Response to the Consultation Document from the Hong Kong Stock Exchange: Proposal on Severe Weather Trading of Hong Kong Securities and Derivatives Markets
Release Date: 2024-01-01
January 1, 2024
To: Hong Kong Exchanges and Clearing Limited (hereafter referred to as "the Exchange" or "your esteemed Exchange")
Question 1: Do you have any comments or concerns on the proposed arrangements for the Hong Kong securities market?
We have several concerns, particularly highlighting:
- Paragraph 23: Members of the dedicated task force have underscored the importance of providing ongoing technical support to all market participants during the transition back to normal trading amidst adverse weather conditions.
- Paragraph 30: The Hong Kong Exchange has explored various operational frameworks based on key principles. Notably, 30.1 emphasizes that the safety of personnel and investors is paramount. We advocate for all operations to be conducted electronically and remotely, strongly advising against the use of physical business points during adverse weather.
- Paragraph 44: The current risk management protocols that apply on normal trading days, including daily market evaluations, margin requirements, contributions to guarantee funds, collateral policies, and liability management processes, will continue to be enforced on trading days affected by adverse weather. Settlement participants must follow the settlement schedule set by Hong Kong Clearing; failure to do so will result in liability incidents, which may prompt actions against the relevant settlement participants by Hong Kong Clearing.
- Paragraph 45: Should customers of settlement participants be unable to meet their payment commitments under any circumstances (e.g., if a customer’s bank is closed), the settlement participants must have adequate risk management and strong funding strategies in place to ensure they can meet their obligations to Hong Kong Clearing promptly.
Despite the Exchange's emphasis on prioritizing safety and discouraging physical transactions, many small to medium-sized brokers feel they cannot entirely eliminate the need for physical transaction settlements. The task force has highlighted the critical need for robust ongoing technical support to all market participants during this transition. While many brokers currently facilitate electronic trading, the technologies they utilize vary widely, from in-house systems to cloud applications and SaaS solutions. Adverse weather may cause incidents or failures at these locations, and timely management of traffic and on-ground conditions may not be feasible. During such instances, the liabilities and losses sustained by participants and investors may remain unresolved. We recommend that the Exchange provide practical technical support solutions alongside this consultation document to facilitate comprehensive assessment; otherwise, it risks becoming an impractical suggestion disconnected from real-world circumstances.
Question 2: Do you have any comments or concerns on the proposed arrangements for Northbound Trading under Stock Connect?
We have the following concerns:
We do not oppose the normal trading of Stock Connect and Shenzhen Stock Connect. However, participants should be reminded to prioritize risk management and liquidity measures for margin trading on these platforms, as securities collateral financing through China Connect directly affects participants' financial resources (FRR). In adverse weather conditions, liquidity management should be proactively arranged, and coordination tests with the banking system should be conducted; failing to do so may result in liquidity issues or insufficient funds due to technical failures, ultimately affecting participants and investors.
Question 3: Do you have any comments or concerns on the proposed arrangements for Hong Kong derivatives market?
We have the following concerns:
In Paragraph 61, regarding the reporting of significant open contracts, participants must inform their clients about these regulations and ensure ongoing compliance, including during trading days affected by adverse weather.
The Exchange should take the initiative in promoting the various reporting obligations that investors have during adverse weather conditions and should enhance market education significantly.
Question 4: Do you have any comments or concerns on the proposed arrangements for new listings and new products?
We have the following concerns:
- Paragraph 64: We recommend that new listings and first-day trading of equity securities, debt securities, and recognized collective investment schemes continue as planned on trading days affected by adverse weather.
- Paragraph 65: Applicants should adhere to their listing timelines and comply with the deadlines set forth in the Listing Rules and relevant guidelines from the Exchange (if applicable). Notably, applicants should consider potential weather-related challenges when planning listing timelines and should accurately reflect these considerations in their listing documents (such as prospectuses or underwriting agreements for initial public offerings).
