Regulation for Quality Markets Annual Report 2016-17 Our logo
The SFC logo symbolises our mission of creating a fair and level playing field. Lines between the blocks form the Chinese character “正”, which means fairness and justice. The square signifies a solid legal framework and the parallel bars represent equal treatment. Contents
2 Message from Chairman and CEO 4 Strategic Priorities 10 SFC at a Glance 14 Corporate Governance 34 Our People 36 Highlights of the Year 38 Operational Review 39 Overview 42 SFC activity data 44 Intermediaries 51 Investment products 55 Listings and takeovers 60 Market infrastructure 63 Enforcement 72 Risk assessment 73 Global regulatory engagement 77 Stakeholder communication 81 Corporate Social Responsibility 90 Corporate Developments 98 Financial Statements 98 Securities and Futures Commission 126 Investor Compensation Fund 145 Unified Exchange Compensation Fund 159 Supplementary Information 159 Breakdown of SFC activity data 166 Committees, panels and tribunal 175 Glossary and abbreviations SFC Annual Report 2016-17
Message from Chairman and CEO
There can be no doubt that change is a permanent feature of our markets. Innovation, new business models and cross-boundary market connectivity present significant opportunities for Hong Kong, but they also bring risks which must be managed. As global markets become more competitive and complex, we maintain a tight focus on the advancement of Hong Kong’s position as a leading international financial centre.
New regulatory approach The challenges ahead will cut across all of our regulatory functions. To address them, we have adopted a “One SFC” approach and introduced organisational changes which deploy our existing resources and expertise more Carlson Tong effectively. The operating divisions responsible for Chairman enforcement, intermediaries and listing matters were reorganised, while cross-divisional working groups were set up to tackle more serious market problems. This more specialised, collaborative and multi-disciplinary We adopt a “One SFC” approach approach allows us to deliver fast and responsive and introduce organisational regulation. changes to deploy our resources
Earlier, more targeted intervention helps minimise and expertise more effectively. damage to our markets and irreparable harm to affected investors. We pay particular attention to those problems which pose the most significant or systemic risks. By Facilitating market development focusing on the greatest threats we achieve better Our broader objectives include encouraging a more regulatory outcomes, and this provides the impetus for diverse listed market trading on fundamentals better market behaviour. and establishing Hong Kong as the premier asset management hub in Asia. In pursuing them, we strive to Furthermore, we have been transparent about signalling combine sound regulation with the development of new our actions and intentions to the market as early as products and platforms and the pursuit of reciprocal possible. This front-loaded, “real-time” regulatory overseas market access. approach is already making an impact in listing-related matters and in intermediary supervision. To give Hong Kong retail and institutional investors more options, we are fostering the expansion of a mix Investor protection is always a vital part of our mission. of wholesale and retail intermediaries and platforms It is essential for Hong Kong’s future success that retail to provide a wider range of more affordable retail and institutional investors – both local and international investment products as well as to service increasingly – have confidence in a robust regulatory framework diversified cross-boundary capital flows. A related which delivers undoubted accountability, efficiency and aim is to ensure that Hong Kong offers hedging and transparency.
2 SFC Annual Report 2016-17
Message from Chairman and CEO Chairman and CEO
and to manage Mainland exposures. The regulatory Message from basis for these developments hinges on cross- boundary supervisory and enforcement cooperation. The type and intensity of reciprocal cooperation with the China Securities Regulatory Commission has been transformed over the past three years and we will Priorities Strategic continue to build on this progress.
Our influence in the international regulatory community, in particular through the chairmanship of the Board of the International Organization of SFC at a Glance Securities Commissions, has contributed to Hong Kong’s reputation as a key influencer of global regulatory benchmarks.
