Securities & Futures Commission of Hong Kong

Client Securities Rules

Q1:

Under this section, an intermediary or associated entity may deposit client securities or securities collateral with an approved custodian.

How can I know which company or overseas company has been so approved by the Commission under section 11?

A:

The Commission has only approved the Hong Kong Securities Clearing Company Limited (as the operator of the CCASS) as a custodian under these Rules (and under sections 81, 81A and 121AB of the now repealed Securities Ordinance).

We do not have any plan at present to approve any other custodian but we shall let the market know by appropriate means as and when we do grant such an approval.

Section reference: Section 5

Q2:

At present, it is common that clients of CCASS participants deposit physical share certificates for immediate sale, without waiting for the successful completion of re-registration.

After executing the order, the intermediary will deposit the certificates to HKSCC Depository for settlement in T+2. However it is possible that one or two weeks later, HKSCC may inform the intermediary that some certificates have been rejected for transfer.  This would mean that the intermediary had technically breached section 10(1) through the use of another client's shares for settlement of the sale order of the customer who deposited the certificates.

A:

Under section 10(1), an intermediary or an associated entity must take reasonable steps to ensure that client securities and securities collateral are not dealt with except as provided in Part 2 of the Rules.

We take the view that rejection of re-registration of share certificates by CCASS, which may occur from time to time,  is essentially outside the control of the intermediary.   The question of whether the intermediary or associated entity has taken reasonable steps to safeguard client assets will depend upon all the circumstances.  However, in isolated cases of such rejection, it is unlikely to be regarded as a failure to take reasonable steps provided there was nothing to alert the intermediary or associated entity of a likelihood of rejection.

However, if such rejection occurs repeatedly in relation to any client, then we would expect the intermediary or associated entity to implement additional controls to prevent this from reoccurring, for example, by requiring clients to show proof of original purchase or to deposit physical share certificates beforehand.

Section reference: Section 10(1)

3.7878 s