Deacons Financial Services Client Seminar 2014 Regulatory Compliance Update for Asset Managers

Transcription

1 Deacons Financial Services Client Seminar 2014 Regulatory Compliance Update for Asset Managers Jane McBride, Partner & Head of Financial Services Licensing, Compliance and Regulatory Team 1:00 pm 2:00 pm, Wednesday, 3 December 2014

2 2 Disclaimer These materials are for general guidance only and should not be relied upon as, or treated as a substitute for, specific advice. Deacons accepts no responsibility for any loss which may arise from reliance on any of the information contained in these materials. If you would like advice on any of the issues raised, please contact us.

3 3 Today s topics 1. Insider dealing 2. Personal account dealings 3. Capital raising 4. Investment decisions 5. Buy side trading 6. Electronic Trading Rules 7. New OTC derivatives regime update

4 4 1. Insider Dealing SFO Section 270 three elements 1. when a person connected with a listed corporation 2. having information which she / he knows is inside information in relation to the listed corporation 3. deals, counsels or procures another to deal in the listed securities

5 5 1. Insider Dealing FMCC and ICG Fund Manager Code of Conduct (FMCC) para 3.3 Prohibition A Fund Manager should not effect or cause to be effected any transaction based on confidential price sensitive information or when otherwise prohibited from dealing by statutory restrictions on insider dealing, and should have procedures in place to ensure that staff are aware of such restrictions. Internal Control Guidelines (ICG) para VII (7) Prevention Management establishes and enforces procedures which ensure that proper safeguards exist to prevent the firm or its staff from taking advantage of confidential price sensitive information, or executes transactions as or on behalf of insiders which may contravene Part XIV of the SFO.

6 6 1. Insider Dealing Current Trend 70 Number of investigation / / / / / /2013

7 7 1. Insider Dealing Inside Information Inside information (ss245, 285 SFO) is information about a corporation or any of its shareholders, officers, listed securities or their derivatives which is Specific Not generally known to persons who are accustomed or would be likely to deal in the listed securities of the corporation Likely to materially affect the price of the listed securities if it were known to those who are accustomed or would be likely to deal in the listed securities of the corporation

8 8 1. Insider Dealing Inside Information Specific With enough particularity to be able to be identified and clearly expressed Does not need to be precise it may be broad and allows substantial room for particulars Transactions under negotiation can be specific information but not mere rumour, vague hopes, worries and unproven hypotheses

9 9 1. Insider Dealing Inside Information Not generally known To those accustomed or likely to deal in the listed securities of the corporation By its nature, inside information is known only to a few and not generally known to the market Such market often refers to the general investing public Even certain information is covered by media reports which may have a wide circulation, such information cannot be automatically taken to be information generally known to the market

10 10 1. Insider Dealing Inside Information Materiality A real or substantial likelihood of affecting the price of the listed securities A mere fluctuation and slight change in price not sufficient Able to cause a change of sufficient degree to amount to a material change; and whether it is material is judged by whether it would influence ordinary reasonable investors

11 11 1. Insider Dealing How does it affect you? Section 270(1)(e) / 291(5) A person who has information which he knows is inside information in relation to a listed corporation; and which he received, directly or indirectly, from a person whom he knows is connected with the corporation; and whom he knows or has reasonable cause to believe held the information as a result of being connected with the corporation; and shall not [deal or counsel another person to deal in the listed securities]

12 12 1. Insider Dealing Defences and exceptions Chinese walls Motive test Off market transactions between insiders Dealing with connected persons Trustees and personal representatives Agency Exercise of pre-existing right / contract

13 13 1. Insider Dealing - Dual Civil and Criminal Regime Civil (MMT) Disgorgement Order Cold Shoulder Order Cease and Desist Order Disqualification Order Costs Order Compound Interest Disciplinary Recommendation (ss 257, 259 SFO) Criminal Up to 10 years imprisonment and HK$10 million fine Other orders: Disqualification Order, Cold Shoulder Order, Disciplinary Recommendation (s 303 SFO) Disgorgement Order and Confiscation Order (pending coming into effect)

14 14 1. Insider Dealing - Dual Civil and Criminal Regime Either criminal prosecution or MMT proceedings but not both

15 15 1. Insider Dealing - Tiger Asia ( TA ) Date Disciplined Person Reason for Disciplinary Action 20 December 2013 TA and two senior officers TA were invited to participate in a proposed placement of shares TA short sold the shares before the proposed placement was announced and subsequently covered the short sales with the placement shares Profit made at least HK$30 million Penalty SFC obtained freezing order against TA TA appeal to the CFA but unsuccessful TA agreed to pay HK$45 million back to investors in HK and overseas

16 16 2. Personal account dealings CoC CoC para 12.2 Written policy Policy to contain conditions Employees must identify all related accounts Dealing through group company or duplicate trade confirmations and statements of account Separately recorded and clearly identified Trades to be reported to and actively monitored by senior management

