Version 1. Waivers or Modifications for Statutory Requirements

Transcription

1 Waivers or Modifications for Statury Requirements Waiver of Financial Resources Rules ( FRR ) granted since 12 June 2000 and currently in force. Please note that the following s were granted after considering special circumstances of each application and business needs of each applicant. The s may not be suitable for general application or they may need be granted subject different conditions. Registered persons are welcome approach the Intermediaries Supervision Department if they consider compliance with specific provision(s) in the FRR would be unduly burdensome for them having regard the benefits which compliance would confer on the investing public and discuss possible /waiver with Department staff. Section 2 Calculation of net underwriting commitment Section 28 requires a dealer make a financial adjustment for net underwriting commitments. Under section 2, net underwriting commitment excludes securities sub-underwritten or subscribed for in writing through or from that dealer by another person. This causes burden a dealer that reduces its underwriting exposure by having a put option sell securities at the purchase/subscription price which will be exercised where necessary. September 2001 The allows the dealer exclude securities which the dealer has an irrevocable right under a put option sell its affiliated company The affiliated company is of sound financial standing owned by a company of investment grade rating, hence the default risk should be low. This only applies where the underwriting agreement prohibits sub-underwriting or further sub-underwriting, but does not disallow the lay-off of risks by the put option arrangement. The dealer is required report, on a quarterly basis, details of these put option arrangements and the related underwriting or sub-underwriting agreements. The direction is subject annual renewal on application by the dealer

2 Section 6(1) Liquid capital requirement Under section 6(1) of the FRR, the dealer shall have and at all times maintain in business for which it is registered, liquid capital of no less than its required liquid capital, namely the higher of HK$3 million (being the floor requirement) or an amount equals 5% of his tal liabilities. This creates hardship for a fund manager which intends cease business very shortly. November 2001 Reduces the floor requiremnet from $3 million $1.5 million. The direction will be valid for limited time. During the period, the dealer will not handle client assets and its dealing activities will be limited processing redemption of authorised fund. Section 6(1) Liquid capital requirement Section 6 requires a securities dealer maintain a minimum liquid capital of the higher of HK$3M or an amount which is equal 5% of his tal liabilities. The tal liabilities figure (computed on the trade date basis) is directly affected by turnover. Where a dealer has substantial operation in agency bond trading, the tal liabilities figure and the hence the minimum liquid capital can be very large because the trades typically are of much higher value. This causes undue burden where agency bond trading in this case is perceived carry a very low risk. December 2000 The allows the dealer use an averaging method in calculating the required liquid capital for recognised bond transactions. Under the modified rule, the dealer is required maintain a minimum liquid capital of the higher of - HK$3M; or - 5% of the dealer s tal liabilities (but excluding amount payables counterparties arising from recognised bond transactions) and the average of amounts payable counterparties arising from recognised bond transactions on the last day of each of the preceding 12 months

3 To qualify as recognised bond transactions: - the bonds traded are of investment grade rating; - trades are settled on a delivery-versus-payment basis through reputable settlement agents; and - the counterparties have investment grade rating or are group companies owned by a corporation of investment grade rating. Section 6(1) & Section 30(2) Computation of ranking liabilities and tal liabilities Section 6(1) sets out the liquid capital requirement for dealers and section 30(2) sets out liabilities of a dealer that shall not be included in his ranking liabilities. In the circumstances that the dealer only acts as an intermediary conduit in the funding arrangements for securities trading activities of group companies (i.e. it receives funding from the holding company lend an associated company) and is not subject any recourse, the inclusion of the resulted loans due the holding company in ranking liabilities and tal liabilities affects the operational efficiency and causes undue burden the dealer. July 2000 The allows the dealer exclude from his ranking liabilities and tal liabilities the loans due the holding company drawn under the loan facility in respect of the funding arrangements for securities trading activities of the group. The dealer should not be exposed any risk as a result of the arrangement. The dealer should not be liable for any expenses, costs and losses in relation the arrangement. The dealer is not subject any recourse. Section 6(1) & 35(1) Liquid capital requirement and submission of Section 6 requires a securities dealer maintain minimum liquid capital of the higher of HK$3M or an amount which is equal 5% of his tal liabilities. Section 35(1) also requires FRR returns be June 2000

4 monthly financial returns lodged with the Commission by a dealer. However, it is not appropriate apply the above requirements a dealer whose principal business activities are non-securities related and the Hong Kong entity is merely a branch office that conducts specialised securities related business. The allows the dealer apply the liquid capital and monthly return reporting requirements only its securities related business in Hong Kong. Under the modified rules, the dealer is required maintain minimum liquid capital of the higher of HK$3M or 5% of tal liabilities arising from securities related business in Hong Kong. The dealer is only required submit monthly financial returns in relation its Hong Kong securities related business. The dealer is restricted engage in its existing securities dealing activities only. The dealer is required maintain separate accounting records for its securities related business in Hong Kong. The dealer is required maintain a minimum amount of fixed term deposit in a designated bank account in Hong Kong and the dealer must obtain prior approval from the Commission before withdrawing any fund from this account. The dealer is required report the Commission if there is any significant increase in business volume. The dealer is required submit audirs certificate on whether the liquid capital computation at each financial year-end is correctly compiled from the books and records of the dealer and in accordance with the modified FRR. Section 9(1)(b) Minimum capital requirement Section 9(1)(b) requires dealers maintain paid up capital of not less than $5 million. This causes burden a dealer that was in the process of winding up it business. Ocber