In our day-to-day work, prudent resource allocation Governance Corporate and robust financial controls enable us to effectively deliver on our statutory objectives and operational priorities. We also remain committed to corporate Ashley Alder social responsibility efforts which centre on the impact our work has on the community and the environment. CEO People Our A foundation for the future In the years to come, effective regulation and strong We strive to combine sound regulation of the Year
ties with other regulators, particularly on the Mainland, Highlights with the development of new products will remain essential for healthy and sustainable market and platforms and the pursuit of development. The strategic priorities set out in the overseas market access. following pages detail the ways in which we now use the full range of our powers to achieve our statutory Operational
objectives and provide a sound basis for market Review other derivative products, whether exchange-traded development. or over-the-counter, which meet the needs of global We are confident that we are well placed for the and Mainland institutional capital to manage evolving
challenges ahead and for this we would like to thank Social Corporate Mainland and other risks. Responsibility the Board and our staff for their dedication, hard work Anchoring Hong Kong as a competitive international and support. equity fund raising centre is a top priority. Last year, the public took a keen interest in our joint consultation with Hong Kong Exchanges and Clearing Limited on Developments Corporate listing reform. A common objective should be a more vibrant market, targeting a more diverse range of quality listings, with more participation from local and international investors. Statements
Carlson Tong Ashley Alder Financial The launch of Shenzhen-Hong Kong Stock Connect in Chairman CEO December 2016 further enhanced Hong Kong’s role as a gateway for investors to access Mainland markets Supplementary Information
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Strategic Priorities
As a statutory regulator, we have the duty to A new approach to regulation keep in mind the need to maintain Hong Kong’s As the markets we regulate become more complex, status as a competitive international financial global and interconnected, the challenges we face centre. Pre-eminently, this involves promoting increasingly cut across all of our regulatory functions. high-quality markets. Our most pressing need To address them, we have adopted a “One SFC” is to keep ahead of and facilitate the rapid approach to combine and deploy the full range of our changes which are affecting the financial regulatory tools to achieve our statutory objectives. In industry, whether this is about technological our daily operations, we stay focused on discharging transformation or greater cross-boundary market our statutory duty to make efficient use of our connectivity between the Hong Kong and resources. mainland China markets. As far as possible, we strive to proactively identify and tackle problems early, paying special attention to those Managing these changes is particularly important which pose the most significant or systemic risks to our in view of Hong Kong’s developing role enabling markets. We are increasingly using early intervention international capital to interact with Mainland and a front-loaded and “real-time” regulatory opportunities and Mainland capital to be matched with approach, including in listing-related matters, and opportunities overseas. Despite recent attention paid to signal to the intermediary community where our to capital flows and currency stability, it is clear that conduct and prudential attention will be focused. over the past decade the pace of Mainland market opening-up and liberalisation has accelerated. We are increasingly using early Meanwhile, the size and composition of two-way capital flows and the financial services activities intervention and a front-loaded, positioned around them have changed significantly. “real-time” regulatory approach. In Hong Kong, Mainland investors have joined international institutional and local retail investors in Across the board, we will be more transparent and the markets, while local and international firms have rapid in explaining the reasons for many of our actions. been joined by Mainland firms. Mainland firms now And more timely, impactful enforcement sends a account for a significant share of our initial public strong deterrent message to achieve better regulatory offering (IPO) sponsor business and margin loans. outcomes as well as shape future market behaviour. Their growing presence means that the Mainland has overtaken the United States as the source of the A multi-disciplinary approach makes our operations largest number of shareholder groups controlling our agile and efficient and allows us to maximise the licensed corporations. impact of our actions. For example, a new initiative pools resources from three divisions (Intermediaries, Future market development initiatives to advance Hong Corporate Finance and Enforcement) to implement Kong’s position as an international financial centre a concerted strategy to tackle listed company issues. and our approach to regulation are two interlinked Setting up more specialised teams within these three aims. Both must be responsive to rapid developments divisions also focuses resources and develops our in our own market and around the world, while at the expertise. In our enforcement casework, incorporating same time ensuring we are on top of any attendant legal advice earlier in the process also helps improve risks. Inevitably, when a key selling point for Hong efficiency and achieve a speedier conclusion to cases. Kong is that its legal and regulatory system engenders confidence, then more effective, responsive regulation is a necessary pre-condition for market development.
