Annual Report 2019-20 - SFC

Strategic PrioritiesCorporateSocial rmationOther initiatives focus on reforming the reviewstructure for Listing Committee decisions and updatingSEHK’s disciplinary powers and sanctions. We are alsoexploring new policies and measures to shorten thesettlement process for initial public offerings (IPOs),including an electronic platform for IPO subscriptions.To promote Hong Kong as an international financialcentre and a listing venue of choice, we are workingwith SEHK on changes to improve access to HongKong markets for overseas-listed companies.CorporateDevelopmentsCommunication with the industry and the public is nowmore important than ever. New features introducedas part of a revamp of our corporate website this yearwill help us engage more efficiently with a wide rangeof stakeholders. The significant savings realised byour move to new office premises will help ensure ourlong-term sustainability.Changing corporate behaviour over the long term willrequire further policy adjustments. We are workingclosely with SEHK to update listing rules and introducenew policies such as recent rule changes to tighten theregulation of backdoor listings and shell activities.OperationalReviewWe monitor closely the rapid changes affecting HongKong and beyond as markets worldwide are highlyinterconnected. We adopt the latest technology to helpus collect and analyse data to manage both near-termand long-term risks, and to maintain a robust marketinfrastructure.Tackling market and corporate misconduct willcontinue to be a top priority. Steps taken by our“ICE” 2 working group resulted in less price volatility inGEM stocks, fewer placings with a high concentrationof shareholders and, overall, a more orderly market(see sidebar on page 44). The average first-day pricechange of GEM listings decreased from about 530% in2016 to around 13% in 2019.Our PeopleThe changes we implemented across our organisationover the past few years have made us more flexible,proactive and multidisciplinary. We restructured someof our operating divisions and streamlined workprocesses. New initiatives pooled our expertise toensure our regulatory actions are coordinated, targetedand effective. Acting as “One SFC”, the organisationis now well positioned to deploy the full range ofresources and tools available to us to promote stability,resilience and financial innovation.For example, we stepped up our direct interventionsto tackle unfair corporate transactions in light ofthe growing number of instances where listedcompanies acquire assets at unreasonably high pricesor sell assets which are substantially undervalued.Shareholders’ interests could be harmed as a result.We also published guidance to flag our concerns aboutrecurring types of misconduct and remind directorsand their advisers to comply with their statutory andlegal responsibilities when evaluating or approving theacquisition or disposal of a company or a business.CorporateGovernanceIn periods of uncertainty and volatility, we remainfocussed on ensuring high-quality markets whichfunction in a fair and orderly manner. We arepressing ahead firmly with our front-loaded regulatoryapproach to identify and address misconduct andmarket irregularities through pre-emptive and timelyinterventions.The new approach to the regulation of listing matterswhich we introduced in 2017 has led to improvementsin a number of areas. Over the past three years, wehave directly intervened at an early stage in morethan 120 cases using our statutory powers under theSecurities and Futures (Stock Market Listing) Rules(SMLR)1 and more generally under the Securities andFutures Ordinance.Mission andMandatesAdapting to changeListing mattersStrategicPrioritiesAs part of our mandate, we also work to maintainHong Kong’s financial stability and its status as aninternational financial centre. To address emergingchallenges and foster sustainable market development,we regularly modernise our regulatory framework andpursue close cooperation with our counterparts inHong Kong, the Mainland and overseas.Current initiativesMessage fromChairman and CEOOur overarching objective is to strengthen the integrityand soundness of Hong Kong’s securities and futuresmarkets. Safeguarding the interests of investors andminimising fraud and market misconduct are key toinstilling investor confidence.1 Under the SMLR, we may raise objections to listing applications or direct The Stock Exchange of Hong Kong Limited (SEHK) to suspend trading in alisted company’s shares.2 ICE (Intermediaries, Corporate Finance, Enforcement) is a cross-divisional working group set up to tackle corporate misconduct.SFC Annual Report 2019-205

