Circular to Licensed Corporations - Foreign exchange margin trading on the Mainland and other activities not regulated by the SFC

17 Jun 2019



The Securities and Futures Commission (SFC) reminds licensed corporations (LCs) of the following:

Unauthorised activities on the Mainland

The SFC has noted that the State Administration of Foreign Exchange (SAFE) recently took action against a Mainland entity for soliciting Mainland investors to engage in forex margin trading outside the Mainland on behalf of an online trading platform operated by the entity’s offshore shareholder. SAFE advised that the Mainland authorities have not approved any institution to engage in forex margin business either directly or on an agency basis on the Mainland2. SAFE also advised that according to Mainland requirements3, it is illegal for any unapproved institution to conduct forex margin trading or for any client, whether an organisation or individual, to entrust an unapproved institution to do so.

In this connection, the SFC is aware that some LCs or their related parties offer leveraged foreign exchange trading or similar services to investors via websites presented in simplified Chinese and provide Mainland investors toll free telephone numbers for enquiry. The SFC warns LCs not to engage in unauthorised or illegal forex margin trading on the Mainland or assist other persons or Mainland investors in such activities. LCs which provide or market forex margin trading or similar services to Mainland investors, or assist other persons to provide or market them to Mainland investors, should immediately review the legality of their activities under Mainland law and regulations. Any non-compliant activities should be discontinued immediately and be notified to the SFC in accordance with paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct)4.

LCs must ensure compliance with the licensing and other requirements of all the jurisdictions in which they operate or provide services and implement sufficient compliance controls. Before commencing business in a jurisdiction, LCs should obtain a thorough understanding of the local legal and regulatory requirements, seek proper legal and professional advice and discuss the applicable requirements with the relevant regulatory authority.

Alleged fraudulent or illegal activities of related parties

It has also come to the attention of the SFC that some LCs’ related parties may be associated with other alleged illegal activities on the Mainland, such as unauthorised stock broking or fraudulent crowdfunding or peer-to-peer lending, or alleged fraudulent London gold activities in Hong Kong. The LCs may have allowed related parties to use their names and SFC licensing statuses on websites or marketing materials to promote these activities. LCs’ staff resources or business premises may also be shared with these related parties.

The SFC reminds LCs and their controlling entities to take all necessary steps to review the legality of the services offered by themselves and their related parties to ensure their activities comply with the law and regulations administered by the SFC as well as the applicable requirements of other jurisdictions. Unauthorised or illicit activities must be discontinued immediately. Any contravention of the law or regulations of other jurisdictions may amount to a breach of paragraph 12.1 of the Code of Conduct5, which may call into question the fitness and properness of a corporation to be, or to remain, licensed in Hong Kong.

Furthermore, improper conduct by an LC’s controlling entity or its other subsidiaries may adversely affect the LC and the group as a whole. Even a perceived association with alleged fraudulent or illegal activities may have negative implications for an LC’s fitness and properness. Accordingly, LCs are urged to take all necessary steps to ring-fence the conduct of related parties suspected of being involved in or associated with dubious activities. These include ceasing co-location or resource sharing arrangements and clearly segregating regulated activities from those which are potentially unauthorised or illegal.

Failure to take appropriate action may impugn on the fitness and properness of the LC, its senior management and its controlling entities, and may result in regulatory action. The SFC may impose conditions on the LCs and their controlling entities to mitigate the risks and where the situation warrants, the SFC will take action which may include issuing restriction notices and suspending or revoking the licence of the LC.

Should you have any queries regarding the contents of this circular, please contact your case officer.


Intermediaries Division
Securities and Futures Commission

End

SFO/IS/033/2019

1 Such activity is similar to leveraged foreign exchange trading in nature and is regulated by SAFE.
2 Please refer to a notice entitled “国家外汇管理局关于非法网络炒汇平台案例的通报” (reference no. 000014453-2019-00322) published by SAFE on 10 May 2019 (Chinese version only): http://www.safe.gov.cn/safe/2019/0510/13189.html.
3 A notice entitled “关于严厉查处非法外汇期货和外汇按金交易活动的通知”( 证监发字[1994]165号) published by China Securities Regulatory Commission on 28 October 1994 (Chinese version only): http://www.csrc.gov.cn/pub/newsite/flb/flfg/bmgf/qh/ccffqh/201012/t20101231_189909.html.
4 Paragraph 12.5 of the Code of Conduct requires notification to the SFC of any material non-compliance with applicable laws and regulations.
5 Paragraph 12.1 of the Code of Conduct relates to compliance in general.


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Page last updated : 17 Jun 2019