4 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 5 SFC Annual Report 2016-17 Report Annual SFC We will communicate our key We will communicate our key priorities more clearly and quickly. clearly and priorities more timely fashion. Intermediaries by us The number of firms and individuals licensed using highly and many of them are rapidly, has grown navigate the changing To sophisticated technology. the way we repositioning industry landscape, we are our key supervise intermediaries and will communicate clearly and quickly. priorities more better align licensed firms’ governance structures To persons and regulated officer with the responsible the Manager-In-Charge introduced we recently regime, sense of initiative which will help foster a stronger and a compliance responsibility senior management and behaviour. conduct to drive proper culture to tackle specific we use thematic reviews Increasingly, enhancing early public risks as they emerge and are the notifications of our inspection priorities to promote of emerging issues and risks. awareness industry’s We are liaising with Hong Kong Exchanges and liaising with Hong Kong Exchanges are We for Listing on its proposals Clearing Limited (HKEX) New GEM and a proposed both Rules changes covering and transparency enhance accountability, To Board. the the system, we will also conclude across efficiency of listing regulation the structure joint consultation on as a statutory role, the SFC’s to clearly delineate Ordinance Securities and Futures under the regulator under its non-statutory role, SEHK’s and the SMLR, and Listing Rules. of the In our day-to-day work, the restructuring teams into four integrated Corporate Finance Division and debt focusing on IPOs, post-IPO matters, takeovers and coordinated in a more securities will help us work to clarify a pathway for IPOs 1 s are offered as part of offered are SMLR, unless the securities impose conditions on, the listing of the securities under an application defined in section 2 of the 4 of the SMLR. option scheme as exempted under section substitutions or employee share offer, a capitalisation issue, pre-emptive The SFC is empowered under section 6 of the SMLR to require further information from the listing applicant and, where necessary, to object to, or necessary, the listing applicant and, where from further information require under section 6 of the SMLR to The SFC is empowered
1 2017, we issued guidance on the use of valuations in corporate transactions. powers under the Securities and Futures (Stock Market powers under the Securities and Futures Listing) Rules (SMLR) of suitable “Belt and Road” companies, while in May with The Stock Exchange of Hong Kong Limited (SEHK) of GEM stocks. the price volatility regarding our In April 2017, we explained how we would apply underwriters and placing agents on the standards of placing agents on the standards and underwriters expected of them in the listing and conduct that are placing of GEM IPO stocks, as well as a joint statement policy and market development as well as risks falling policy and market development as well For instance, in the statutory remit. within the SFC’s to sponsors, beginning of 2017 we issued a guideline Listing matters towards approach proactive taking a have been We address these complex challenges whilst facilitating these address and sustainable market development healthy, risks. emerging addressing Current initiatives Current to initiatives on a number of making progress are We the powers vested in the SFC to provide a sound basis the powers vested in the SFC to provide as a leading international for Hong Kong to progress financial centre. including clearer guidance on our regulatory stance guidance on our regulatory including clearer had an and expectations of intermediaries, have actively use immediate impact. Overall, we will more The right approach to regulation will be key to will be key to regulation The right approach our recent managing the changes ahead. Already, Enterprise Market (GEM) listings, actions on Growth supplement our risk-identification, monitoring and supplement our risk-identification, surveillance capabilities. market regulation. In advancing our risk data strategy, our risk data strategy, In advancing market regulation. to global regulatory we focus on benchmarking to new technologies and adopting standards We also follow the development of financial also follow the development We they intersect with securities technologies and how Strategic Priorities Strategic SFC Annual Report 2016-17
Strategic Priorities
For example, following up on last year’s assessment of Asset management money laundering and terrorist financing risks in the Establishing Hong Kong as Asia’s leading asset securities sector, we will conduct thematic inspections management centre is a key priority, and its of selected licensed corporations to evaluate the attractiveness as a preferred funds domicile and asset effectiveness of their measures and controls to mitigate management hub has been bolstered by the Mutual such risks. Recognition of Funds (MRF) programme. These enable In addition, after our recent thematic review on the local fund industry to tap overseas markets and algorithmic trading, we issued a circular in December provide additional investment opportunities in Hong 2016 and organised a forum in May 2017 to share Kong for both domestic and overseas investors. with the industry our observations and good practices Following the MRF arrangements with the China and to elaborate on related requirements in the Code Securities Regulatory Commission (CSRC) and the of Conduct2. Swiss Financial Market Supervisory Authority, we are now discussing similar arrangements with a number of During the year, we also conducted thematic reviews other European authorities. We are also in discussions on alternative liquidity pools, best execution and client with the CSRC on including exchange-traded funds as facilitation, and we will share the results with the eligible securities under Stock Connect. industry in the coming months.
Cybersecurity remains a supervisory priority in light of Establishing Hong Kong as Asia’s the increase in hacking incidents. Following a thematic leading asset management centre inspection of internet brokers’ resilience to hacking and broadening fund distribution risks, we identified controls to be incorporated into baseline cybersecurity requirements which were the channels are key priorities. subject of a consultation launched in May 2017. In addition, we are helping to organise an industry-wide Broadening fund distribution channels and widening crisis simulation exercise in October 2017 to increase the diversity of products on offer in Hong Kong are awareness of emerging threats. also important. In a recent consultation on online distribution and advisory platforms, we proposed In a month-long consultation in March 2017, we new guidelines and tailored guidance to the industry proposed changes to enhance market transparency and on the design and operation of online platforms and promote consistency in the application of the Securities clarified how the suitability requirement would operate and Futures (Professional Investor) Rules, while at in the online environment. We hope this will enable the same time addressing the business needs of more distribution channels to flourish, lead to greater intermediaries and their clients without compromising investor choice at lower costs, and generally facilitate investor protection. the development of online distribution and advisory The reorganisation of the Intermediaries Division platforms for the benefit of both the industry and around four key segments of the market – asset investors. management, global institutions, Greater China We are continuing our discussions with the institutions and Asian institutions – has helped us Government, HKEX and other industry stakeholders enhance our knowledge of specific industry segments on arrangements for an exchange-based platform and enabled a more outcomes-based supervisory approach.