Moreover, the Exchange also advocates for the continued launch and trading of exchange-traded products, structured products, futures, and options. For this aspect, the Exchange should engage in thorough consultations with stakeholders, including investment banks, to assess the impact of adverse weather on corporate listings and hedging arrangements for structured products and futures and options. The consultation document lacks mention of prior market research; it merely suggests proposals without relevant feedback from market participants. Given the current significant drop in capital raised by new stocks, unilateral proposals may be seen as inappropriate.
Question 5: Do you have any comments or concerns on the proposed money transfer arrangements:
We have the following concerns:
(i) Cheque clearing
(ii) Banking Services
In adverse weather, the consultation document indicates that the delivery of paper checks will be compromised, which will inevitably affect customer deposits, withdrawals, and securities settlements.
The document also discusses electronic check arrangements; however, the current usage and popularity of electronic checks remain low. Earlier this month, a bank publicly announced its decision to stop issuing electronic checks, highlighting the inadequacy of their current application.
Concerning online transfer or remittance systems mentioned in banking services, some banks impose limits on transfer amounts; for example, the transfer limit on FPS may not align with the demands of securities trading. Therefore, banks and securities firms must come to an agreement to prevent disruption to investor operations due to electronic transfer limits.
Question 6: Do you agree with the proposed arrangements for listing applicants and listed issuers as set out in paragraphs 90 – 91 above, where (a) no change should be made to the existing definition of “business day” under the Listing Rules; and (b) consequential amendments (where necessary) should be made to the Listing Rules to remove any current time extension? Please provide reasons for your view.
We disagree for the following reasons:
- Paragraph 83: Under Hong Kong legislation Chapter 622, the Companies Ordinance mandates public companies to issue share certificates for any shares transferred within a specified timeframe or to prepare relevant certificates for debt securities transfers within 10 business days after submission of transfer documents. The term "business day" pertains to days when recognized securities markets are operational, aligning with the definition in the Listing Rules. As such, it also encompasses days when the Exchange operates only for half a day (e.g., when either the morning or afternoon session is canceled due to adverse weather). Continuing trading during adverse weather maintains operational continuity, and according to the definition, trading days under such conditions should be classified as business days.
The statements in paragraph 90 indicate that the Exchange, issuers, and other relevant entities can fulfill their obligations on trading days affected by adverse weather, and the Exchange's online platforms (including the "disclosure" website) will remain operational during these days. We believe that trading days affected by adverse weather should be recognized as "business days" (as defined in the Listing Rules). This interpretation will also influence banks’ operational days and their definition of "business day." It is essential to note that the current employment relationships in the labor market are closely tied to bank operating days, directly or indirectly affecting working days, wage calculations, labor insurance, and other relevant protections. Has the Exchange conducted careful evaluations regarding the social costs of such changes to accurately assess the potential impacts of altering the "business day" definition?
Question 7: Do you agree with the proposed arrangements for listing applicants and listed issuers as set out in paragraphs 92 – 94 above, and that consequential amendments (where necessary) should be made to the Listing Rules to accommodate situations where there are practical difficulties in complying with a Listing Rule obligation on a SWT Day? Please provide reasons for your view.
We disagree for the following reasons:
Adverse weather, especially prolonged adverse conditions lasting more than one day, will impact sea, land, and air transportation. Historically, legal extensions due to adverse weather have been granted. If the new recommendations are implemented, for instance, requiring physical presence or service from a party that is overseas and affected by transport delays, the associated responsibilities will be assigned to that party, according to this consultation document. Such circumstances should be redefined within the Listing Rules to clarify responsibilities and establish necessary regulations.
Question 8: Do you envisage there being any material practical difficulty in complying with any particular Listing Rule requirements (e.g. those identified in paragraph 93) if a SWT Day is counted as a “business day”? If so, please explain the practical difficulty with reference to the relevant Listing Rules.
The practical challenges are as outlined in the previous question 7.
Question 9: Do you agree that consequential amendments to the Listing Rules should be made to reflect any arrangements proposed under this chapter and the relevant trading and clearing arrangements proposed under Chapter 2?
Amendments to the Listing Rules are warranted for the following reasons:
We must revise the Listing Rules to make clear that violations or non-compliance resulting from adverse weather conditions (such as transportation disruptions, building damage, etc.) should be exempted. However, the definition of "business day" requires careful consideration in relation to the entire labor market. Thorough research in collaboration with governmental departments is essential; otherwise, trading on business days during adverse weather could lead to substantial social issues, which would be counterproductive.
