SFC issues consultation paper on short selling disclosures

Yesterday the HK SFC issued a second consultation paper (see www.sfc.hk) on the issue of mandatory short selling position disclosures.  This paper follows on from the first one where the SFC asked the industry to comment on whether a reporting regime should be put in place.  The MFA and our firm were the only two that at the time said it was a bad idea.  Other organisations seemed to lack the will to explain what a silly policy idea this was.

So now we have the consultation on how the new rules will work.

The new rules essentially will invovle the following:

1 - It will apply initially just to Hang Seng Index component stocks
2 - Reporting threshold is 0.02%
3 - Reporting would be once a week, within 2 days of the last trading day of the week
4 - Reporting is aggregated and published one week after the reporting date, individual positions are confidential
5 - Reporting will be done electronically
6 - OTC short positions do not need to be reported
7 - Reporting is done by the entity beneficially owning the security, ie a fund has an obligation to report.  If a manager has more than one fund then each fund has a separate obligation to report
8- It will be a criminal offence to not comply with the rules with both jail terms and fines for breaches

The new system will be costly to implement and the majority of smaller managers/funds will probably just do what many do in Australia and Japan and go on swap.  The loser here will be investors.  Going on swap adds a few basis points here and there to the cost of every trade.

The Commission is wrong on this point.  There is no policy need for this in Hong Kong, the Commission has other established tools at its disposal to monitor the volume of short sales in relation to a security and to find out who is behind such selling.

In addition the proposal that breaching this costly and unecessary legislation would be a criminal offence is totally unacceptable.  Lets hope the investment community in Hong Kong has a little more stomach to complain to its regulator this time around than they did last time.

SFC consultation paper on list of exchanges

On May 4 2011, the SFC issued a consultation paper  proposing amendments to the list of exchanges specified in the Securities and Futures (Financial Resources) Rules.

The proposed amendments aim to update the list of specified exchanges  to facilitate market development and alleviate the compliance burden of licensed corporations.

The public is invited to submit comments to the SFC on or before 3 June 2011

The consutlation paper can be found using this link

SFC seeks to codify a requirement for public companies to dislcose inside information

The SFC has today drafted guidance on what constitutes “inside information", a new term used in the proposed legislation to mean “price sensitive information". “Safe harbours” and how they would apply are also described in the “Draft Guidelines on Disclosure of Inside Information”.

The SFC notice which was issued by way of an alert reads as follows:

Consultation begins on draft guidelines on disclosure of inside information

The Securities and Futures Commission (SFC) has begun soliciting public comments on a draft set of guidelines to explain “inside information” and its application, in parallel with the Government’s publication today of proposals to make it statutory for listed corporations to make timely disclosure of “price-sensitive information”.

The Government’s consultation paper (Note 1) proposes to include in the Securities and Futures Ordinance (SFO) a statutory requirement for a listed corporation to disclose to the public as soon as practicable “price-sensitive information” that has come to its knowledge.

As part of the proposals, the SFC has drafted guidance on what constitutes “inside information", a new term used in the proposed legislation to mean “price sensitive information". “Safe harbours” and how they would apply are also described in the “Draft Guidelines on Disclosure of Inside Information”.

“We support statutory backing of the disclosure obligation on listed companies as that would represent a key step to enhance transparency and the quality of Hong Kong’s securities markets,” said Mr Martin Wheatley, the SFC’s Chief Executive Officer. “The proposed guidelines are intended to help issuers comply with the proposed statutory rule. We will continue to liaise with the Government on related initiatives, including direct access to the Market Misconduct Tribunal.”

As the proposed definition of “inside information” is the same as that of “relevant information” used in existing and prior legislation related to insider dealing (Note 2), the guidelines quote decisions of Hong Kong tribunals reached previously on insider dealing. Decisions of these tribunals regarding “relevant information” are helpful in understanding what the proposed statutory regime means when referring to “inside information”.

The public is invited to submit comments to the SFC on the draft guidelines by 28 June 2010. Written comments may be submitted online via the SFC website, by e-mail to cfdconsult@sfc.hk, by post or by fax 2810 5385.