2 The Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
6 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 7
SFC Annual Report 2016-17 Report Annual SFC We will further enhance We will further enhance the smooth operation of the smooth operation of cross-border trading links. regulatory cooperation with regulatory cooperation with Mainland authorities to ensure Mainland authorities to ensure China investments across different asset classes. In this asset classes. different China investments across is significant for Hong Kong amid the potential area integration with the global increasing the Mainland’s economy. to enhance its clearing now working with HKEX are We in view of the expansion processes risk management of its business and the latest international regulatory issues regulatory developments, as well as to address its latest strategic plan. In addition, we arising from implementing our enhanced supervisory approach are on-site to HKEX, focused on conducting regular operations. non-listing related inspections of HKEX’s and the robustness This is important to ensure of our market infrastructure. resilience provident funds and pooled retirement funds. In funds and pooled retirement provident also we are in data collection, global trends light of for requirements reporting examining the existing Kong. public funds in Hong Markets Kong Stock Connect in The launch of Shenzhen-Hong role Hong Kong’s strengthened December 2016 further of the world. and the rest connecting the Mainland focused on Hong Building on this, we will remain internationalKong as a gateway for investors to access market, further enhancing regulatory the Mainland the to ensure cooperation with Mainland authorities trading links. smooth operation of cross-border and engage in initiatives also actively support will We as a place where for Hong Kong to develop its role more financial market participants can manage to mainland complex risks, particularly those relevant Chairman Mr Carlson Tong speaking at the SFC SFC speaking at the Chairman Mr Carlson Tong Regulatory Forum requirements. We plan to introduce further streamlined further streamlined plan to introduce We requirements. time for approving processing the to reduce measures offering scheme changes and authorisations of revised documents of authorised funds including mandatory We remain focused on ways to enhance how we focused on ways remain We offered and authorise investment products regulate to the public and monitor compliance with regulatory regulatory regime governing trustees and custodians of regime regulatory client assets. In light of heightened attention on protecting In light of heightened attention on protecting our reviewing we are investors’ assets globally, Similarly, we are conducting a holistic review of the conducting a holistic review we are Similarly, to align and Mutual Funds in order Code on Unit Trusts governing SFC-authorised requirements the regulatory funds with international benchmarks. and independent advice, safe custody of fund assets and independent advice, safe custody and liquidity management. and following a recent market consultation, we will and following a recent of the asset be enhancing the overall regulation commissions management industry with a focus on necessary precondition to realise Hong Kong’s ambition Kong’s Hong to realise necessary precondition In light to be a dominant asset management centre. developments, and market of international regulatory the choice of an attractive, alternativethe choice investment fund vehicle. in line with international is a Local regulation standards consultation on the subsidiary legislation and an SFC legislation and an consultation on the subsidiary companies in Hong Kong code for open-ended fund the industry with will provide which, when enacted, for fund distribution. We are also preparing a public also preparing are for fund distribution. We Strategic Priorities Strategic SFC Annual Report 2016-17
Strategic Priorities
To facilitate a smooth transition to the new framework, we conducted a survey to collect information on OTC derivatives activities carried out by intermediaries and their affiliated companies. We are now finalising proposed changes to the rules relating to capital and other prudential requirements for licensed corporations engaging in OTC derivatives activities.
Enforcement Last year we conducted a comprehensive strategic Chief Executive Officer Mr Ashley Alder addresses an industry review of our enforcement priorities, tools and conference organisational structure. Of the risks we identified, those which pose the most serious and imminent In today’s larger and more complex markets, identifying threats relate to corporate fraud and misfeasance, transaction orders directly at a client level rather than insider dealing, market manipulation, intermediaries at a broker level can help us conduct more efficient misconduct, gatekeeping by sponsor firms and mis- and effective surveillance of trading activities. We are selling of financial products. working closely with HKEX to devise an operational model to accomplish this for the entire Hong Kong Accordingly, we prioritised our resources by forming market, and will consult the market in due course. An both permanent and temporary specialised teams investor identification model is also being considered which help us handle increasingly complex cases more for northbound trading activities under Stock Connect. efficiently while building up our expertise by addressing each of the key risks identified by our divisions which We expanded the scope of the excess position limits have frontline contact with the market. This has for futures and options contracts to ensure they already achieved faster results such as a number of remain appropriate to meet the needs of our market. settlements with investment banks for a variety of In preparation for the introduction of a paperless internal control failures, including some related to securities market, we are reviewing clearing and position limits, electronic trading systems and conflicts settlement arrangements with HKEX to identify the of interest. changes needed and the potential impact on market participants. To deliver strong deterrent messages, we do not hesitate to impose sanctions, including suspensions A new over-the-counter (OTC) derivatives regulatory or revocations of licences when the misconduct is framework is being implemented in phases in Hong particularly serious. Recently, we took action against Kong to fulfil international commitments aimed at a number of sponsor firms with a view to improving improving transparency, mitigating systemic risk standards in the sector and targeted the directors and preventing market abuse. Mandatory clearing, and senior officers of listed companies who fail to which requires certain standardised products to be discharge their duties. cleared through designated central counterparties, was introduced in September 2016, and expanded Moreover, we have made it clear that firms and mandatory reporting commences in July 2017. individuals are encouraged to cooperate with us in resolving our concerns and for this we will give them credit. In appropriate cases, cooperation can facilitate a possible early resolution. This in turn allows us to achieve earlier remedial outcomes to compensate investors harmed by misconduct.