Question 10: Under the proposed model, do you foresee any insurmountable difficulties for implementing SWT? If yes, please specify.
We foresee several challenges that require attention:
- Technical Support: The industry rapidly adapted to remote work during the pandemic, yet it remains uncertain whether these capabilities can fully meet regulatory standards; even regulatory agencies may not guarantee operational reliability during such times. Although regular operations have resumed, we should leverage the technological advancements made during the pandemic to enhance technical support for remote work.
- Cost Issues: The industry faces challenges due to a tough economic environment coupled with rising technological investment demands. This places additional strain on small and medium-sized brokers, who must increase technology investments while managing personnel challenges.
- Practical Operations: While some participants may have the necessary technical support for remote work, the suitability of home working environments remains a significant concern. Space constraints and the likelihood of family members being home during adverse weather may lead to issues of confidentiality and operational processes that need to be addressed. Other family members may have similar job requirements, making it difficult to implement control measures at home, resulting in operational risks.
- Responsibility: The consultation document reiterates that the Exchange may pursue actions against participants who fail to comply with various requirements due to risk management and response measures during adverse weather, which may lead to liability incidents. If adverse weather causes physical incidents that disrupt systems or operations, determining the allocation of responsibilities becomes problematic, creating additional risks for operators and complicating matters for insurance and service providers.
- Social Costs: Beyond assessing the costs of maintaining trading in the securities and banking sectors during adverse weather, social costs must also be evaluated. As more individuals work normally during adverse weather, societal challenges related to basic needs—such as food, housing, and transportation—will increase. The risk factors for related service providers and law enforcement agencies managing these needs also rise and must be factored into the assessment.
Question 11: Would there be adequate time to prepare for SWT to come effective in July 2024 under the proposed model? If not, what would be a reasonable length and why?
We do not believe the preparation time allocated by the Exchange is reasonable. We propose the following suggestions:
The consultation document notes that from 2018 to the present, adverse weather has resulted in 11 trading suspensions, which averages to about 2.2 occurrences per year, including both half-day and full-day suspensions.
The economic landscape over the past year, particularly in terms of trading volume and market sentiment, has been low, and there has been an uptick in the number of securities firms surrendering their licenses to the Securities and Futures Commission, increasing the temptation for operationally pressured firms to cut back on technology investments. Is this outcome something the Exchange welcomes?
If we calculate from the consultation's end date of January 26, 2024, combined with the Exchange's need to process and integrate various feedback and the significant Lunar New Year holiday in our region, the final draft is anticipated to be released around early March 2024. If it is to be implemented by July 2024, this would provide only 3 to 4 months for execution. This timeframe likely falls short for the securities and banking sectors to complete essential processes, such as enhancing system capabilities, institutional frameworks, establishing effective business continuity plans, and conducting necessary system tests.
Paragraphs 99.2, 99.3, and 99.4 of the consultation document highlight that participants should engage their service providers and information suppliers to ensure continuity of services during trading days in adverse weather. They are encouraged to leverage the remote work capabilities developed during the pandemic to prepare for maintaining business processes during such trading days. Participants should also formulate comprehensive business continuity plans for fully remote work scenarios to guarantee service maintenance. Participants needing core employees to return to the office or other locations in Hong Kong during adverse weather trading periods should comply with the "Code of Conduct for Work during Typhoon and Rainstorm Situations" issued by the Labour Department.
The consultation document's three paragraphs indicate that other relevant entities, including service providers, information suppliers, the Hong Kong Exchange, and the Labour Department, must be considered by participants. We believe that 3 to 4 months is insufficient time for adequate communication and preparation between participants and the Exchange.
We propose a phased implementation 12 to 18 months following the formal introduction of this proposal. This approach would allow participants to extend their planning period, ensuring all parties can adequately implement necessary arrangements. Given an average of about 2.2 trading suspensions per year, this strategy would minimize impact and provide a more practical balance of interests among all stakeholders.