Strategic PrioritiesIntermediariesWe adopt a risk-based approach to licensing andsupervising intermediaries by focusing on the greatestthreats and systemic risks.The number of corporations and individuals we licensecontinues to increase. To update our competencyframework for licensed individuals, which has beenin place since 2003, we will launch a consultationon proposed changes to the entry requirementsand continuous professional training guidelines. Wewill also revamp our licensing portal and processingsystems as we develop the next generation of ouronline licensing platform.The trading and business models of our licensedcorporations are increasingly complex and globalised.To assess their risk management and governancepractices, a thematic review now underway focuseson their operational and data risks and their remotebooking models. We have also been collaborating withoverseas and local regulators to inspect our licensedcorporations’ risk management practices for remotebooking and transfer pricing. This will help us betterunderstand global firms’ operations across jurisdictionsand member companies. We are also conducting areview of the risks of using mathematical models, suchas in capital calculations, derivatives pricing and riskexposure measurements, to make or inform businessdecisions.To enhance our regulation of firms involved infundraising in the equity and debt capital markets,we will consult the market soon on proposed conductrequirements based on the findings of our recentthematic inspection of their book-building activities.In light of market volatility and liquidity issues withsome overseas funds, our inspections of fund managerswill focus more on liquidity risk management practices.A survey of the practices of the controllers of selectedbrokers will help us understand group liquidity profilesand identify potential problems for early supervisoryaction. On an ongoing basis, we also review brokers’risk management and compliance with the guidelinesfor securities margin financing activities to ensure theymaintain robust risk management controls in times ofmarket volatility.As another priority, we are collaborating with theHong Kong Monetary Authority (HKMA) to monitorsales practices. Our first annual joint product surveywith the HKMA will cover the sale of non-exchange-6SFC Annual Report 2019-20traded investment products by intermediaries duringthe period from 1 January to 31 December 2020. Thefindings will help us better understand market trends,identify risks and coordinate responses to addressareas of common concern.The potential for conflicts of interest and misconductwhen firms manage trades for clients, particularlywhere sales staff have the discretion to control spreadcharges which may be in excess of those disclosed toor as agreed with the clients, will be the subject ofanother thematic review.As part of the Government’s continuous effort tostrengthen Hong Kong’s anti-money launderingand counter-financing of terrorism regime, we willcommence a periodic update to the risk assessmentfor the securities sector to take forward therecommendations of the Mutual Evaluation Reportof Hong Kong published by the Financial Action TaskForce (FATF) in September 2019. We will also proposeamendments to our anti-money laundering guidelinesto align them with the latest FATF standards andprovide additional risk-based guidance.Asset and wealth managementTo develop Hong Kong as a full-service global assetand wealth management centre and a preferred funddomicile, we are committed to encouraging productinnovation, broadening the market reach for HongKong public funds and enhancing our regulations toalign with international regulatory developments.Changes to the open-ended fund companies (OFC)regime proposed in a recent consultation, includingexpanding the investment scope for private OFCs andallowing securities brokers to act as their custodians,would encourage more private funds to set up in HongKong.

Strategic PrioritiesFinancialStatementsWe have also been working with the China SecuritiesRegulatory Commission (CSRC) and other stakeholdersto facilitate ETF cross-listing between the Mainland andHong Kong to enrich our product offerings.Subsequent to the publication of a joint conclusionspaper with HKEX and the Federation of ShareRegistrars Limited in April 2020 on introducing apaperless securities market in Hong Kong, we areworking on the legislative amendments. The regime,expected to be implemented from 2022, will provideinvestors with efficient and meaningful options tohold and transfer securities in their own nameselectronically.CorporateSocial ResponsibilityTo detect suspicious trading activities and potentialmarket misconduct in a more timely and efficientmanner, we are working with HKEX to implementan investor identification regime for the Hong Kongsecurities market. We aim to consult on the operationalmodel for the regime this year.CorporateDevelopmentsWe work closely with the industry to enhance marketefficiency and liquidity to support the long-termdevelopment of our exchange-traded fund (ETF)market. Together with Hong Kong Exchanges andClearing Limited (HKEX), we are exploring ways toenhance the ETF market-making regime. To allowmore cost-effective ETF product line-ups and provideinvestors with more investment choice, we work tofacilitate issuers’ product applications under newstreamlined measures for some SFC-authorised feederETFs.OperationalReviewAn over-the-counter (OTC) derivatives regime is beingintroduced in phases in Hong Kong. We will monitorthe development of global reform initiatives, such asbenchmark reform and the expanded scope of marginrequirements for non-centrally cleared derivatives, toassess their impact on the OTC derivatives market.We are working with the Government on legislativeamendments to implement refinements to the scope ofregulated activities under the OTC derivatives licensingregime. We will also work with the HKMA to assessthe feasibility of implementing a mandatory tradingobligation.Our PeopleTo strengthen Hong Kong’s competitiveness as a funddomicile, we are actively involved in the Government’staskforce on establishing a new limited partnershipregime for funds, providing tax concessions forlocal private equity funds’ carried interest and otherinitiatives. We are also working with the HKMA andMainland authorities to facilitate the launch of theGreater Bay Area Wealth Connect scheme which willprovide mutual market access for wealth managementproducts. This will improve the renminbi liquidity poolin Hong Kong and strengthen its role as an offshorerenminbi centre.CorporateGovernanceFollowing the success of Mainland-Hong Kong StockConnect, Hong Kong is well positioned to facilitatecapital flows between the Mainland and the rest of theworld. We are working with the CSRC and the stockexchanges to introduce an Exchange Bond Connectinitiative for trading eligible bonds listed or traded onthe Hong Kong and Mainland stock exchanges.Mission andMandatesAs part of our efforts to expand market access for ourfunds, we are exploring mutual recognition of funds(MRF) arrangements with a number of jurisdictions3.Preparations are also underway to enhance theMainland-Hong Kong MRF scheme to offer Mainlandinvestors a more diversified pool of fund productsmanaged in Hong Kong.MarketsStrategicPrioritiesTo gain greater insight into leverage in funds and thepotential risks it may pose to the markets, we plan toupgrade fund data reporting requirements based onthe latest international trends. We will issue guidanceon the electronic dissemination of documentation forSFC-authorised investment products in view of thewider use of electronic media.Message fromChairman and CEOIn another consultation, we proposed creating a newtype of regulated activity to regulate firms actingas depositaries of SFC-authorised funds which willbring them under our regulatory oversight. We willfurther consult on proposed amendments to subsidiarylegislation and SFC codes and guidelines in due course.We also plan to launch consultations on proposals toupdate the Code on Real Estate Investment Trusts andthe Code on Pooled Retirement Funds.SupplementaryInformation3 Overseas MRF arrangements have been established between Hong Kong and Australia, France, Luxembourg, Malaysia, the Netherlands, Switzerland,Taiwan and the United Kingdom.SFC Annual Report 2019-207

