Securities & Futures Commission of Hong Kong

Financial resources rules and financial return

A. General

Q1:

What is liquid capital?

A:

Liquid capital is one kind of the financial resources that a licensed corporation is required to maintain under the rules. It is the amount by which a licensed corporation’s liquid assets exceeds its ranking liabilities.  

Section reference: 2

Q2:

What is required liquid capital?

A:

Required liquid capital is the minimum amount of liquid capital that a licensed corporation must have in order to comply with the financial resources requirement under the rules. A licensed corporation’s required liquid capital is determined by reference to a fixed amount applicable to the type of regulated activities for which it is licensed and to a variable parameter called “variable required liquid capital”, the calculation of which is defined in section 2 of the Rules.

Section reference: 2

Q3:

What are liquid assets?

A:

A licensed corporation’s liquid assets are the amount of assets that it is required to include in the calculation of its liquid capital. The values of such assets are subject to adjustments to cater for factors such as illiquidity and credit risks. The description and valuation of such assets are prescribed under Division 3 of Part 4 of the Rules. 

Section reference: 2

Q4:

What are ranking liabilities?

A:

A licensed corporation’s ranking liabilities are the sum of the liabilities on its balance-sheet and adjustments to cater for such factors such as market risks and contingency. The description and calculation of such liabilities and adjustments are prescribed under Division 4 of Part 4 of the Rules. 

Section reference: 2

Q5:

What is a “haircut amount”?

A:

A haircut amount is an amount calculated as a certain percentage of the market value of securities or other investments. It is used to calculate a risk adjustment to cater for market risks of house positions or collateral for the purposes of liquid capital computation. The percentage mentioned above is called the “haircut percentage”. The haircut percentages for different types of securities and investments are set out in Schedule 2 of the Rules.

Section reference: 2

Q6:

The Rules allow a licensed corporation to make certain elections in its calculation of liquid capital. Can the licensed corporation withdraw its election afterwards?

A:

Licensed corporations are bound by an election previously made under the Rules but they can apply in writing to the SFC for approval of the withdrawal of such election.  A licensed corporation should continue to follow its elections until such time as the SFC has approved their withdrawal.

Section reference: 58(5)(g) and 59

Q7:

What is the consequence of failure to maintain the financial resources required under the Rules?

A:

Under section 146(1) of the SFO, a licensed corporation which becomes aware of its inability to maintain or to ascertain whether it maintains, the amount of financial resources required of it under the Rules shall notify the SFC in writing as soon as practicable and immediately cease carrying on regulated activity otherwise than for the purpose of completing such transactions as the SFC may permit. However, the SFC may permit such licensed corporation to carry on business subject to any conditions it may impose.  If the licensed corporation fails to comply with the above, it will be subject to a fine or imprisonment.

Section reference: 146 SFO

B. Capital requirements

Q8:

Is there a full list of the minimum paid-up share capital amounts and the minimum required liquid capital amounts in the Rules?

A:

Yes, the details of the minimum amount of paid-up share capital amounts and required liquid capital for different types of regulated activities are set out in Schedule 1 of the Rules. This Schedule should be read in conjunction with the other provisions of the Rules, in particular sections 4, 5 and 6, in order to obtain a full picture of the application of these requirements.

Section reference: 2, 5, 6 & Sch 1

Q9:

What is the minimum paid up share capital requirement for a licensed corporation which is licensed for more than one type of regulated activity, say for Type 1 and Type 3?

A:

The minimum paid up share capital requirement for a licensed corporation which is licensed for more than one type of regulated activity is the highest of the minimum requirements that are applicable to the respective regulated activities for which it is licensed. In the example provided, the minimum paid up share capital requirement for Type 1 is $5 million whereas for Type 3 is $30 million. Therefore, a Type 1 cum Type 3 licensed corporation needs to maintain at least $30 million paid up share capital.

Section reference: 5 & Sch 1 Table 1

Q10:

What is the minimum liquid capital requirement for a licensed corporation which is licensed for more than one type of regulated activity, say for Type 1 and Type 2?