If you have any questions concerning this letter, please do not hesitate to contact me at (phone: / email: ) or Mr. Wong Hoi Lok Ivan at (phone: / email: ).
Sincerely,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association
To: Hong Kong Exchanges and Clearing Limited (hereafter referred to as "the Exchange" or "your esteemed Exchange")
Question 1: Do you have any comments or concerns on the proposed arrangements for the Hong Kong securities market?
We have several concerns, particularly highlighting:
- Paragraph 23: Members of the dedicated task force have underscored the importance of providing ongoing technical support to all market participants during the transition back to normal trading amidst adverse weather conditions.
- Paragraph 30: The Hong Kong Exchange has explored various operational frameworks based on key principles. Notably, 30.1 emphasizes that the safety of personnel and investors is paramount. We advocate for all operations to be conducted electronically and remotely, strongly advising against the use of physical business points during adverse weather.
- Paragraph 44: The current risk management protocols that apply on normal trading days, including daily market evaluations, margin requirements, contributions to guarantee funds, collateral policies, and liability management processes, will continue to be enforced on trading days affected by adverse weather. Settlement participants must follow the settlement schedule set by Hong Kong Clearing; failure to do so will result in liability incidents, which may prompt actions against the relevant settlement participants by Hong Kong Clearing.
- Paragraph 45: Should customers of settlement participants be unable to meet their payment commitments under any circumstances (e.g., if a customer’s bank is closed), the settlement participants must have adequate risk management and strong funding strategies in place to ensure they can meet their obligations to Hong Kong Clearing promptly.
Despite the Exchange's emphasis on prioritizing safety and discouraging physical transactions, many small to medium-sized brokers feel they cannot entirely eliminate the need for physical transaction settlements. The task force has highlighted the critical need for robust ongoing technical support to all market participants during this transition. While many brokers currently facilitate electronic trading, the technologies they utilize vary widely, from in-house systems to cloud applications and SaaS solutions. Adverse weather may cause incidents or failures at these locations, and timely management of traffic and on-ground conditions may not be feasible. During such instances, the liabilities and losses sustained by participants and investors may remain unresolved. We recommend that the Exchange provide practical technical support solutions alongside this consultation document to facilitate comprehensive assessment; otherwise, it risks becoming an impractical suggestion disconnected from real-world circumstances.
Question 2: Do you have any comments or concerns on the proposed arrangements for Northbound Trading under Stock Connect?
We have the following concerns:
We do not oppose the normal trading of Stock Connect and Shenzhen Stock Connect. However, participants should be reminded to prioritize risk management and liquidity measures for margin trading on these platforms, as securities collateral financing through China Connect directly affects participants' financial resources (FRR). In adverse weather conditions, liquidity management should be proactively arranged, and coordination tests with the banking system should be conducted; failing to do so may result in liquidity issues or insufficient funds due to technical failures, ultimately affecting participants and investors.
Question 3: Do you have any comments or concerns on the proposed arrangements for Hong Kong derivatives market?
We have the following concerns:
In Paragraph 61, regarding the reporting of significant open contracts, participants must inform their clients about these regulations and ensure ongoing compliance, including during trading days affected by adverse weather.
The Exchange should take the initiative in promoting the various reporting obligations that investors have during adverse weather conditions and should enhance market education significantly.
Question 4: Do you have any comments or concerns on the proposed arrangements for new listings and new products?
We have the following concerns:
- Paragraph 64: We recommend that new listings and first-day trading of equity securities, debt securities, and recognized collective investment schemes continue as planned on trading days affected by adverse weather.
- Paragraph 65: Applicants should adhere to their listing timelines and comply with the deadlines set forth in the Listing Rules and relevant guidelines from the Exchange (if applicable). Notably, applicants should consider potential weather-related challenges when planning listing timelines and should accurately reflect these considerations in their listing documents (such as prospectuses or underwriting agreements for initial public offerings).
Moreover, the Exchange also advocates for the continued launch and trading of exchange-traded products, structured products, futures, and options. For this aspect, the Exchange should engage in thorough consultations with stakeholders, including investment banks, to assess the impact of adverse weather on corporate listings and hedging arrangements for structured products and futures and options. The consultation document lacks mention of prior market research; it merely suggests proposals without relevant feedback from market participants. Given the current significant drop in capital raised by new stocks, unilateral proposals may be seen as inappropriate.