5 The allows the dealer maintain a lower paid up capital during the winding up period. The dealer is required: - not carry any business other than winding up its remaining business; - maintain at all times shareholders' funds of not less than $5 million; and - notify the Commission in case of changes in its capital and winding up process. The direction is subject annual renewal on application by the dealer. Section 11(1) Section 11(1) stipulates that only assets described in sections can be included in liquid assets and this does not cover net unrealized gain arising from currency spot and forward contracts. This creates hardship the dealer whose principal business activities include entering in currency spot and forward contracts with enforceable netting agreement. September 2000 The allows the dealer include as part of its liquid assets the net unrealized gain arising from transactions in currency spot and forward foreign exchange contracts. The currency spot and forward foreign exchange contracts are hedged and the hedged positions are maintained with counterparties of investment grade rating. The dealer is required submit semi-annual audirs certificates confirming proper extraction of the FRR returns. Section 11(4) Assets in a currency that is subject exchange control Under section 11(4), all assets held in a currency that is subject exchange control shall be excluded from liquid assets. The rule does not make a distinction between situations where there is or there is not a need remit cash Hong Kong. As a result, this creates undue burden a Hong Kong broker that has a branch operated in Korea. The burden arises where the overseas branch has significant April

6 trade receivables not due for settlement as these cannot be treated as liquid assets when the corresponding trade payables are treated as ranking liabilities. The allows a dealer include in its liquid assets trade receivables arising from purchases or sales of securities listed in Korea which are not yet due for settlement in accordance with the relevant rules and which are matched with a corresponding trade payable denominated in Korean Won. Only the part of the trade receivable from clients/brokers in the overseas branch not yet due for settlement and matched by a corresponding payable can be counted as liquid assets The dealer is required immediately inform the Commission if it identifies or becomes aware of any material changes the relevant trading or settlement rules and regulations in Korea and the licensing condition imposed on the Korean branch. Section 12 Cash in hand and at bank Under section 12, money deposited with an overseas bank, which is not an authorised institution or an approved bank formed or established outside Hong Kong, shall not be included as liquid assets. This creates hardship a HK broker who has business operations in an overseas market and maintains a significant bank balance with an overseas bank, which is not specified in the FRR but subject comparable regulary control, for trade settlement purposes. February 2001 The allows the dealer include in its liquid assets money held on account with United World Chinese Commercial Bank ( UWCCB ) in Taiwan. The dealer is required by local regulation settle trades using UWCCB as a settlement bank. UWCCB is subject comparable regulary control acceptable the Commission

7 Section 15(a) Financial adjustment on house positions Under section 15(a), house positions are included in liquid assets at market value less applicable haircut. This causes burden a dealer that has acquired shares meet potential liabilities under specific circumstances. December 2000 The allows the dealer include the full market value of the house positions in its liquid assets. The only applies shares earmarked for this purpose which must be deposited in a separate designated CCASS account and the shares can only be used meet liabilities under specific circumstances. The dealer is required ensure compliance with the FRR after making full provisions for the liabilities. Section 16(c) Amounts receivable from specified exchanges/ clearing houses in respect of futures and option trading. Commodity dealer Section 16(c) only allows dealers include amounts receivable from specified exchanges/ clearing houses or any of their clearing members or clearing participants, as specified in the FRR, as liquid assets. This creates hardship a dealer who deals actively in products traded on futures and options exchanges, which are not specified in the FRR, as the amount deposited with these exchanges cannot be counted as liquid assets. January 2001 The allows the dealer include amounts receivable from, and cash deposited with Malaysia Derivatives Clearing House Berhad, Korea Futures Exchange or any of their clearing members or clearing participants, in the ordinary course of trading in futures or options contracts, other than, where applicable, admission fees paid it and cash deposited as security against the dealer's general obligations, as liquid assets

8 The exchange and clearing house are subject comparable regulary control acceptable the Commission. The dealer shall inform the Commission immediately if it identifies or becomes aware of any material changes in the law and regulation of Korea and Malaysia governing exchange control or their regulary capital requirements applicable clearing members or participants. Section 18 Fees receivable Section 18(a) includes as liquid assets fee receivables which have been outstanding for not more than 2 weeks after their billing date. This causes burden a dealer which receives investment advisory fees only pay them out, upon receipt, group companies under a back--back charging arrangement. September 2001 The allows the dealer include as liquid assets such investment advisory fee receivables which have been outstanding for not more than 2 months after their billing date the extent that the dealer is liable pay out under the back--back arrangement. The dealer is only required pay fees the extent that they have been collected. Fees receivables must be matched with a corresponding liability pay out under a back--back arrangement. Section 22(5) Writing of a zero strike OTC call option Under section 22(5), the writing of a zero strike OTC call option attracts a financial adjustment of twice the market value of the option. Furthermore, the corresponding amounts of premium receivable cannot be treated as liquid assets. This causes undue burden a dealer that holds a long position of scks which underlie zero strike OTC call options written a group company under the group s index arbitrage strategy. May

