Securities & Futures Commission of Hong Kong

Contract Notes, Statements of Accounts and Receipts Rules

A. General

Q1:

A Hong Kong broker entered into a tripartite agreement with the client and a US bank (which is not part of the HK broker's group). The US bank will be providing settlement, custody and trade documentation services to the client.

Will the HK broker be exempted from issuing contract notes, statement of accounts and receipts as long as the US Bank is issuing the relevant document in accordance to US requirements?

If the Bank in the example is regulated by another country other than US/UK, will the same apply? Or is the HK broker required to obtain separate approval from SFC?

A:

In order to qualify for exemption under the avoidance of duplication provisions in section 4 of the Rules, the foreign intermediary who is providing the contract notes, statements of account or receipts to the clients of an intermediary who is subject to the Rules should be a related corporation of the intermediary. There is a definition of "related corporation" in section 3 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (SFO).

Furthermore, the foreign intermediary should be regulated under the law of US or UK. Where the foreign intermediary is regulated by another country other than US/UK, section 4 has no application. In the circumstances, an application may be made for modification of any requirements of the Rules under section 134 of the SFO. Any such application will be considered on its own merits, and any modification granted may be subject to such reasonable conditions as the SFC may impose to ensure that the interest of the investing public will not be prejudiced.

Section reference: 4

Q2:

The Rules apply to relevant contracts meaning those which are entered into in HK between the client and the intermediary. Where the intermediary in HK merely performs the role of a representative (e.g. perform administrative work) to the market and distribute funds and is not the contracting party to the contract, the Rules by definition would not apply. Is this interpretation correct?

A:

The question whether a relevant contract has been entered into, hence triggering the requirement under the Rules to issue a contract note, is a matter of law. Where an intermediary is not a party to the contract for dealing in the mutual funds either as principal or as agent for the client, the intermediary does not need to issue a contract note.

Section reference: 5(1)

Q3:

While the contract notes rules require an intermediary to issue contract note by T+2, for transactions in some mutual funds, does the T day means the day of fund house providing confirmation to the intermediary? i.e. the intermediary is required to provide a contract note to the client within 2 business days of receiving the fund house's confirmation.

A:

The 2 days starts to run upon entering into the relevant contract. Under general principles of contract law, a contract is entered into when an offer is accepted, but where and when an offer is accepted depending on the medium through which the acceptance is made and the circumstances of the case.

The contract is completed when the dealing request is accepted by the fund house and such acceptance is ordinarily communicated to the intermediary distributor as agent for the investor shortly after the price is calculated. This will normally be the time when the 2 business days starts to run.

Section reference: 5(1)

Q4:

What does the term “nature of the dealing” mean?

A:

There is a definition of “dealing” in Section 1, Part 1, Schedule 1 to the SFO. In respect of securities, the nature of a dealing refers to, for example, buying, selling, underwriting, subscribing, etc.

Section reference: 5(3)(c)(ii)

Q5:

Under section 5(3)(c)(iii) of the Rules, an intermediary is required to include in the contract note the name of the market or exchange on which the relevant contract has been executed. Please advise if it applies to contracts executed in overseas markets or exchanges. In practice, we would encounter certain difficulties as overseas brokers may not provide such information to us or even if they do, it is most likely that we may not be able to meet the time limit for delivery of the contract note.

A:

It is our intention that wherever transactions are entered into through a market or exchange, whether it is local or overseas, the name of the market or exchange should be disclosed. Arrangements should be put in place by an intermediary for the overseas broker to provide all necessary information to the intermediary for the purpose of preparing the contract note required to be provided under the Rules. We appreciate that the information may not be readily available from overseas brokers. In the case of genuine difficulty in processing the information in time, the SFC will consider an application for modification on a case-by-case basis pursuant to section 134 of the SFO.

Section reference: 5(3)(c)(iii)

Q6:

Section 5(3)(c)(iii) requires that a contract note to state the name of the market or exchange on which the contract has been executed.

If we buy stocks for a client on the New York Stock Exchange, can we put down "US market" instead of "New York Stock Exchange" in the contract note?

A:

No, it is our intention that in such circumstances, New York Stock Exchange should be disclosed.

Section reference: 5(3)(c)(iii)

Q7:

There is a requirement to include in the month end statement or contract note a reference to the date of their preparation. Please confirm whether the preparation date is still required even if it is the same as the contract trade date or the statement's month-end date?

A:

In such circumstances, our view is that the document should make it clear that the date on which the relevant contract is entered into or statement’s month-end date (as the case may be) is also the date of preparation of the document.

Section reference: 5(3)(e), 7(c)

Q8:

Should statements of account be named as "Combined" if contract notes and receipts are shown and presented in the monthly statements of account?