Strategic PrioritiesA third focus is on market misconduct using complexand sophisticated schemes. To this end, a MarketMisconduct Team has been formed by reorganisingour market surveillance and investigation functions tohelp us detect and investigate these schemes moreeffectively. We will continue to target liable individualsand seek criminal and other sanctions whereappropriate to send a strong deterrent message.Following our review of HKEX’s temporary suspensionof the derivatives markets due to system failure inSeptember 2019, we are monitoring the progress of itsimplementation of the measures we recommended.We will work with HKEX to improve its decision makingprocess and market communications to ensure orderlymarket operation and prudent risk management.EnforcementTo protect the investing public and the reputationof Hong Kong’s financial markets, we adopt a frontloaded and focussed enforcement approach to preventand mitigate harm to investors and nip problems inthe bud. We use our powers under the SFO to secureassets which are the suspected proceeds of financialcrimes and act promptly to prohibit licensees whichmay not be fit and proper from carrying on regulatedactivities.We seek to improve the quality of our markets byconcentrating our enforcement resources on keyrisk areas and making it difficult for unlawful actsand misconduct to go undetected. One priority isto tackle highly organised corporate fraud whereindividuals and firms collude to defraud investors. Wehave commenced court proceedings against listedcompanies and directors at fault. We aim to deploy thefull spectrum of sanctions and remedies available to usin seeking to maintain an orderly market.Failures in handling conflicts of interest by listedcompany directors and licensed firms is anotherpriority. In cases where directors breach their fiduciaryduties, we may seek compensation or restorative ordersagainst them. We will also target conflicts of interestin our disciplinary actions to raise the standards ofconduct of our licensed firms.4 Formerly the International Affairs team.8SFC Annual Report 2019-20To more effectively tackle cross-boundary marketmisconduct, we strengthened our strategic cooperationwith the CSRC and entered into a tripartiteMemorandum of Understanding with the CSRC and theMinistry of Finance on access to audit working papersfor Hong Kong-listed Mainland companies. Locally,more formal collaboration with the IndependentCommission Against Corruption (ICAC) will enhanceour effectiveness in combatting financial crimes andupholding market integrity.We regularly review our data strategy to ensure thatwe make the best use of all available informationto facilitate our investigations and deliver effectiveenforcement outcomes in a digital age throughbenchmarking our technological capabilities againstour international counterparts and developing dataanalytic tools.Green and sustainable financeWe drive and coordinate efforts to bolster HongKong as a hub for green and sustainable financein the region. To manage these initiatives and ourengagement with counterparts more effectively,we now have a dedicated International Affairs andSustainable Finance team4.Promoting environmental, social and governance (ESG)criteria in asset management and corporate disclosuresare priorities we set out in our September 2018Strategic Framework for Green Finance. Additionalmeasures to align our regulatory regime with latestinternational developments were outlined in ourDecember 2019 report on our survey on integratingESG factors and climate risks in asset management. Wealso worked with SEHK on updated rules which willtake effect on 1 July 2020 to mandate ESG and climatechange-related disclosures by companies listed in HongKong.

