Prime brokers offering trade execution services to clients in Hong Kong are expected to comply with regulatory requirements of the territory, regardless of where the risk positions are located. 

Securities and Futures Commission (SFC) has recently clarified this position in a circular that was forwarded to prime brokers. These are financial institutions that provide a range of prime services related to equity derivative activities. The SFC has made it clear that prime brokers in Hong Kong need to remember their regulatory obligations.
 

What are Those Obligations?

Primer brokers are expected to take the necessary steps to ensure that they always operate within a robust risk management framework. Reporting and accountability processes need to be clearly defined, and integration needs to occur across all of the different jurisdictions involved. 

Trade execution and other prime brokerage services have to not only take place within the company's own risk management programme, but they must also ensure they overlay with relevant regulatory requirements and operational needs. This ensures that consistent standards are maintained and that these are no less stringent than the applicable local rules. 

The PBs are expected to maintain effective procedures and policies for proper risk management. They need to ensure that adequate information is provided to allow management to take timely action to manage risk. They should also establish realistic risk limits to be used for ongoing monitoring. The broker should periodically review these limits to ensure they're still appropriate. 

Trade execution services contain a range of inherent risks. The SFC has also underlined the importance of regular stress testing, paying particular attention to a variety of exceptional situations. These might include risk mismatches, such as when a client portfolio holds products with complex features and risk profiles or illiquid positions. Methodologies need to be clearly defined and reviewed periodically. 

Regulatory Requirements

Prime brokers have been reminded of the necessity of complying with the applicable regulatory requirement where the risk positions for prime services are booked if they are the contracting entity. This includes those related to over-the-counter (OTC) derivative transactions, trade execution, securities margin financing and the Securities and Futures (Financial Resources) Rules. 

The SFC has also reminded prime brokers that breaches or severe control failures that arise from their group operations in Hong Kong may affect their ability to offer prime services in the territory. 
 

Prime Services in the Territory

A recent survey into the provision of trade execution and prime brokers services in Hong Kong endeavoured to discover the range of prime services offered, the scope of those services, and their front-to-back business processes. It looked at the risk management frameworks for prime services and any related equity derivatives activities. 

It found that 13 out of the 17 institutions surveyed offered a full range of prime brokerage services. Following this survey, a number of prime brokers in the territory were selected for visits to verify the responses to the study. On-site inspections assessed the key risks and validated risk management strategies and controls.

This proactive approach from the regulator shows the determination by authorities to create a safe and consistent environment for trade execution and prime brokerage services in Hong Kong. 

GIS HK operates a dedicated trading desk open across Asia, UK, European and US trading hours. We are ready to meet the multi-asset trading order execution requirements for institutional and professional clients on a 24/5 basis. 

Call +852 3018 3009 or email info@gishkltd.com to find out more.