A:

The minimum liquid capital requirement for a licensed corporation which is licensed for more than one type of regulated activity is the highest of the minimum requirements that are applicable to the respective regulated activities for which it is licensed. In the example provided, the minimum paid up share capital requirements for both Type 1 and Type 2 are $3 million. Therefore, for a Type 1 cum Type 2 licensed corporation the minimum liquid capital requirement is $3 million.

Section reference: 6 & Sch 1 Table 2

Q11:

Will advisers continue to be subject to a net tangible assets requirement under the Rules?

A:

It depends. Advisers will be required to comply with a paid-up share capital requirement (unless it is subject to the “specified licensing condition” namely, that it does not hold any client asset) and liquid capital requirement under the Rules. In order for advisers to prepare themselves for the change in the regulatory capital regime, the Rules provide them with a 6 month grace period until 1 October 2003. During the grace period, advisers shall continue to maintain net tangible assets of not less than $500,000.

Section reference: 60(5) & (6)

Q12:

Is an adviser which is subject to the “specified licensing condition” namely, that it does not hold any client asset, required to comply with the paid up share capital requirement?

A:

No, licensed corporations that are only licensed for Type 4, 5, 6 or 9 and subject to the “specified licensing condition” are not subject to the paid up share capital requirement.

Section reference: 5

Q13:

How do investment advisers obtain a “specified licensing condition” so that they will be subject to less stringent requirements in terms of the level of required liquid capital, paid-up share capital and the filing of financial returns?

A:

Most of the existing advisers’ registration or exemption are already subject to the “ specified licensing condition” which prohibits them from holding or controlling client assets either on their own or through other entities. Such condition will automatically continue to be attached to their licence to be granted under the SFO. If an adviser’s licence is not subject to such condition or the like and it is not holding and does not intend to hold client assets, it may contact the Licensing Department of the SFC for imposing such condition. 

Section reference: 2, 5, 6, 56(3) & Sch 1

Q14:

How can an introducing broker apply for a lower liquid capital requirement?

A:

Approved introducing agents are not subject to the paid up share capital requirement and have a lower minimum liquid capital requirement ($500,000). An introducing broker that satisfies the criteria set out in section 58(4) of the Rules can apply to the SFC for approval as an approved introducing agent.

Section reference: 58(4)

C. New policies

Q15:

Can equity linked products be treated as liquid assets?

A:

Currently the rules only accept equity linked instrument listed on the SEHK as liquid assets. Licensed corporations are advised to contact the Intermediaries Supervision Department if they wish to engage in dealing in products not specified in the Rules.

Section reference: 2 & Sch 2 Table 7

Q16:

How should a general provision for doubtful debts be treated in the computation of liquid capital?

A:

The Rules impose a cap on the admissible value of amounts receivable to be the net amount of the amount receivable after deducting the general provision for doubtful debts.

Section reference: 21(7), 22(3), 23(2), 24(2)

Q17:

What is the new treatment for calculating the liquid asset value of amounts receivable from cash clients who settle their securities transactions on a net basis?

A:

In respect of amounts receivable from cash clients who settle their securities transactions on a net basis, licensed corporations can elect to include, on a client by client basis, the lower of the net amount receivable from the client and the discounted market value of the securities held for the client as liquid assets if the client has authorized the licensed corporation in writing to dispose of his securities and set off any trading balance arising from securities dealing.

Section reference: 21(2) & (3)

Q18:

What other business can approved introducing agents do?

A:

Approved introducing agents can now also carry on Type 4, 5 and 6 regulated activities in addition to the introducing business.

Financial Return

Q19:

If a licensed corporation finds any form in the Financial Return inapplicable, is it still required to submit the full set of Financial Return?

A:

No. We accept licensed corporations that find any forms inapplicable to simply so indicate in the Declaration page without needing to file a blank page for the nil return.

Section reference: General

Q20:

When will a licensed corporation submit its first Financial Return under the Securities and Futures (Financial Resources) Rules (FRR)?