17 17 2. Personal account dealings FMCC & ICG FMCC para 2 Various constraints Relevant persons includes persons over whom they exercise control and influences Define types of investments Disclosure of existing holdings upon joining or at least annually thereafter Prior approval Prohibited personal transactions Holding period Adequate audit trail and record keeping ICG para III (2) Updated PAD policies provided to staff Appendix of ICG para 4 Disclosure upon joining and at least semiannually thereafter, despite FMCC 2.1.1(a) annually thereafter

18 18 2. Personal account dealings Recent case Date: Disciplined Person: Reason for Disciplinary Action: 13 January 2014 Mr Poon of China International Capital Corporation Poon conducted personal trading activities through securities accounts of others, and concealed his beneficial interests in and his personal trading activities conducted through these securities accounts from his then employers. Although no client suffered loss, it is plainly dishonest for licensees to hide their own trading activities. Penalty: Banned from re-entering the industry for 10 months

19 19 3. Capital raising Selling process Prior or at the point of sale: PI assessment Properly licensed (eg. temporary licence) Market brand instead of products Exam or re-visit process and highlight new potential red flags Cross border marketing matrix

20 20 4. Investment decisions CoC para 3.10 Best interests of clients FMCC para 3.1 Consideration of: investment objectives, restrictions and guidelines i.e. asset class, geographical spread, risk profile, etc relevant regulatory requirements FMCC para 1.4(c) ICG Appendix Part A para 2(d) Delineate investment decision process from dealing process

21 21 4. Investment decisions Select products best suit clients needs Due Diligence works (including company visits and track records review) Reasons for decision Meet SFC expectation Communication and compliance records Sufficient internal controls Consistent with client investment mandates Ensure compliance with SFC s codes / guidelines and internal policies and procedures

22 22 5. Buy side trading - CoC CoC Para 3.10 Requirements Best interest of clients Para 13.3 Transactions involving payments to a party connected to the manager out of the client s assets On arm s length terms In best interests of client Terms should not be less favorable than generally available in the market

23 23 5. Buy side trading - FMCC FMCC Para 3.2 Requirements Best execution on available terms Para 3.4 All orders must be handled fairly and efficiently Para 5.1 Clear and comprehensive audit trails for recording orders Order details documented? (name of instruments, price, quantity, target allocation, time of order received from PMs, placed to brokers and executed by brokers) Records of orders

24 24 5. Buy side trading - Considerations Before initiating orders, managers shall consider: Cash level Investment restrictions and procedures Basis of intended allocation Compliance pre-approval Approved brokers?

25 25 6. Electronic Trading Rules Effective 1 January 2014 Para. 18 and Sch. 7 of the Code of Conduct Type 9 Manager Part IV of the FMCC (Appendix D in Conclusion) certain provisions apply to managers which use an electronic trading system (designed in-house or provided by third party) for execution of funds.

26 26 6. Electronic Trading Rules Have you: got in place an Electronic Trading Policy identified the (i) electronic trading systems and (ii) algorithmic trading system conducted due diligence on third parties, e.g. the User Template SFC Regulation of Electronic Trading distributed by AIMA, to HKIFA members keep proper records on design, development, deployment and operation of the systems put in place risk management and supervisory controls to monitor orders and trades ensure that contingency measures are in place ensure compliance rests with the responsible officers or executive officers and the management

27 27 7. New OTC derivatives regime update Securities and Futures (Amendment) Ordinance ( Amendment Ordinance ) Gazetted on 4 April 2014 Defines and regulates OTC derivatives Creates new regulated activities and imposes additional licensing obligations Creates statutory reporting, clearing, trading and recordkeeping obligations Sets out regulatory responsibilities and powers of the SFC and MA Confers rule making powers on the SFC Sets out consequences for failure to comply

28 28 7. New OTC derivatives regime update Proposed implementation timetable Mandatory reporting (and record keeping) followed by Mandatory clearing (and record keeping) followed by New licence obligations followed by Mandatory trading (and record keeping)

29 29 7. New OTC derivatives regime update Statutory reporting obligation Section 101B(1) of the Amendment Ordinance: A prescribed person must report an OTC derivatives transaction to which subsection (2) applies- (a) (b) to the Monetary Authority; and in accordance with the reporting rules. Prescribed persons are authorised institutions, approved money brokers, licensed corporations and other persons prescribed in the reporting rules Section 101H gives flexibility for the SFC to allow exemptions from the reporting obligation

30 30 7. New OTC derivatives regime update Proposed mandatory reporting rules Mandatory reporting rules initially apply to: plain vanilla interest rate swaps (floating v fixed) in currencies and floating rate indices to be specified by the MA plain vanilla basis swaps (floating v floating) in currencies and floating rate indices to be specified by the MA non-deliverable forward transactions in currencies (including some precious metals) to be specified by the MA Reportable transactions: defined by reference to product class (e.g. interest rate swap agreements) and product type (e.g. basis swaps) to include other types of OTC derivatives over time Information to be reported set out in Schedule 2 of the draft Rules