Strategic PrioritiesCorporateDevelopmentsCorporateSocial rmationWith greater market connectivity between Hong Kongand the Mainland, our cooperation with Mainlandregulators is critically important to safeguard marketintegrity and investors’ interests. We maintain closeand effective high-level communication as well aseveryday interaction with our Mainland counterpartsto enhance cross-boundary regulatory cooperationand to ensure the smooth implementation of marketdevelopment initiatives including the mutual marketaccess schemes.OperationalReviewFully developing our online portal, WINGS5, has helpedovercome the digitalisation challenge by passingdata provided by market participants straight tobackend processing and analysis. We are adoptingother new technologies to organise large volumesof information to make our investigation andlitigation work more efficient. We plan to apply moreOur Chief Executive Officer Mr Ashley Alder serves asChair of the Board of the International Organizationof Securities Commissions (IOSCO) and ex-officiomember of the Financial Stability Board (FSB) Plenaryand Steering Committee. Our senior executives playan active role in IOSCO’s and FSB’s committees andworking groups. IOSCO and FSB have cooperated veryclosely to respond to the COVID-19 crisis, and IOSCOhas reprioritised its work programme for 2020 to focusprimarily on the multiple challenges facing marketparticipants and regulators arising from the crisis.Our PeopleWe are developing an internal data analytic platform toautomate the analysis of trading data when inspectinglarge securities brokers. In addition, we will revampthe returns required under the financial resources rulesto collect additional financial and risk information fromlicensed corporations.In supporting Hong Kong’s status as an internationalfinancial centre, we foster close relationships withour local and overseas counterparts and activelyparticipate in international regulatory bodies. Locally,we build strong connections with other regulatorsand enforcement agencies to advance our jointinitiatives and share information. Formal cooperationarrangements we made this year with the ICACand the Competition Commission will facilitate ourexchange of information and expertise.CorporateGovernanceWe regularly review our regulatory regime andour internal operations to keep up with the latesttechnological developments and innovative businesspractices to ensure they are adopted effectively andsecurely. A major focus is on regulating the conductof intermediaries who leverage technologies to deliverfinancial services. The new licensing framework forvirtual asset trading platforms we announced inNovember 2019 brings a largely unregulated area withgrowing importance under our supervision.Regulatory cooperationMission andMandatesTechnologyTo strengthen our monitoring framework andmechanisms to identify changing market trends andsystemic risks, we stepped up our efforts to ensurethe integrity of the data we receive from the reportingregimes for OTC equity derivatives, large openpositions in exchange-traded derivatives and shortpositions in stocks. This data provides us with thetimely information we need to make a comprehensiveassessment of the market situation.StrategicPrioritiesLocally, we initiated the Green and Sustainable FinanceCross-Agency Steering Group to promote consistencyand collaboration in accelerating the development ofHong Kong as a green and sustainable finance centre.Co-chaired by the SFC and the HKMA, the group’sinitial focus will be on cross-sectoral regulatory andmarket development issues. We established a ClimateChange Technical Expert Group to help us developexpected standards as well as practical guidance andbest practices for incorporating climate-related risksin asset managers’ investment and risk managementprocesses.artificial intelligence-related technology to expandour automatic risk detection and market monitoringcapability.Message fromChairman and CEOWe stay abreast of the latest trends and standardsin green and sustainable finance through our activeparticipation in international rule-setting bodiesand working groups, and collaborate with otherauthorities to support sustainable investment. Wealso work to complement Hong Kong’s green andsustainable finance initiatives which contribute to thedevelopment of the Greater Bay Area and financialsector connectivity across the region.5 Web-based INteGrated Service.SFC Annual Report 2019-209

Mission and MandatesMission statementAs a financial regulator in an international financialcentre, the Securities and Futures Commission strivesto strengthen and protect the integrity and soundnessof the securities and futures markets in Hong Kong forthe benefit of investors and the industry.MandatesOur work is defined and governed

pragmatic to facilitate remote working arrangements and different methods of achieving regulatory . we may raise objections to listing applications or direct The Stock Exchange of Hong Kong Limited (SEHK) to suspend trading in a . SFC Annual Report 2019-20 Strategic Priorities. SFC Annual Report 2019-20 Message from Chairman and CEO .