Question 5: Do you have any comments or concerns on the proposed money transfer arrangements:
We have the following concerns:
(i) Cheque clearing
(ii) Banking Services
In adverse weather, the consultation document indicates that the delivery of paper checks will be compromised, which will inevitably affect customer deposits, withdrawals, and securities settlements.
The document also discusses electronic check arrangements; however, the current usage and popularity of electronic checks remain low. Earlier this month, a bank publicly announced its decision to stop issuing electronic checks, highlighting the inadequacy of their current application.
Concerning online transfer or remittance systems mentioned in banking services, some banks impose limits on transfer amounts; for example, the transfer limit on FPS may not align with the demands of securities trading. Therefore, banks and securities firms must come to an agreement to prevent disruption to investor operations due to electronic transfer limits.
Question 6: Do you agree with the proposed arrangements for listing applicants and listed issuers as set out in paragraphs 90 – 91 above, where (a) no change should be made to the existing definition of “business day” under the Listing Rules; and (b) consequential amendments (where necessary) should be made to the Listing Rules to remove any current time extension? Please provide reasons for your view.
We disagree for the following reasons:
- Paragraph 83: Under Hong Kong legislation Chapter 622, the Companies Ordinance mandates public companies to issue share certificates for any shares transferred within a specified timeframe or to prepare relevant certificates for debt securities transfers within 10 business days after submission of transfer documents. The term "business day" pertains to days when recognized securities markets are operational, aligning with the definition in the Listing Rules. As such, it also encompasses days when the Exchange operates only for half a day (e.g., when either the morning or afternoon session is canceled due to adverse weather). Continuing trading during adverse weather maintains operational continuity, and according to the definition, trading days under such conditions should be classified as business days.
The statements in paragraph 90 indicate that the Exchange, issuers, and other relevant entities can fulfill their obligations on trading days affected by adverse weather, and the Exchange's online platforms (including the "disclosure" website) will remain operational during these days. We believe that trading days affected by adverse weather should be recognized as "business days" (as defined in the Listing Rules). This interpretation will also influence banks’ operational days and their definition of "business day." It is essential to note that the current employment relationships in the labor market are closely tied to bank operating days, directly or indirectly affecting working days, wage calculations, labor insurance, and other relevant protections. Has the Exchange conducted careful evaluations regarding the social costs of such changes to accurately assess the potential impacts of altering the "business day" definition?
Question 7: Do you agree with the proposed arrangements for listing applicants and listed issuers as set out in paragraphs 92 – 94 above, and that consequential amendments (where necessary) should be made to the Listing Rules to accommodate situations where there are practical difficulties in complying with a Listing Rule obligation on a SWT Day? Please provide reasons for your view.
We disagree for the following reasons:
Adverse weather, especially prolonged adverse conditions lasting more than one day, will impact sea, land, and air transportation. Historically, legal extensions due to adverse weather have been granted. If the new recommendations are implemented, for instance, requiring physical presence or service from a party that is overseas and affected by transport delays, the associated responsibilities will be assigned to that party, according to this consultation document. Such circumstances should be redefined within the Listing Rules to clarify responsibilities and establish necessary regulations.
Question 8: Do you envisage there being any material practical difficulty in complying with any particular Listing Rule requirements (e.g. those identified in paragraph 93) if a SWT Day is counted as a “business day”? If so, please explain the practical difficulty with reference to the relevant Listing Rules.
The practical challenges are as outlined in the previous question 7.
Question 9: Do you agree that consequential amendments to the Listing Rules should be made to reflect any arrangements proposed under this chapter and the relevant trading and clearing arrangements proposed under Chapter 2?
Amendments to the Listing Rules are warranted for the following reasons:
We must revise the Listing Rules to make clear that violations or non-compliance resulting from adverse weather conditions (such as transportation disruptions, building damage, etc.) should be exempted. However, the definition of "business day" requires careful consideration in relation to the entire labor market. Thorough research in collaboration with governmental departments is essential; otherwise, trading on business days during adverse weather could lead to substantial social issues, which would be counterproductive.