8 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 9 . 3 SFC Annual Report 2016-17 Report Annual SFC of the Financial Stability Board (FSB) of the Financial Stability Board Mr Alder sits As the Chairman of the IOSCO Board, Plenary and its Steering Committee. Our on the FSB’s FSB’s and actively participate in IOSCO’s senior staff committees and working groups. Locally, our collaboration with the Hong Kong our collaboration with Locally, thematic policy ranges from Monetary Authority of financial services which onsite reviews to projects and banking institutions. straddle securities activities colleges for supervisory also participate in regional We financial institutions. the supervision of global with work to achieve closer cooperation We our jurisdictions, including through authorities in other bodies. involvement in global regulatory our Chief Since the appointment of Mr Ashley Alder, of the as Chairman of the Board Executive Officer, International Organization of Securities Commissions Secretariat (IOSCO), we have worked with the IOSCO to its wider relevant work more to make IOSCO’s between members interaction to promote membership, and developed markets, and to clarify emerging from policy work and that the intersection between IOSCO’s framework which delivers framework which delivers confidence in a regulatory confidence in a regulatory It is essential that investors have have It is essential that investors accountability and transparency. The FSB was established by the leaders of the G20 countries in 2009 as an international body to promote global financial stability through the stability through global financial countries in 2009 as an internationalThe FSB was established by the leaders of the G20 body to promote implementation and monitoring of international policies and standards.
3 information and formalising cooperation arrangements. larger and more complex cross-boundary capital flows complex cross-boundary larger and more will further strengthen We and intermediary activity. sharing cooperation through regulatory cross-border We have a unique and increasingly essential reciprocal essential reciprocal have a unique and increasingly We as our interests with Mainland regulators relationship converge on matters of common concern arising from counterparts as well as regular high-level engagement as well as regular counterparts with Mainland authorities and government agencies. Regulatory collaboration capital market integration calls for close Increasing communication with our Mainland and effective enhancements to the investor compensation regime investor compensation regime enhancements to the changes. proposed consult the public on and will We recently conducted a study of possible recently We individuals manage their money wisely. individuals manage their money wisely. The Investor Education Centre, an SFC-funded The Investor Education Centre, financial comprehensive provides subsidiary, to help information, tools and educational resources associated with a complex product based only on with a complex product associated information posted on an online platform. our consultation on online distribution and advisory our consultation on investors retail the difficulty platforms addresses and risks the nature may have in fully understanding confidence in a robust regulatory framework which framework regulatory confidence in a robust accountability and transparency delivers undoubted are investments which them from whilst protecting For example, to understand. overly complex or difficult Investor protection is a vital part of our mission, as it is a vital part Investor protection success that local future Kong’s is essential for Hong investors have and institutional and overseas retail Investors Strategic Priorities Strategic SFC Annual Report 2016-17
SFC at a Glance
Mission statement Provide protection for the investing public As a financial regulator in an international financial Minimise crime and misconduct in the industry centre, the SFC strives to strengthen and protect the integrity and soundness of Hong Kong’s securities and Reduce systemic risks in the industry futures markets for the benefit of investors and the Assist the Government in maintaining Hong Kong’s industry. financial stability Mandates In 2012, the SFO was amended to broaden our statutory investor education objective. As a result, we Our work is defined and governed by the Securities delegated our education function to a wholly-owned and Futures Ordinance (SFO), which sets out our subsidiary, the Investor Education Centre, which powers, roles and responsibilities. We have six statutory has a broad mandate to provide financial consumer objectives: education and information. Another wholly-owned Maintain and promote a fair, efficient, competitive, subsidiary, the Investor Compensation Company Limited, transparent and orderly securities and futures was established in 2003 to manage and administer claims industry against the Investor Compensation Fund.
