Regulatory Alerts2010-09-02
Added · Updated
Circular Issued by the Securities and Futures Commission Regarding Code of Conduct Requirements with respect to Derivative Products
The Securities and Futures Commission issued a circular reminding licensed corporations to strictly comply with the Code of Conduct when providing services on derivative products such as derivative warrants and exchange-traded funds. The regulator mandates that intermediaries must ensure transactions are suitable for clients, verify client understanding of product risks, and confirm sufficient net worth to bear potential losses. Additionally, a new requirement effective June 2011 obliges intermediaries to explain risks to clients characterized as lacking derivative knowledge, even in non-solicited exchange-traded transactions.
SECURITIES ANO FUTURES COMMISSION ~ j R li!J j l i iHHH! 1.t 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:
- 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.
- 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
More like this from HKMA
HKMA published 11 documents in the last 30 days. We email you each new one the day it's published.