Circular to all Licensed Corporations on Alternative Liquidity Pools

9 Apr 2018



The SFC recently conducted a thematic review to assess compliance with the regulatory requirements for Alternative Liquidity Pools (ALPs) by licensed corporations (LCs) and to gather information on the latest market developments. This was the first major thematic review of ALPs following the introduction of Paragraph 19 and Schedule 8 of the Code of Conduct1 on 1 December 2015, which set out requirements for the operation of ALPs in Hong Kong.

The review, conducted between 2016 and 2017, found that LCs had implemented measures to comply with the requirements, but also identified a number of deficiencies. In particular, these related to ensuring that ALP users are qualified investors, disclosing information to ALP users, routing orders to third-party ALPs and posting orders to both the ALP and the exchange.

The Report on the Thematic Review of Alternative Liquidity Pools in Hong Kong accompanying this circular provides an overview of the ALP landscape in Hong Kong, outlines the areas covered by the thematic review and summarises the findings and a number of good practices identified. LCs may consider implementing similar controls and mechanisms, where applicable, to enhance their ALP control frameworks.

The SFC would like to highlight the following key areas of concern:

LCs are also reminded to establish and implement effective controls to ensure all ALP users are qualified investors in accordance with paragraph 19.4 of the Code of Conduct3, provide sufficiently comprehensive information to users (eg, order priority, routing and execution methodology and opt-out arrangements) and ensure their ALP Guidelines have been brought to users’ attention in accordance with paragraph 19.7 of the Code of Conduct2.

The SFC will continue to monitor market and regulatory developments of ALPs both in Hong Kong and overseas, and in response may propose further measures.

Should you have any queries regarding the contents of this circular, please contact the case officers in charge.

Intermediaries Supervision Department
Intermediaries Division
Securities and Futures Commission

End

SFO/IS/021/2018


1 Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
2 Paragraph 19.4 of the Code of Conduct requires that only qualified investors are permitted to access the ALPs.
3 Paragraph 19.7 of the Code of Conduct requires a licensed or registered person operating an ALP to:
(a)   By means of ALP Guidelines, provide sufficiently comprehensive information to users of ALP to ensure they are fully informed as to the manner in which the ALP operates; and
(b)   Prior to routing any order to an ALP on behalf of a client for the first time, a licensed or registered person should ensure the ALP Guidelines have been brought to the attention of the person placing or originating the order.


Click here to download the document

Supplementary document:
Report on the Thematic Review of Alternative Liquidity Pools in Hong Kong


Page last updated : 9 Apr 2018