AsianInvestor’s regulatory roundup: Dec-Jan
Hong Kong: New e-trading in force
New rules regulating the use of algorithmic trading in Hong Kong came into force on January 1. These require asset managers and other regulated entities engaging in electronic trading to document and test the reliability and security of their systems, whether coded internally or developed by third parties. Brokers have expressed concern that responsibility for use and monitoring of third-party algos lies with them, with some suggesting third-party providers may be unwilling to disclose proprietary coding to intermediaries as it may be deemed too commercially sensitive. However, the Securities and Futures Commission (SFC) rejected this, concluding after a consultation process in March last year that fund houses are not expected to have the same level of knowledge of algo-trading as third parties. To facilitate cooperation between fund houses and third-party developers to meet the new requirements, five Hong Kong-based financial associations, including the Alternative Investment Management Association, Asia Securities Industry & Financial Markets Association and the Hong Kong Investment Funds Association, collaborated last October in creating an electronic trading information template, to help fund managers conduct due diligence on their third-party algo providers.
Hong Kong: SFC cuts fund approval lapse time
Hong Kong securities regulator SFC adopted a new process to speed up the fund application process from January 1. One key change will see the approval lapse time halved from 12 to six months for SFC-authorised investment products, including unit trusts and mutual funds, investment-linked assurance schemes, unlisted structured investment products and real estate investment trusts. In other words, if the SFC has not authorised a fund within six months, an application will lapse. If a manager opts to continue seeking authorisation, it will need to repeat the procedure and pay another application fee. The SFC updated its fund approval application form on January 2. It comes after the SFC acknowledged the authorisation process had increased in recent years, attracting industry criticism. The regulator has been on the defensive over the issue. In a circular on November 29, the SFC pointed out that of 111 funds authorised from January to July 2013, only 28% of the processing time was attributable to the SFC, with 72% attributable to applicants. Further, the SFC suggested some applicants “might have taken advantage of the system” by submitting premature applications.
Hong Kong: Tiger Asia case concludes
The long-running saga involving the now-defunct US-based hedge fund Tiger Asia drew to a conclusion late last month following admissions of insider trading from two of the firm’s senior executives, Bill Sung Kook Hwang and Raymond Park. Hong Kong’s Court of First Instance ordered Tiger Asia to pay just over $45 million to investors affected by insider-dealing involving two Hong Kong-listed stocks, Bank of China and China Construction Bank. The trades dated back to December 2008 and January 2009. The SFC notes the sum has already been paid to the court, and would be disbursed to 1,800 investors in Hong Kong and overseas. The SFC announced in July it had instigated a market misconduct tribunal against three executives, although it subsequently accepted that defendant William Tomita was a junior staff member acting on the instructions of Hwang and Park, so dropped the charges against him. All of Tiger Asia’s employees are located in New York. The US Securities and Exchange Commission (SEC) and the US Attorneys’ Office for New Jersey began proceedings against Tiger Asia on December 12, 2012. Tiger Asia management pleaded guilty to criminal offences under US law. Hwang and Park were charged with civil offences by the SEC.
Singapore: US derivatives regulator approves SGX for clearing
The Singapore Exchange announced on December 30 it had received approval from the US derivatives regulator allowing it to offer over-the-counter derivatives clearing to US persons. This will allow financial institutions including asset managers to clear their derivatives via its clearing house while complying with US laws and regulations, including the US Dodd-Frank Act, the Commodity Exchange Act and Commodity Futures Trading Commission regulations. Dodd-Frank rules will require clearing houses globally to register with the US-based regulator if they clear swaps for institutions classed as US persons.
Asia Pacific: CFTC gives nod over local compliance
The US Commodity Futures Trading Commission (CFTC) has granted permission for firms in Australia, Hong Kong and Japan to follow local rules when complying with Dodd-Frank rules. The trio are amongst six jurisdictions approved on December 20 to follow substituted compliance determination when trading swaps with US persons. The rules governing non-US swap dealers and major swap participants surrounding chief compliance officers, swaps data record-keeping and risk management programmes can now comply with home jurisdiction rules as the regulator believes such rules are comparable with those of the US, reducing the administrative and cost burden. However, the CFTC did not issue substituted compliance determinations for certain requirements such as swaps data reporting and real-time public reporting. In practice, this may mean non-US swap dealers may need to comply with two sets of laws when transacting swaps.