Help the public understand the workings of the industry
As of 31 March 2017 245 49 listing applications reviewed authorised automated under the dual filing regime trading services +12% 262 SFC-authorised renminbi investment products 108 enquiries raised with listed +16% companies on disclosure irregularities 735 Hong Kong-domiciled SFC-authorised funds 494 takeovers and share buy-backs 2,780 transactions handled authorised collective investment schemes +14%
Note: Unless specified, figures are for the full year from 1 April 2016 to 31 March 2017.
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SFC at a Glance Chairman and CEO
Regulatory functions requirements. We also work to facilitate market growth Message from and product innovation, particularly in supporting the Our work can be divided into the following key areas: development of Hong Kong as an asset management hub and a premier offshore renminbi centre. Intermediaries We set standards for industry practitioners seeking Priorities Listings and takeovers Strategic to be, and to remain, licensed. We supervise licensed We oversee the listing-related functions of The Stock corporations, including securities brokers, futures Exchange of Hong Kong Limited (SEHK) as well as dealers, leveraged forex traders, fund managers, public companies’ mergers, takeovers, privatisations investment and corporate finance advisers and credit and share buy-backs. We monitor the timeliness rating agencies, with a focus on both business conduct SFC at a of corporate disclosures under the statutory inside Glance and financial soundness. information disclosure regime and vet listing applications alongside SEHK under the dual filing Investment products regime, in addition to enhancing listing rules. We also
We perform gate-keeping functions in authorising Governance
perform risk-based reviews of particular companies and Corporate investment products offered to the public and broader thematic reviews of activities which may signal monitoring compliance with disclosure and other corporate misconduct. People Our of the Year 414 548 Highlights investigations initiated compliance advice
letters issued Operational +21% Review
591 Social Corporate investigations completed Responsibility +36% 8,960
requests for trading records from Developments intermediaries Corporate 54 +12%
licensees disciplined Statements Financial 27 Supplementary $93 million disqualification and Information in fines restorative orders
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SFC at a Glance
Market infrastructure Regulatory collaboration We conduct day-to-day supervision and monitoring To ensure our regulatory framework is aligned with of exchanges and clearing houses, share registrars global standards, we work closely with local, Mainland and authorised automated trading services providers. and overseas regulators. We contribute to international In addition, we formulate policies to facilitate the initiatives through our active participation in the development of market infrastructure and to build International Organization of Securities Commissions links with Mainland and international markets. We also and other global rule-setting forums. We collaborate collect quantitative information about the financial with authorities in mainland China and regulators in markets as a means to help reduce systemic risks. other jurisdictions to deepen financial integration and regulatory cooperation. Enforcement Through our surveillance, investigative and disciplinary Stakeholders work, we combat misconduct and malpractice in the We maintain close communication with stakeholders securities and futures markets. Where appropriate, we to help them understand our work and the rationale take action to remedy the effects of market misconduct behind it. When formulating policies, we consult the by applying to the court for injunctive and remedial industry and the investing public through a variety of orders. We work with other law enforcement agencies channels. and overseas regulatory bodies on investigations where required.
42,872 11,094 licensees and registrants licensees for asset as of 31 March 2017 management activities 7,838 new licence applications 312 risk-based, on-site inspections of intermediaries 387 new corporate licence applications 1,755 breaches noted during +54% on-site inspections 23,121 applications to conduct 74 new regulated activity circulars to industry
Note: Unless specified, figures are for the full year from 1 April 2016 to 31 March 2017.
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SFC at a Glance Chairman and CEO
History and background be vested with broad investigative and disciplinary Message from powers so it could carry out its regulatory functions The securities and futures markets in Hong Kong properly. were largely unregulated until 1974 when legislation was introduced to regulate the industry following a In May 1989, the SFC was officially established as market crash the previous year. Under the legislation, an independent statutory regulator following the Priorities regulation was conducted on a part-time basis by two enactment of the Securities and Futures Commission Strategic separate commissions, one for securities and another Ordinance. Further reviews to improve the regulatory for commodities trading. regime were conducted after the 1997 Asian financial crisis. The SFO came into effect on 1 April 2003, Another major market crash in 1987 triggered the consolidating and modernising the ordinances SFC at a
formation of the Securities Review Committee chaired Glance previously regulating Hong Kong’s securities and by chartered accountant Ian Hay Davison. Its report, futures markets. released in 1988, recommended the establishment of a single statutory body outside the civil service, headed Although the SFO provides for the Government to and staffed by full-time professionals and funded fund the SFC, the SFC has been self-funded through Governance Corporate primarily by the market. It also proposed that this body fees and transaction levies since the early 1990s. People Our of the Year Handled 40 Highlights 185 workshops for over Operational
Fintech Contact Point Review enquiries 3,000 industry participants Corporate Social Corporate Responsibility 2,322 134 complaints against intermediaries press releases Developments
and market activities Corporate +13% +18% Statements 59,952 Financial average page views on SFC website daily Supplementary
6,532 Information general public enquiries +18%
13 SFC Annual Report 2016-17 Corporate Governance Governance
We strive to promote transparency, accountability and integrity. Sound corporate governance is essential to ensure we carry out our regulatory functions properly and effectively.
14 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 15 Corporate SFC Annual Report 2016-17 Report Annual SFC Regulatory committees Process Review Panel Securities and Futures Appeals Tribunal The Ombudsman Courts Advisory Committee Advisory Committee
External committees External committees Advice and Review Checks and balances Checks and balances , published by the Hong Kong Institute of Certified Public Kong Institute of Certified Public , published by the Hong SFC
Internal control
Audit Committee Audit Committee Budget Committee Investment Committee Remuneration Committee Accountability and Communication
and the Government) Stakeholders (eg, the public, industry Board committees Key components of our governance framework Governance for Public Bodies – A Basic Framework Governance for Public Accountants. A well-defined management structure, high standards of conduct, comprehensive operational and financial control and financial control operational of conduct, comprehensive high standards structure, A well-defined management the pillars of our corporate governance framework. This are and independent checks and balances procedures with best governanceframework is also consistent set out in for public bodies including those practices Governance framework Corporate GovernanceCorporate SFC Annual Report 2016-17
Corporate Governance
Board members
1 Carlson Tong 5 Edward Cheng 9 Teresa Ko 12 Mary Ma 1 2 Chairman Non-Executive Director Non-Executive Director Non-Executive Director 3 4 5 2 Ashley Alder 6 Christina Choi 10 Julia Leung 13 Kelvin Wong 6 7 8 9 Chief Executive Officer Executive Director, Executive Director, Non-Executive Director Investment Products Intermediaries 10 11 12 13 14 3 Thomas Atkinson 14 William Wong, SC Executive Director, 7 Brian Ho 11 Keith Lui Non-Executive Director Enforcement Executive Director, Executive Director, Corporate Finance Supervision of Markets 4 Albert Au Non-Executive Director 8 Lester Huang Non-Executive Director
Note: During the year, Prof Leonard Cheng served on the Board as Non-Executive Director until 31 December 2016 and Mr James Shipton served on the Board as Executive Director until 18 June 2016.
16 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 17 SFC Annual Report 2016-17 Report Annual SFC and quarterly policy meetings as well as special and and quarterly policy meetings as well meetings off-site consideration thorough enable to meetings before of agenda items members for comment our operations and financial condition on a monthly basis operations as appropriate conflicts of interest regarding them to better understand the members to enable organisation and their responsibilities supervising their work Arrange for the Board to hold monthly meetings to Arrange for the Board information members with relevant Board Provide meetings to minutes of the Board draft Circulate members with information regarding Furnish Board our policies and apprised of Keep the Board to observe policies members Board Require new Board induction briefings for Provide Assigning responsibilities to senior management and to senior Assigning responsibilities to the Board Reporting regularly
individual members. Assessment results are reported to reported are individual members. Assessment results on an anonymous basis. the Board is tasked with ensuring The Commission Secretariat good corporate governance. the Board It supports and senior management, assists them in dealing with organisation-wide policies and initiatives and ensures policies and follow relevant proceedings that Board also liaises Secretariat The Commission procedures. place to achieve this: conducts a self-assessment exercise regularly The Board assesses The exercise its effectiveness. to improve and the performance of responsibilities basic board Executive Directors and Non-Executive Executive Directors Directors EDs complementary. and NEDs are of our EDs The roles SFC and the for the daily operations of responsible are functions including duties in key each has executive intermediaries, market corporate finance, enforcement, NEDs provide operators and investment products. of the guidance on and monitor the performance functions. organisation’s Governance practices to maintain clear and proper endeavour We facilitate the working of an efficient to processes of and uphold high standards Board and accountable in corporate governance. The following practices are SFC’s agenda and priorities, and implementing them SFC’s with the Board as agreed operations of the SFC operations of the strategy and overall direction Developing strategic objectives, including setting the setting including objectives, strategic Developing Monitoring the executive team’s performance Monitoring the executive team’s Counselling the CEO on how the organisation is run for day-to-day Assuming executive responsibility Leading the Board in setting the SFC’s policies, in setting the SFC’s Leading the Board
