Response to the Consultation Paper on Proposed Risk Management Guidelines for Licensed Persons Dealing in Futures Contracts
Release Date: 2023-01-06
Securities and Futures Commission Online Submission
54th Floor, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong
6 January 2023
To: Securities and Futures Commission
54th Floor, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong
6 January 2023
To: Securities and Futures Commission
Response to the Consultation Paper on Proposed Risk Management Guidelines for Licensed Persons Dealing in Futures Contracts
Question 1:
Do you agree that a RO or an MIC should be designated to manage each material risk relating to futures business?
Response: We disagree. The existing "Core Function Supervisor" framework by the SFC already requires licensed corporations to appoint appropriate supervisors (MIC) and responsible officers (RO) for managing and overseeing business operations. Allocating a specific supervisor or officer to each major risk as outlined in the guidelines would increase operational burdens on brokerages. Additionally, there is a scarcity of qualified personnel in the industry, and small to medium-sized futures brokerages may struggle with implementation. The term "major risk" needs clear definition, as standards will differ based on the futures business's scale and type. The consultation paper's use of "designated" implies that this individual must be an RO or MIC, who reports to the board or OMO. The SFC's example of managing liquidity risk by a finance supervisor and trading risk by an RO risks overlapping roles, potentially leading to confusion and inefficiency.
Question 2:
Do you agree that the aforesaid factors should be taken into account by futures brokers in understanding the nature and risks of the underlying commodity market of commodity futures products? If not, please explain.
Response: We disagree. Futures commodities already include comprehensive information about their characteristics, and brokerages explain related risks. As a trading platform, brokerages cannot fully understand each commodity's nature. All futures products settle in cash and are closed before expiration.
Question 3:
Do you agree that incorporating client risk limits into a futures broker’s risk management system, order management system or trading platform will enable the futures broker to better manage its exposure to clients’ trading?
Response: Agree.
Question 4:
Do you agree that the alternative requirements for a futures broker’s affiliate clients (clients which are group entities regulated or supervised by a financial regulator in Hong Kong or a prescribed country) will enable the futures broker to manage its exposure to their trading activities? If not, please provide the rationale and any alternative suggestions.
Response: Agree.
Question 5:
Do you agree that no waivers of margin calls or forced liquidation should be allowed for clients who have failed to meet two margin calls by the settlement deadlines without reasonable excuse in the preceding 30 calendar days? If not, what different threshold would you suggest?
Response: We disagree. Futures price fluctuations can trigger margin calls, and since many global futures are traded at night Hong Kong time, clients may lack time to top up margins. Brokerages should set internal guidelines for margin calls rather than enforcing strict requirements.
Question 6:
Do you agree that 10% of the higher of ELC or available funding is an appropriate limit for a futures broker’s exposure to concessionary margining? If not, what limits would you suggest? Please provide reasons.
Response: We disagree. The existing Financial Resources rules provide adequate regulations for margin calls, allowing brokerages to control risks effectively.
Question 7:
Do you agree to exclude from the calculation of the aggregate uncovered client margin amount the trading of futures contracts in a trading session of a futures market which extends beyond midnight? If not, please provide reasons.
Response: Agree.
Question 8:
Do you agree that futures brokers should conduct due diligence reviews of executing or clearing agents and have a back-up agent? If not, please provide reasons.
Response: Agree.
Question 9:
Do you agree that a futures broker should deposit its own funds into an omnibus account with an executing or clearing agent or clearing house or a designated trust bank account to remedy a shortfall in client assets caused by set-off of clients’ overlosses with other clients’ assets?
Response: Agree.
Question 10:
Do you agree that the amount of client margin excess held by an overseas executing or clearing agent should not exceed the futures broker’s ELC reported in its latest monthly financial returns? If not, what limit would you suggest?
Response: We disagree. This calculation makes it difficult for small and medium brokerages to survive. Client funds should be the basis, and compliance with financial resources rules should suffice.
Question 11:
Do you agree with the proposed requirement to conduct stress tests at least daily if concessionary margining is applied to any client, and at least weekly in other cases, and that stress testing should also be conducted during a volatile market?
Response: We disagree. Daily stress tests are excessive. Monthly tests are sufficient, as major fluctuations are rare. Brokerages can adjust margins during significant fluctuations to manage risks.
Question 12:
Do you agree with the alternative approach suggested in paragraph 65 above to estimate the projected losses of client and house accounts? If not, please provide the rationale and any alternative suggestions.
Response: We disagree. A 200% margin requirement is too high; maintaining the current 100% is more reasonable. The existing margin call system effectively controls client risks, as evidenced since the 1987 market crash.
Question 13:
Do you agree with the threshold for excessive exposure to individual clients or groups of connected clients set out in paragraph 68(b) above? If not, please provide the rationale and any alternative suggestions.
Response: We disagree. The threshold is too low; clients’ risk tolerances vary. Brokerages should assess risks based on internal controls.
Question 14:
Do you agree with the stress scenario set out in paragraph 68(c) for assessing a futures broker’s ability to absorb the projected overlosses of client accounts and the projected losses of house trading? If not, please provide the rationale and any alternative suggestions.
Response: We disagree. Current margin levels are effective. The extreme stress scenarios suggested are unrealistic. Continuing the existing system or reducing stress test parameters is advisable.
Question 15:
Do you foresee any challenges for futures brokers relying on the group-level stress tests to comply with paragraphs 60 and 61 of the Proposed Guidelines, including the submission of stress test reports to the SFC upon request? If so, please explain the challenges and provide alternative suggestions.
Response: Yes, challenges exist. System support is necessary, yet systems only use prior day data. Suppliers are hesitant to develop systems due to costs. Medium-sized firms face cost and technical barriers.
Question 16:
Do you think that a nine-month transition period is appropriate for the requirements set out in paragraphs 70(a) and (b) above? If not, what would be an appropriate transition period? Please give your reasons.
Response: Not appropriate. Additional resources for preparation and system upgrades are needed. Some brokerages may need to raise capital, especially those with complex internal processes. An 18-month transition is more reasonable.
Question 17:
Do you think that a three-month transition period is appropriate for all other requirements in the Proposed Guidelines? If not, what would be an appropriate transition period? Please give your reasons.
Response: Not appropriate. Similar to the previous point, more resources and potential capital increases necessitate a longer transition period of over 18 months.
For inquiries regarding this letter, please contact me at (6102-9568) or Mr. LIU Tsan Pui Martin, Deputy Director of Industry Affairs, at ( ).
Yours sincerely,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association