End

Notes:

1. A copy of the Government’s consultation paper “Consultation Paper on The Proposed Statutory Codification of Certain Requirements to Disclose Price Sensitive Information by Listed Corporations” is available on its website at www.fstb.gov.hk.
2. Under the Government’s proposals, a listed corporation is obliged to disclose to the public as soon as practicable any “price sensitive information” that has come to the knowledge of the listed corporation. In defining “price-sensitive information,” it is proposed that its definition will replicate the definition of “relevant information” in section 245 of the SFO, which a person is prohibited from using when dealing in the securities of a listed corporation. It is proposed that the SFO will use the term “inside information” to refer to the “price-sensitive information” that a listed corporation needs to disclose.

Consultation paper on Listed and Unlisted Investment Products

On January 28 MAS issued a consultation paper on the Regulatory Regime for Listed and Unlisted Investment Products. This consultation paper is part of the second response MAS issued to a consultation process undertaken in March 2009 on unlisted investment products.

The main proposals, contained in the consultation paper, focus on a new obligation on financial advisers and brokers to formally assess a retail customer's investment knowledge or experience before selling investment products to the customer. It is proposed that the new obligations will apply for all investment products other than a list of products which are already established in the market and generally understandable by retail investors. MAS will prescribe the list of products that will be excluded from the new obligations.

MAS have also included the following proposals in this consultation paper:

(i) Expanding the scope of the CMFAS examination module that was planned for the three classes of unlisted "complex investment products" consulted in March 2009 to cover other non-excluded investment products; and

(ii) Requiring issuers of debentures which are asset-backed securities and structured notes, collective investment schemes and sub-funds of investment-linked life insurance policies to prepare Product Highlights Sheets.

Responses to this consultation paper are due to MAS by 12 March 2010

SFC proposes changes to REIT and listed CIS regulation

On 8 January the SFC released a series of proposals to extend the Codes on Takeovers and Mergers and Share Repurchases (Codes) to real estate investment trusts (REITs) and to apply the market misconduct and disclosure of interests provisions in the Securities and Futures Ordinance (SFO) to listed collective investment schemes (CISs).

Martin Weatley, SFC’s Chief Executive Officer said  "We believe that the proposals represent a step forward in defining a regulatory infrastructure that better protects the interests of investors and assists the further development of Hong Kong's REIT market"

The first part of the proposals calls for amendments to the REIT Code including aligning the control structure of REIT with that of listed companies, and to the Codes including introducing a set of REIT Guidance Notes to the Codes.

The second part seeks to clarify and enhance the regulation of market conduct regarding dealings in listed CIS by applying market misconduct regulations and disclosure of interest requirements.

Public comments are due by 8 March 2010. For further information please use the following link REIT and Listed CIS  regulation change

Key SFC releases over the Christmas and New Year Break

Over the Christmas and New Year break there have been several media releases by the SFC in Hong Kong. Below is a brief summary of the major announcements. Further details can be found on the SFC website

• The SFC plans to make January the investor education month with a series of events including a radio program, additional advertising and a financial knowledge quiz. Mr Martin Wheatley, the SFC’s Chief Executive Officer, said: “The New Year is a good time for investors to review their investment portfolios and plan ahead. Amidst growing concerns of asset price bubbles forming in emerging markets and recent volatility in the global financial markets, it is important that investors do their homework, ask the right questions and evaluate risks to make informed investment decisions.”
• The SFC released its annual report on the operation of the Stock Exchange of Hong Kong. The SFC reported that the operational procedures and decision-making processes reviewed were appropriate to enable the Exchange to discharge its statutory obligation to maintain an orderly, informed and fair market, and to make rules for the proper regulation and efficient operation of the market in 2008. The SFC did however, find some areas for improvement.
• The SFC together with Hong Kong Exchanges and Clearing Limited (HKEx) and the Federation of Share Registrars Limited (FSR) jointly issued a consultation paper on a proposed operational model to introduce a scripless securities market in Hong Kong. The key proposals are:    investors may choose to hold their securities in scripless form; all scripless securities will be held inside the Central Clearing and Settlement System; and to the extent possible, the regime will also apply to shares and debentures of overseas companies that are listed in Hong Kong. All comments are due by 31 March 2010.

Hong Kong SFC Proposals to enhance investor protection released

Following the Lehman mini bond scandal in Hong Kong where large numbers of investors appear to have been sold inappropriate financial products, regulators have been going through a process of analyzing what went wrong in order to consider new procedures. A short while ago the Hong Kong Monetary Authority, which regulates banks, set out a number of new rules for those institutions regarding sales and suitability.

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