Circular Issued by the Securities and Futures Commission Regarding Code of Conduct Requirements with respect to Derivative Products

HONG KONG MONETARY AUTHORITY
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Banking Conduct Department
Our Ref: B1/15C
016/lC
2 September 2010
The Chief Executive
All Registered Institutions
Dear Sir / Madam, i!l n !J/! "1 ms
Circular Issued by the Securities and Futures Commission (SFC) Regarding Code of Conduct Requirements with respect to Derivative Products I am writing to draw your attention to a circular issued by the SFC on 31 August 2010 ("the SFC Circular"). The SFC Circular reminds intermediaries to ensure compliance with the obligations under the SFC Code of Conduct when providing services to clients with respect to derivatives products, including investor characterization under the new paragraph 5.lA of the Code of Conduct which will come into effect in June 2011. A copy of the SFC Circular is attached at Annex. Registered institutions are reminded to put in place appropriate measures to ensure that their staff are familiar with the risks and features of the investment products and comply with the applicable requirements when serving their clients. Yours faithfully, Meena Datwani Executive Director (Banking Conduct) Encl. c.c. SFC (Attn: Mr Stephen Po, Senior Director of Intermediaries Supervision) 55th Floor, Two International Finance Centre, W rl! i:p lit~ ~t 1!r8 ~ [;jl)J ~f ~ ill i:p ,i:,,2 AA 5 5 tl 8 Finance Street, Central, Hong Kong i!t !~: (852) 2878 8100 ~ ~: (852) 2878 2100 Tel: (852) 2878 8100 Fax: ;(852) 2878 2100 E-mail: Meena_Datwani@hkma.gov.hk Website: www.hkma.gov.hk i!t mj): Meena_Datwani@hkma.gov.hk ~ ±it : www.hkma.gov.hk

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SECURITIES ANO FUTURES COMMISSION
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31 August 2010
Circular to Licensed Corporations
Circular
Code of Conduct Requirements with respect to Derivative Products The Commission would like to remind licensed corporations to ensure compliance with the obligations under the Code of Conduct1 when providing services to clients with respect to derivative products. Currently in the Hong Kong market, these products would generally include derivative warrants, callable bull/ bear contracts, and those exchange-traded funds that invest in derivative instruments designed to replicate the performance of an index. In particular, licensed corporations should be mindful of the following requirements:

1. Intermediaries are required under the Code of Conduct to know their clients and
   ensure the transaction is suitable for a client when making a recommendation or solicitation to the client.
2. A licensed corporation should assure itself that the client understands the nature and
   risks of the derivative products and has sufficient net worth to be able to assume the risks and bear the potential losses of trading in the product. Furthermore, under the new paragraph 5.1A of the Code of Conduct which will come into effect in June 2011, where a client who has been characterized as without knowledge of derivative wishes to purchase a derivative product which is traded on an exchange and the intermediary has not solicited or provided a recommendation to the client, the intermediary should explain the risks associated with the product to the Glient. Licensed corporations are reminded to put in place appropriate measures to ensure that their staff are familiar with the risks and features of the investment products and comply with the applicable requirements when serving their clients. Should you have any queries regarding the contents of this circular, please contact Ms Lorraine Chan on 2842-7751. Intermediaries Supervision Department Securities and Futures Commission End SFO/lS/0020/2010 1 Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission Tel: (852) 2840 9222 Fax: (852) 2523 4598 Website: www.sfc.hk
   Annex