9 Where the dealer writes zero strike OTC call options on specified scks a group company and beneficially owns the underlying scks, the allows the dealer include just once the market value of the relevant zero strike OTC call options in its ranking liabilities. In addition, the corresponding amounts of premium receivable due from a group company, which are calculated on a transaction-by-transaction basis and not yet due for settlement, can be treated as liquid assets. The dealer does not bear any risk under this back--back arrangement. The number of shares underlying the zero strike OTC call options written by the dealer matches the number of the shares of the respective scks beneficially owned by the dealer. Section 23 Concentration adjustment of margin clients Securities dealers Section 23 requires the dealer make a concentration risk adjustment which effectively limits individual margin loans or loans groups of related margin clients 10% of aggregate margin loans that can be included in liquid assets. This causes undue burden dealers whose margin loans are well-collateralised by good quality and highly liquid sck collateral. February, March and July 2001 The allows the dealer opt include in its ranking liabilities the amount of concentration shortfall, being the amount by which the amount receivable from individual margin clients or groups of related margin clients exceeds the aggregate of - 40% of market value of constituent scks of HSI and / or Nikkei 225 and /or the Tracker Fund; - cash deposited as security; and - bank guarantee instead of the concentration risk adjustment stipulated in section 23. Constituent scks of HSI and Nikkei 225 and the Tracker Fund are generally of good quality - 9 -

10 and actively traded. Amounts receivable from individual margin clients or groups of related margin clients that can be included in liquid assets should not exceed 3 times of the dealer s liquid capital. The dealer is required submit calculation of the concentration risk adjustment the Commission on a monthly basis. Section 31(1)(a) Financial adjustments for guarantees provided Section 31(1)(a) requires a dealer include in his ranking liabilities a financial adjustment which equals 10% of the amount of any guarantee, indemnity or any other similar financial commitment he has provided. This creates undue burden the dealer that provides guarantee on the minimum investment return of a number of guaranteed pooled retirement funds where the risks of the underlying assets are low. March 2001 The allows the dealer calculate the tal guaranteed amount as the tal principal amount of the guaranteed pooled retirement funds + the guaranteed investment return - tal of all cash in hand and deposits with the authorized institutions - tal market value of qualifying debt securities less the applicable haircut amounts provided in Part I of Schedule 2 of the FRR. The dealer is required ensure that all assets held by the guaranteed pooled retirement funds shall be marked--market at least on weekly basis and whenever there is a substantial change the market value of assets held by the funds. The dealer is required immediately take up the loss (guaranteed return less actual return) in its liquid capital computation under the FRR, whenever a guaranteed pooled retirement fund s overall actual return in any given guarantee year calculated on an annualised basis falls below the guaranteed return, and immediately notify the Commission. If the aggregate market value of a description of qualifying debt securities held by the funds equals or exceeds 25% of the dealer s required liquid capital, these securities should be subject an additional haircut of 5% or 10%

11 The dealer is required include 5% of each net long or short foreign currency position of the funds in the tal guaranteed amount. The issued share capital of the dealer should not be less than a prescribed amount. There should not be any change of the major shareholders of the dealer either directly or indirectly. Section 35(1) Lodging of monthly returns Securities dealers and commodity dealer Section 35(1) requires a dealer lodge calendar month end FRR returns with the Commission. This causes burden dealers whose financial systems are set up based on the globally set fiscal periods, which may vary slightly from the calendar months. June 2001 The allows the dealers lodge the fiscal month end FRR returns with the Commission instead of calendar month end not later than three weeks after the end of the calendar month. Deviation of fiscal month end dates from calendar month end dates should not be significant. Prior approval must be obtained from the Commission on any changes in the cycle of the dealers fiscal month end dates. Item 1 of Part II, Schedule 4 Foreign Exchange Agreements Under Item 1 of Part II, a dealer who has entered in foreign exchange agreements with counterparties who are not authorised institutions or approved banks formed or established outside Hong Kong is required include 5% of the principal amount in his ranking liabilities. This may be unduly burdensome where the counterparties - have investment grade rating; or - are group companies owned by a corporation of investment grade rating. Ocber 2000 The allows the dealer treat certain counterparties on the same basis as authorised

12 institutions and approved banks formed or established outside Hong Kong. These counterparties must have investment grade rating or be within the same group of companies as the dealer and owned by a corporation of investment grade rating