. Securities margin financing ( SMF ) is defined as providing financial accommodation for facilitating the acquisition and continued holding of listed securities. The financier may allow a client to draw against his margin account to facilitate the continued holding of securities acquired under the margin account. The purpose for which a client draws against a margin account is a question of fact and a prudent financier will make appropriate enquiries of the client. It must be noted that any advance in excess of the realisable value of the securities collateral would generally as a matter of fact fall outside the scope of "providing financial accommodation for facilitating the acquisition and continued holding of listed securities". Making such advance may be in breach of the sole business requirement under s121e and such breach is an offence under the Securities Ordinance. Drawings made in other situation need to be considered on a case-by-case basis against the definition of securities margin financing. Examples are where the management and the customers are located, where the transactions are consummated and the place where the business is being conducted. This has been laid out in s121c, a $1M fine and imprisonment for 2 years on conviction on indictment.

2 - 2 - s about 5. If the staff of a financier is registered as a dealer s representative, will he need separate registration as the financier s accredited director or representative? Yes, a person is required to be registered as a representative of a financier if (a) he acts on behalf of the financier performing functions relating to the business of SMF, other than work normally performed by an accountant, clerk or cashier; or (b) he is a director of the financier actively participates in or is directly responsible for supervising the financier's SMF business. At least one of such director of the financier must be an approved director under s121i. However, if his margin finance activities are performed under the dealer umbrella where the dealer fulfils all relevant requirements, then no separate registration is required. 6. Dealers are required to notify the SFC whether they provide SMF. Is this requirement compulsory and how do dealers notify the SFC? 7. If an overseas financial institution sets up a subsidiary in HK to introduce SMF business back to its overseas parent company, and SMF is provided by the overseas company directly to clients in HK, does the overseas company need registration in HK? 8. What is the difference between the approved director of a financier versus a financier s representative, and what are the differences in their duties? 9. Can a loan provided to the offeror for the financing of the General Offer get any exemption? 10. Where can a dealer or financier find his CE number (which is required to be stated on his liquid capital return)? Whilst the notification requirement is not compulsory, it is in the dealer's interest to seek the Commission's endorsement. This is because if it transpires later that the dealer is not fit and proper to carry on SMF business, this may have adverse consequence on its registration and therefore on its operation as well. Whether the overseas company or its subsidiary is considered to be carrying on a business of SMF is a matter of fact. Factors to be considered include management presence, business solicitation and places where the contracts are entered into. A representative performs for the financier any functions carried on by the financier while an approved director in addition to being a financier s representative is specifically charged with the direct responsibility of supervising the financier s business. No. For exempted activities, please refer to Schedule 4 of the Securities Ordinance. This number can be found in the second part of the Commission s reference after the slash which is quoted on all correspondence issued by the Licensing

3 - 3 - s about Department of the Commission. SECURITIES MARGIN FINANCING 11. Take a dealer that has a small number of cash clients who normally do not settle on time. They keep the positions for a day or two, sell and settle the difference. It may be a few out of hundreds of clients and this is only offered to special clients of good credit standing and no margin client agreement is signed. Will this dealer be considered to be conducting SMF? It very much depends on the circumstances. If the dealer makes a conscious decision to offer this facility to his clients, the Commission will be inclined to think that he is conducting SMF. If some clients are merely late in settlement and no interest is charged, then the dealer would generally not be deemed to conduct any SMF business. In summary, the Commission will need to look at the circumstances of each case, relevant considerations include frequency/ regularity of late settlement. PROTECTION OF CLIENT SECURITIES 12. Can a client widen the scope of s81a(6), SO by written consent (i.e. contracting out)? 13. Does the Commission have the authority to grant amendment or modification to allow securities collateral to be pledged with an overseas banks or overseas financial providers? 14. Does the dealer need annual authorization from clients for lending or depositing clients securities with CCASS? 15. Does s81 apply to securities owned by cash clients? For example, if the cash client so authorises, can the dealer liquidate the client s securities to settle his debts? No The Commission has the authority to modify ss81a and 121AB after reviewing the circumstances on a case-by-case basis. Note that this will probably also require a FRR modification in order to relax the restriction in the definition of collateral. Yes, provided that the debts are in relation to dealing in securities or provision of financial accommodation (see s81(5)).

4 - 4 - s about 16. Can client authorisation under s81 and s81a be included in the client agreement or must it be contained in a separate document? A separate document. PROTECTION OF CLIENT MONEY 17. Regarding credit balances to be segregated within 4 days. Say client A had credit balance of $1 million on Day 1 but withdrew $1 million on Day 3, does that free the financier from the need to segregate funds for this client for Day 1 to Day 4? 18. The segregation of client money after 4 business days. Is the reference point trade date or settlement date? Neither, it should be the date of receipt/payment. STATEMENT OF ACCOUNTS 19. If a change (such as a change in the margin rates) does not trigger a margin call or have a significant effect on client position, does the firm still need to issue statements of account? 20. If a dealer does not set expiry date or facility limit (he only looks at the discounted value of collateral on hand), how can he comply with the requirement in the Securities Ordinance? 21. Can the daily and monthly statements of account sent to clients in electronic form (via or fax)? Also, can the same be kept for record in electronic form? 22. Must dealers providing discretionary fund management services but no SMF issue daily statements of account? The dealer is recommended to make this clear to his clients (preferably by including a statement to this effect in the statement of account). Given that the despatch by and fax should actually provide a better audit trail, the Commission does not have any objection in principle provided that the clients consent to this in writing. No, they need only comply with the existing requirements as stated in the Code (or where applicable, the SEHK or HKFE Rules).

5 - 5 - s about GENERAL - MISCELLANEOUS 23. For SEHK and HKFE trades, there is a charge payable to the Exchange. Should this be included under commission paid as it is customary for this charge to be included there? No, to be included in overheads.