31 31 7. New OTC derivatives regime update Proposed exemptions re reporting requirements Limited exemption from reporting requirements for less active authorised financial institutions, approved money brokers and licensed corporations

32 7. New OTC derivatives regime update Proposed mandatory reporting rules 32 Locally-incorporated authorised institutions, approved money brokers and licensed corporations Must report all reportable transactions: 1. that they are counterparty to, or 2. that they have conducted in Hong Kong on behalf of an affiliate Overseas-incorporated authorised institutions Must report all reportable transactions: 1. that they are a counterparty to that is booked with their Hong Kong branch, or 2. that they have conducted in Hong Kong on behalf of an affiliate, their head office or a non-hong Kong branch Central counterparties (CCPs) that operate as a recognized clearing house Must report all reportable transactions that they have entered into as part of the clearing process (and so are a counterparty to).

33 33 7. New OTC derivatives regime update Proposed mandatory reporting rules Obligation to report subsequent events relating to reportable transactions: an event that occurs after a transaction in an OTC derivative product is entered into, and which affects the product, the terms or conditions on which the transaction was entered into or the persons involved in entering into the transaction Party that originally reported the transaction is required to report subsequent events, except in limited circumstances

34 34 7. New OTC derivatives regime update Reporting timelines 6 month grace period to comply with the reporting rules 9 month grace period to report positions entered into previously and still outstanding ( backloading ) Once grace periods expire, reporting of new reportable transactions required on a T+2 basis Reporting of subsequent events required on a T+2 basis Proposed daily reporting of valuations

35 35 7. New OTC derivatives regime update Backloading obligations Obligation to report information about certain reportable transactions entered into prior to the product type specification day Authorised institutions, approved money brokers and licensed corporations only need to report prior transactions to which they are a counterparty No obligation to report if prior transaction is terminated or matures prior to expiry of a grace period

36 36 7. New OTC derivatives regime update Record keeping obligations List of required records in Schedule 3 to the draft Rules Records must be kept for at least 5 years after termination or maturity of the relevant transaction

37 37 7. New OTC derivatives regime update New SFC licensing requirements New Type 11 regulated activity dealing in OTC derivative products or advising on OTC derivative products New Type 12 regulated activity providing client clearing services for OTC derivative transactions Expanded Type 7 regulated activity providing automated trading services to include automated trading services that include OTC derivative transactions Expanded Type 9 regulated activity asset management to include managing a portfolio of OTC derivative products Note a person may need to be licensed for e.g. Type 11 regulated activity even if none of its OTC derivatives activities give rise to mandatory reporting or clearing obligations in Hong Kong.

38 38 7. New OTC derivatives regime update Transitional licensing provisions Transitional provisions allow conduct of the new and/or expanded regulated activities during a transitional period without a licence An application for a licence to conduct the new and/or expanded regulated activities must be made and is subject to various requirements, depending on the type of entity applying and the type of regulated activity If the application is rejected, the transitional provisions allow an additional period following the rejection to close down the business connected with the relevant regulated activity

39 7. New OTC derivatives regime update Timeline planner 39

40 7. New OTC derivatives regime update Planning ahead for licensing 40 Considerations 1. Licensing requirements 2. Deemed licensing? 3. Human resources Expanded Type 9 RA Existing Type 9 AM If applicable, uplift condition regarding futures contracts RO with relevant experience One RO with 2 out of 6 years of experience gained anywhere Type 11 RA Discrete service of advising on OTC products Dealing or advising in HK for two years prior to start of regime Two ROs (one ED) with 2 years of experience gained in HK 4. Update business plan including description of types of OTC derivative products updated organization structure operational flowchart summary of history on activities internal controls and contingency plans 5. Update compliance policies reflect the additional regulatory obligations

41 Considerations 1. Upgrade internal infrastructure 7. New OTC derivatives regime update 41 Planning ahead for mandatory reporting and record keeping Expanded Type 9 RA Type 11 RA Sign up with Hong Kong Trade Repository (HKMA) Capable to identify, collate and report transactions with subsequent events (i.e. T+2 basis) Collate information re transactions entered as counterparty / remain outstanding at the start date 2. Consider appointing agent 3. Record keeping arrangements 4. Update compliance policies Identify agent and conduct due diligence Provide sufficient information Monitor performance Securities and Futures (OTC Derivative Transactions Reporting and Recordkeeping) - Schedule 3, Part 1: searchable and identifiable Reflect the mandatory reporting and recordkeeping obligations

42 42 7. New OTC derivatives regime update Systemically important participants A person that: Is not otherwise regulated by the SFC or the MA, and Engages in OTC derivative transactions, and Holds a position in a specified class that reaches the notification level Obligations of SIPs Notify the SFC Give information to the SFC on request Comply with directions from the SFC

43 43 Contact info: Phone: