SFC releases report on retail futures brokers
The Securities and Futures Commission (SFC) today published its Report on the fact-finding exercise on retail futures brokers which aimed to understand the business profiles and major risk management controls and practices of 10 major local futures brokers (the Reporting Firms) (Note 1).
This information assists the SFC in supervising licensed corporations and helps market participants understand the industry landscape and benchmark themselves among peers.
Among the key findings of the exercise, most of the Reporting Firms’ active clients were based in Hong Kong and the majority were individual clients. While most Reporting Firms dealt in both local and overseas futures contracts, dealing in local futures contracts represented about 70% of the Reporting Firms’ client turnover and 46% of their commission income.
The exercise revealed that the Reporting Firms adopted inconsistent criteria to assess whether clients are “established” (Note 2). This raises concerns that individuals who are treated as established but do not have good financial standing or creditworthiness could expose brokers to undue financial risk.
A separate concern is that information about setting-off arrangements (Note 3), such as the specific terms and risks involved, might not be specified in clients’ authorisations or otherwise provided to them. In cases where funds are transferred to cover a margin shortfall, the client might not be given an opportunity to decide to hold open positions subject to market risk or to stop loss by liquidating them.
The SFC will provide further guidance to the industry on these issues in due course.
- The Reporting Firms are licensed under the Securities and Futures Ordinance to carry on Type 2 (dealing in futures contracts) regulated activity and are exchange participants of the Hong Kong Futures Exchange Limited (HKFE). They accounted for about half of all licensed corporations’ active futures and options clients as of 31 December 2015.
- Under Rule 617(b) of the Rules of the HKFE, if certain criteria are satisfied, exchange participants may transact for established clients even if they do not deposit sufficient upfront margin.
- Setting off the debit balance in a client’s futures trading account against a credit balance in the client’s other trading accounts held with the broker or its affiliated companies.