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Hong Kong – The Securities And Futures (Amendment) Ordinance 2014: New Investigative And Disciplinary Powers Of SFC And HKMA.

Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution


The new regime under the Securities and Futures (Amendment) Ordinance 2014 (to come into operation on a date to be appointed by the Secretary for Financial Services) will be overseen and regulated by the SFC and HKMA jointly. The HKMA will regulate OTC derivative activities of authorized institutions (“AIs“) and approved money brokers (“AMBs“), while the SFC will regulate OTC derivative activities of licensed corporations (“LCs“) and other prescribed persons.


One of the major changes brought about by the new amendment ordinance is that the HKMA is given substantially similar, if not the same, investigative and disciplinary powers as those of the SFC in relation to contravention of the reporting obligation, clearing obligation, trading obligation or record keeping obligation (collectively “Mandatory Obligations“) by AIs and AMBs for their OTC derivative activities. The new investigatory and disciplinary powers for the HKMA are modelled on similar powers given to the SFC under the existing provisions of the SFO.


In other words, if the HKMA has reasonable cause to believe that an AI or AMB may have contravened the Mandatory Obligations, the HKMA (and the person directed or appointed to investigate the matter, called the “MA investigator“) can investigate the matter, request the AI and AMB (or any other persons whom the MA investigator has reasonable cause to believe to be in possession of relevant records or documents) to produce records and documents and require the AI or AMB (or any other person whom the MA investigator has reasonable cause to believe to be in possession of relevant information) to attend an interview by the MA investigator. The HKMA’s new investigative powers are mainly contained in the amended section 178, new sections 184A to 184E and 186A of the SFO.


The existing section 187 (use of incriminating evidence in proceedings) has been amended to extend the right to claim privilege against self-incrimination to persons who are subject to HKMA’s OTC investigations. HKMA’s OTC investigations are also subject to a similar secrecy obligation (new sections 381A to 381F of the SFO).


The HKMA has also been given disciplinary powers, similar to those available to the SFC, to take disciplinary actions against AIs and AMBs for breaches of the Mandatory Obligations (mainly through new sections 203A to 203F of the SFO). Such disciplinary actions include, public or private reprimand, prohibition against the person from carrying on the business of OTC derivative transactions, fine of not exceeding the greater of HK$10 million or 3 times of the profit gained or loss avoided.


The SFC’s investigative and disciplinary powers have been expanded to cover:


  • 1. breaches of the Mandatory Obligations by LCs or other prescribed persons (not AIs or AMBs) (new section 182(da) of the SFO); and
  • 2. non-compliance by registered systematically important participants (“SIP”) with the specified acts required by the SFC to take pursuant to the new section 101X of the SFO (new section 182(db) of the SFO), such acts may include to require the registered SIP:
  • a. to refrain from increasing or to reduce the registered SIP’s exposure arising from its positions;
  • b. to collect collateral or to increase the amount of collateral posted; or
  • c. to restrict the use of collateral or type of collateral collected or posted.


Miscellaneous Amendments


Two other miscellaneous amendments have been made to the SFO, namely the criminal court has been given a power to make a disgorgement order as a result of commission of market misconduct (amended section 303 of the SFO); and market misconduct offences are now subject to the confiscation regime under the Organized and Serious Crimes Ordinance (Cap. 455) (“OSCO“) (amended Schedule 2 to the OSCO).


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