NEWEDGE CUSTOMER FUNDS PROTECTION AT NEWEDGE FINANCIAL HONG KONG LTD & NEWEDGE BROKER HONG KONG LTD January 2015
OVERVIEW The foundation for protecting customer property when customer trades with us is three-fold: Segregation Capital Requirements and Regulatory Reporting Audits and Inspections 2
I. SEGREGATION Newedge Financial Hong Kong Ltd ( NFHK ) is incorporated in Hong Kong and is a subsidiary of Newedge Group SA. NFHK holds a Dealing in Securities and Futures Contracts License with the Securities and Futures Commission ( SFC ). NFHK is a member of the Hong Kong Futures Exchanges ( HKFE ) and the Stock Exchange of Hong Kong ( SEHK ). Newedge Broker Hong Kong Limited ( NBHK ) is incorporated in Hong Kong and is a subsidiary of NFHK. It is also a member of the HKFE. 3
I. SEGREGATION (CONT D) The supervision of both licensed entities is conducted by the SFC in accordance with the Securities and Futures Ordinance ( SFO ) and related legislations, codes and guidelines. Among those laws and rules is the Securities and Futures (Client Money) Rules ( Client Money Rules ) in relation to treatment of the client monies and the Securities and Futures (Client Securities) Rules ( Client Securities Rules ) in relation to the treatment of client securities. Each of NFHK and NBHK typically takes cash as collateral. Each of its obligations in relation to client monies includes: Deposit client monies in segregated accounts designated as a trust account or client account maintained with an authorized financial institution on a pool basis subject to the terms of client s agreement with NFHK and NBHK, respectively. Ensure that the client monies are not commingled with proprietary money. 4
I. SEGREGATION (CONT D) Deposit client monies in the segregated account within one business day after such client monies are received by NFHK or NBHK, respectively. Each of NFHK and NBHK is required, respectively, to top-up its client segregated account with its own funds if a margin call is not satisfied by the client. Such client will subsequently reimburse NFHK or NBHK, as the case may be, for such short fall. Deposit client securities on a commingle basis in segregated client accounts maintained with a licensed bank, an approved custodian or another licensed intermediary in Hong Kong. 5
I. SEGREGATION (CONT D) Take reasonable steps to ensure that the client securities are not deposited, transferred, lent, pledged, charged, repledged, recharged, or otherwise dealt with except in the manner specified in the Client Securities Rules. Calculates the total amount of funds each client has deposited in the segregated account and its margin requirement on a daily basis. These calculations are checked and reconciled with the total amount of funds of NFHK and NBHK, respectively. The reconciliations are maintained as part of the regular books and records of NFHK and NBHK, respectively. 6
II. CAPITAL REQUIREMENTS Being a SFC licensed corporation, each of NFHK and NBHK has to maintain: Paid-up Capital of not less than HKD 5 million; and Required Liquid Capital equal to the higher of the Minimum Required Liquid Capital of HK$3 million and the Variable Liquid Capital, being 5% of the Adjusted Liabilities. October 2013 7 7
III. REGULATORY REPORTING AND HANDLING OF CUSTOMER FUNDS Each of NFHK and NBHK s regulatory capital requirements are met through equity and subordinated loans approved by the SFC from its parent, Société Générale. The subordinated loans cannot be repaid before maturity unless approved by the SFC. Each of NFHK and NBHK must file monthly returns, annual audited accounts and auditor s reports to the SFC. If each of NFHK and NBHK ever had an issue regarding the adequacy of its liquid capital or the amount of client monies and client securities in segregation, according to regulatory rules, it would be required to advise the SFC and the HK Exchange and Clearing Limited ( HKEx ) promptly. The SFC strictly restricts how the licensed corporations handle client monies and securities. Investment of client monies is prohibited and any reuse of client securities must be dealt with in accordance with the Client Securities Rules. 8
IV. AUDITS AND INSPECTIONS As a SFC licensed corporation, HKEx participant, and member of Newedge Group, each of NFHK and NBHK is subject to the following formal inspections or ongoing reviews by the following parties: SFC HKEx Deloitte, our external auditors 9 9
IV. AUDITS AND INSPECTIONS (CONT D) In addition, The Autorité de Contrôle Prudentiel et de Résolution ( ACPR ), the French regulator of Newedge Group, has a right to inspect NFHK and NBHK. Société Générale has the right to audit any Newedge company at any time. The client asset protection procedures are also subject to the review and examination of the Internal Audit Department of NFHK and NBHK, respectively. 10
V. SUMMARY OF APPLICATION OF BANKRUPTCY RULES Under the local regulations, customer assets are held in segregated account(s). Such customer assets may not be commingled with the assets of NFHK or NBHK, respectively, and may not be used by NFHK or NBHK, respectively in the course of its own business except in accordance with the terms of client s agreements with NFHK or NBHK, respectively or in accordance with the SFO and its related regulations. Customer assets will generally not be affected by the bankruptcy of each of NFHK or NBHK as customer assets do not belong to NFHK or NBHK, respectively. Unless otherwise provided under the terms of clients agreements with NFHK or NBHK, respectively or provided by the SFO and its related regulations, customer assets shall not be available for payment of NFHK or NBHK s debts. 11
VI. EVALUATING RISKS TO SEGREGATED CUSTOMER PROPERTY Fraud. This risk is mitigated by each of NFHK and NBHK s internal control governance and the external audits, inspections and internal audits reviews to which it is subject. The internal control structure includes Finance and Accounting, Treasury, Front Office, Clearing Operations, Compliance, Financial Crime Prevention/AML, Internal Audit, Permanent Supervision, and Operational Risk. Proprietary Trading. This risk is mitigated as each of NFHK and NBHK does not engage in any significant proprietary trading activities (other than certain treasury and customer facilitation activities). Default by another customer. This risk is mitigated by each of NFHK and NBHK s procedures for approving and monitoring clients, and the daily and prompt collection of margins. 12
VII. STRUCTURE OF NEWEDGE Société Générale 100% Newedge Group, SA 100% Newedge Financial Hong Kong Ltd 100% Newedge Broker Hong Kong Ltd 13
VIII. NEWEDGE S CONSOLIDATED CAPITAL Newedge, like its shareholder Société Générale, is subject to strict capital adequacy requirements. As of 31 December 2013, the audited consolidated capital structure of Newedge was 1,107M (calculated in accordance with IFRS rules). Consolidated regulatory capital of Newedge as of 31 December 2013 was 1,331M (calculated in accordance with French banking regulation). 14
IX. CONCLUSION Each of NFHK and NBHK manages the client asset protection in an efficient manner. This management is back stopped by regular reviews and reconciliations, both internally and externally, by third party auditors and regulators. Each of NFHK and NBHK is part of a strong organization subject to stringent regulatory requirements. 15
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