New Regulations From the SFC

New Electronic Regulations Issued by Hong Kong’s Securities and Futures Commission (SFC) To Go Into Effect January 1, 2014

Hong Kong – August 1, 2013

TradingScreen Inc. (TradingScreen), the leading, independent provider of liquidity, trading, and investment technology via SaaS, has been following the developments around the SFC’s release of its Consultation Conclusions on the Regulation of Electronic Trading (“Consultation Paper”) on March 22, 2013.

The definitions and principles that will apply to electronic trading and impacted parties are published in two areas of theSFC’sCode of Conduct for Person’s Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”) – paragraph 18 (found on page 24), and notably, more detailed requirements in Schedule 7 (found on page 26). Specifically, the Consultation Conclusions Paper: (1) summarizes comments from 34 written submissions from the registered / licensed community; and, (2) provides SFC responses to those comments. The questions posed to the respondents were broken out under the following topics:

1. Scope of the proposal – electronic trading,  types of products, and persons to whom the proposals apply
2. General requirements on electronic trading
3. Specific requirements on internet trading and direct market access (DMA)
4. Specific requirements on algorithmic trading
5. Electronic trading systems not developed by licensed or registered persons
6. Other matters

The essence of the rules will apply to electronic trading (which includes, but is not limited to, DMA, Internet, and Algorithmic trading) with the aim of ensuring undue risks are not borne by investors.  The new regulations have a broad product application covering equities, exchange traded funds, futures and options, and leveraged foreign exchange. While it is premature to evaluate the precise impact of the regulations, there will be obligations for licensed or registered persons to provide transparency in their electronic trading and comply with the spirit of the Code of Conduct with regard to the electronic systems those parties are utilizing or providing.  To paraphrase the SFC’s announcement: Key aspects of the regulatory regime include Management and Supervision, Adequacy of the System and Record Keeping, and Risk Management.  To that extent, licensed or registered persons have to understand the systems they are using while guiding and instructing their customers on how their electronic trading service works. TradingScreen believes it has the knowledge and industry experience to ensure the proper controls are in place, and more importantly, the flexibility to adopt any new regulations that are mandated by the SFC.  In the past, TradingScreen has demonstrated its ability to comply with global and regional regulations, allowing customers to continue their operations without incident or difficulties. TradingScreen is conducting a detailed review of Schedule 7, and plan to respond to items which it feels impacts its customers or involve an action on its part. TradingScreen recommends that customers become familiar with the changes to both Paragraph 18 and Schedule 7 of the Conduct of Code. TradingScreen will be taking the following actions:

1. It will conduct a full review of Schedule 7.
2. It plans to review how customers may be impacted, and will publish comments to specific requirements spelled out in Schedule 7. Any changes or recommendations TradingScreen adopts will be communicated to clients.
3. It plans to look at how partners in the Broker / Dealer community may be impacted and will publish comments to specific requirements spelled out in schedule 7.  Any changes or recommendations TradingScreen adopts will be communicated to partners.
4. TradingScreen will provide full disclosure on its system to regulators if requested – documentation, system specs, and examples of compliance with the SFC recommendations.
5. TradingScreen will continue to monitor developments and look for further announcements from the SFC. As always, TradingScreen is committed to partnering with customers and would encourage and welcome mutual participation in meeting any regulatory obligations that are presented to the community.

Please feel free to reach out to TradingScreen support to arrange a consultation to discuss further. Thank you.