A:

For licensed corporations that are only licensed for advisory and/or asset management services and are subject to a specified licensing condition, they are only due to submit their first Financial Return on or before 21 January 2004 for the period ended 31 December 2003.  Advisers not subject to specified licensing condition are due to submit their first Financial Return on or before 21 November 2003 for the period ended 31 October 2003.

Deemed licensed corporations which are exempt dealers (other than authorized financial institutions) under the Securities Ordinance are due to submit their first Financial Return on or before 21 November 2003 for the period ended 31 October 2003. 

Other licensed corporations are due to submit their first Financial Return on or before 21 May 2003 for the period ended 30 April 2003.

Section reference: General

Q21:

Does a licensed corporation have to select on the cover page of the return all the relevant regulated activities which it is deemed to be carrying on?

A:

Yes.

Section reference: Form 1

Q22:

What should be reported in the amounts receivable from/ amounts payable to group companies or other related parties under Form 1? How about management fees charged on/ charged by group companies or other related parties in Form 7?

A:

The amounts receivable from/ payable to group company or other related parties in Form 1 would include amounts receivable or payable in relation to intercompany loans, management fees, re-charge of costs or other similar items.  The profit or loss items under Form 7 would include income from and expense to group company or other related parties arising from management fees, re-charge of costs or other similar items.

Section reference: Form 1 & Form 7

Q23:

Other than a responsible officer of the licensed corporation, would the Commission accept other officers to sign the Financial Return? If so, what are the application procedures?

A:

Yes.  A licensed corporation can apply to the Commission to approve a certain officer as signer of the Financial Return.  Please contact the responsible case officer in our Licensing Department for detailed application procedures.

Section reference: Declaration

Q24:

Should credit facilities granted under one credit facility letter be classified as one group?

A:

Whether credit facilities granted under one credit facility letter should be classified as one group depends on the detailed provisions of the relevant credit facility letter.  For instance, two credit facilities under a single credit facility letter may be classified as separate groups if separate security collateral is required for the respective credit facilities.  

Section reference: Form 3

Q25:

Does a licensed corporation have to reproduce information for compiling the “previous month” and “year-to-date” figures in order to fulfill the new disclosure requirement?

A:

No.  Under such circumstances, the licensed corporation is required to fulfil the new disclosure requirements after the effective date of the FRR, i.e. 1 April 2003. 

Section reference: Form 7

Q26:

Does Analysis of Client Securities (Form 8 Table 1) cover overseas securities?

A:

Yes.

Section reference: Form 8 Table 1

Q27:

Under what circumstances can the amounts payable to clients and client money to be segregated be different in Table 2 of Form 8?

A:

The amounts payable to clients and client money to be segregated can be different since not all amounts payable to clients are required to be segregated under the Securities and Futures (Client Money) Rules.  The following are examples of the circumstances leading to such difference:

  1. certain client money included in the amounts payable to clients may not yet be due for segregation; and
  2. certain amounts payable to clients that are related to dealing in overseas securities or futures may not fall within the ambit of the Securities and Futures (Client Money) Rules.

Section reference: Form 8 Table 2

Q28:

If a client receives different services from a licensed corporation, how should the client profile be reported under Form 12? Below are some of the scenarios:

  1. advising on securities and futures contracts
  2. dealing in securities and futures contracts  
  3. dealing in and advising on securities  
  4. dealing in stocks and stock options contracts
A:

Below are our views for the different scenarios:

  1. If a client is due to receive from a licensed corporation monthly statements of account in accordance with Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules, such client should be counted as a client in cell C105.
  2. Such client should be counted as an active securities client and an active futures and options client, respectively. 
  3. If the client does not maintain a separate account with the licensed corporation and is not required to pay separately for the advisory service, the advisory service will be considered as incidental to the business of securities dealing.  Accordingly, the client should be counted as an active securities client only. 
  4. Such client should be reported as an active securities client and an active futures and options client respectively.

Section reference: Form 12

4.9174 s