Question 10: Under the proposed model, do you foresee any insurmountable difficulties for implementing SWT? If yes, please specify.
We foresee several challenges that require attention:
- Technical Support: The industry rapidly adapted to remote work during the pandemic, yet it remains uncertain whether these capabilities can fully meet regulatory standards; even regulatory agencies may not guarantee operational reliability during such times. Although regular operations have resumed, we should leverage the technological advancements made during the pandemic to enhance technical support for remote work.
- Cost Issues: The industry faces challenges due to a tough economic environment coupled with rising technological investment demands. This places additional strain on small and medium-sized brokers, who must increase technology investments while managing personnel challenges.
- Practical Operations: While some participants may have the necessary technical support for remote work, the suitability of home working environments remains a significant concern. Space constraints and the likelihood of family members being home during adverse weather may lead to issues of confidentiality and operational processes that need to be addressed. Other family members may have similar job requirements, making it difficult to implement control measures at home, resulting in operational risks.
- Responsibility: The consultation document reiterates that the Exchange may pursue actions against participants who fail to comply with various requirements due to risk management and response measures during adverse weather, which may lead to liability incidents. If adverse weather causes physical incidents that disrupt systems or operations, determining the allocation of responsibilities becomes problematic, creating additional risks for operators and complicating matters for insurance and service providers.
- Social Costs: Beyond assessing the costs of maintaining trading in the securities and banking sectors during adverse weather, social costs must also be evaluated. As more individuals work normally during adverse weather, societal challenges related to basic needs—such as food, housing, and transportation—will increase. The risk factors for related service providers and law enforcement agencies managing these needs also rise and must be factored into the assessment.
Question 11: Would there be adequate time to prepare for SWT to come effective in July 2024 under the proposed model? If not, what would be a reasonable length and why?
We do not believe the preparation time allocated by the Exchange is reasonable. We propose the following suggestions:
The consultation document notes that from 2018 to the present, adverse weather has resulted in 11 trading suspensions, which averages to about 2.2 occurrences per year, including both half-day and full-day suspensions.
The economic landscape over the past year, particularly in terms of trading volume and market sentiment, has been low, and there has been an uptick in the number of securities firms surrendering their licenses to the Securities and Futures Commission, increasing the temptation for operationally pressured firms to cut back on technology investments. Is this outcome something the Exchange welcomes?
If we calculate from the consultation's end date of January 26, 2024, combined with the Exchange's need to process and integrate various feedback and the significant Lunar New Year holiday in our region, the final draft is anticipated to be released around early March 2024. If it is to be implemented by July 2024, this would provide only 3 to 4 months for execution. This timeframe likely falls short for the securities and banking sectors to complete essential processes, such as enhancing system capabilities, institutional frameworks, establishing effective business continuity plans, and conducting necessary system tests.
Paragraphs 99.2, 99.3, and 99.4 of the consultation document highlight that participants should engage their service providers and information suppliers to ensure continuity of services during trading days in adverse weather. They are encouraged to leverage the remote work capabilities developed during the pandemic to prepare for maintaining business processes during such trading days. Participants should also formulate comprehensive business continuity plans for fully remote work scenarios to guarantee service maintenance. Participants needing core employees to return to the office or other locations in Hong Kong during adverse weather trading periods should comply with the "Code of Conduct for Work during Typhoon and Rainstorm Situations" issued by the Labour Department.
The consultation document's three paragraphs indicate that other relevant entities, including service providers, information suppliers, the Hong Kong Exchange, and the Labour Department, must be considered by participants. We believe that 3 to 4 months is insufficient time for adequate communication and preparation between participants and the Exchange.
We propose a phased implementation 12 to 18 months following the formal introduction of this proposal. This approach would allow participants to extend their planning period, ensuring all parties can adequately implement necessary arrangements. Given an average of about 2.2 trading suspensions per year, this strategy would minimize impact and provide a more practical balance of interests among all stakeholders.
If you have any questions concerning this letter, please do not hesitate to contact me at (phone: / email: ) or Mr. Wong Hoi Lok Ivan at (phone: / email: ).
Sincerely,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association