A:

Consolidated daily statements of account may be provided to a client under section 6 or 10 of the Rules. There is no requirement that it must be named as a "Combined" Statement. Where the daily statements are meant to double up as receipts, they must state that they also serve as a receipt and includes the information specified in section 13(3)(d)(i) and (ii).

Section reference: 6, 10

Q9:

Where physical certificates are registered in the name of the associated entity of an intermediary and are kept by the intermediary in its vault, is the intermediary required to state the name of the associated entity in the daily or monthly statement of account provided to the client?

A:

It is our intention that the name of the associated entity should be disclosed under section 7(d) where it holds the client assets by having physical certificates registered in its name (c.f. definition of "hold" in Section 1 of Part 1 of Schedule 1 to the SFO). We are of the view that where client assets of the intermediary are held by some associated entities as well as the intermediary, section 7(d) may be met by stating in the statement of account the names of all these entities and that the client assets are held by one and/or another of these entities.

Section reference: 7(d)

Q10:

Can an intermediary report the current (last) interest rate for this purpose of this section? Since some clients carried a position for a few months or more than one year and the interest rate changed in on a daily/weekly basis, it would be a LONG list of the interest rates that would be used for calculating the interest income or expenses.

A:

It is our intention that the current (last) interest rates applicable to the two or more currencies relating to the contracts be shown. We expect historical rates to be readily available when requested by a client for information, and for verification by the client whether or not the method disclosed in the client agreement as adopted by the intermediary in choosing the interest rates in calculating the client's interest income and expenses is being followed.

Section reference: 9(2)(k)

Q11:

Can we put down "n/a", "nil" or "nil, but subject to further notice" in this column if our company doesn't set any expiry date?

A:

Yes, the disclosure requirements under section 9(2) apply only to the extent applicable to the account of the client.

Section reference: 9(2)(l)

Q12:

Should intermediaries state in the statement of account: 1) each position limit for different instruments; or 2) the combined position limit for all instruments?

A:

Insofar as there is a limit for each different instrument, it is our intention that all such limits should be shown.

Section reference: 9(2)(l)

Q13:

Is an intermediary required to include in a monthly statement of account:

  1. client’s moneys held at the beginning of the month?
  2. client’s securities held at the beginning of the month?
A:
  1. Yes.
  2. No.

Section reference: 11(3)(b)

Q14:

With respect to the client receipt requirement, where a broker receives client assets which are handed over to be held by the broker’s nominee (associated entity), who should provide a receipt to the client?

A:

Section 13(1) applies where any client assets are received from or on behalf of a client by an intermediary or an associated entity (as the case may be). The intermediary will be required to issue a receipt for receiving the assets from the client. The associated entity will be required to provide a receipt only if, when the assets are handed over to it by the intermediary, it is receiving the assets on behalf of the client.

Whether the broker’s nominee is receiving the client assets on behalf of the client will need to be considered on the particular facts of each case, including considering any contractual terms relevant to the transfer of the client’s assets to the associated entity.

One should seek independent legal or other professional advice if there is any doubt about how the law applies to one’s particular circumstances.

Section reference: 13(1)

Q15:

Is an intermediary required to issue receipts when:

  1. a client deposits money directly into the bank account of the intermediary?
  2. a client transfers his securities from his CCASS Investor Account to the intermediary’s CCASS account?
A:
  1. No.
  2. No.

Section reference: 13(2)(b), 13(2)(e)

Q16:

Does the term “the account” refer to the client account? Section 13(3)(c) also requires the receipts to state the name and account number of the client. Would subsection (d) become duplicated?

A:

Where the "account number" of the client disclosed under section 13(3)(c) uniquely identifies and it is clear to the client that it is same as the client's account into which the client assets or security have been deposited, then section 13(3)(d)(ii) is duplicative and the account needn’t be stated twice. On the other hand, the provision caters for other possibilities; e.g. sub- accounts are attached to the client's primary account.

Section reference: 13(3)(d)(ii)

Q17:

The Rules do not prescribe the form in which documents are to be kept. Can an intermediary retain document in soft copies?

A:

Please refer to the SFC's Guidance Note on the Application of Electronic Transactions Ordinance to Contract Notes (Aug 2000). It provides that when retaining copies of contract notes, it must be ensured that: (a) the information remains accessible so as to be useful for subsequent reference; (b) the electronic record is retained in the format in which it was originally generated, sent or received or can be demonstrated to represent accurately the information originally generated, sent or received; (c) information enabling identification of (i) the origin and destination of the original record and (ii) the date and time of its being sent or received, is retained. As a matter of policy, we intend to apply the same criteria to daily or monthly statements required to be provided under the Rules.

Section reference: 16

4.1326 s