CEO Chairman are separate and distinct. Their major responsibilities separate and distinct. Their major responsibilities are include: Chairman and CEO of the non-executive Chairman and the CEO The roles points of view. members and See pages 29-33 for the full list of Board their biographies. NEDs come from diverse backgrounds. They bring to diverse backgrounds. NEDs come from wide range of experience and expertise a the Board independent as well as a variety of perspectives and Officer (CEO); and eight Non-Executive Directors and eight Non-Executive Directors (CEO); Officer (NEDs), including the Chairman. year are disclosed on page 113. disclosed year are comprised six Board 2017, the As of 31 March (EDs), including the Chief Executive Executive Directors Secretary under delegated authority, and their delegated authority, under Secretary determined by appointment terms and conditions are for the members’ emoluments the Government. Board (SFO). Board members are appointed for a fixed term members are (SFO). Board Special by the Chief Executive of the Hong Kong Financial Administrative Region (HKSAR) or the Constitution are of the Board The constitution and proceedings Ordinance stipulated by the Securities and Futures strategic guidance to senior management and oversees strategic guidance Committee (ExCo). the work of the Executive The Board is responsible for supervising and directing directing for supervising and is responsible The Board ensuring that in role an important our work and plays It effectively. functions we perform our regulatory provides policies, and direction overall sets the SFC’s Board Corporate Governance Corporate SFC Annual Report 2016-17
Corporate Governance
with Board members, organises their meetings, and On 19 June 2016, Ms Julia Leung, then ED of acts as the central contact point with the Government, Investment Products, succeeded Mr James Shipton as the Legislative Council (LegCo) and its members, fellow ED of Intermediaries. regulators and other public bodies. Mr Edward Cheng was appointed as NED for a two- Board appointments year term effective from 1 January 2017. On 21 April 2017, Mr Ashley Alder was reappointed as In addition, four NEDs were reappointed for two-year CEO for a three-year term effective from 1 October 2017. terms: Ms Teresa Ko (from 1 August 2016), Dr William Wong, SC (from 1 August 2016), Dr Kelvin Wong (from Mr Thomas Atkinson was appointed as ED of 20 October 2016) and Mr Albert Au (from 26 May Enforcement for a three-year term effective from 2017). Prof Leonard Cheng stepped down as an NED 3 May 2016 and Ms Christina Choi was appointed as at the end of his six-year term. ED of Investment Products for a three-year term effective from 1 August 2016.
New Executive Directors In his new role, Mr Atkinson has found that the Hong Kong market presents a unique set of enforcement Two EDs, Mr Thomas Atkinson and Ms Christina Choi, challenges. It is highly international with a large number joined our Board during the year. They shared some of listed companies which have business operations thoughts about their new roles. elsewhere. This makes it essential for the SFC to maintain collaborative relationships with regulators in International mindset other jurisdictions, he concluded. Mr Atkinson, a native of Canada, joined the SFC as Local perspective ED of Enforcement in May 2016 from a similar role at the Ontario Securities Commission. Earlier in his Born and raised in Hong Kong, Ms Choi spent 11 years career, holding progressively senior roles at the Toronto at the SFC prior to her appointment as ED of Stock Exchange helped him develop a thorough Investment Products in August 2016. Formerly a partner understanding of securities markets. at an international law firm, she told us that working on complex capital market transactions on the Mainland and around the region helped her better understand the market and the industry.
Her time at the SFC brought home to Ms Choi the importance of teamwork. She quickly found that SFC staff complement one another with their broad range of backgrounds and expertise, including lawyers, accountants and market professionals.
Looking ahead, Ms Choi said the SFC is focused on Having diverse experiences is important, added Mr diversifying and broadening Hong Kong’s role as an Atkinson, as it develops a mindset for dealing with international financial centre. The aim is to make Hong complex situations. As a university student, he spent his Kong a preferred centre for asset and risk management summers in the Canadian oil fields working closely with for international investors, supported by a world-class people from very different personal and educational regulatory regime. In working toward this goal, Ms Choi backgrounds. The work was physically and technically stressed, she always keeps in mind the importance of demanding, and taught him to identify the strengths of being pragmatic and innovative and finding common each individual and coordinate their abilities. goals and mutual benefits.
I want us to focus on high-impact enforcement cases to We are working on a broad agenda of initiatives to bring the strongest possible deterrent effect in a timely support the development of Hong Kong as a manner. fully-fledged international asset management centre. Thomas Atkinson Christina Choi
18 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 19 – – – – – – – – – 6/6 2/2 20/23 20/21 15/17 21/23 21/23 19/23 21/23 22/23 Executive Committee – – – – – – – – – – – 1/1 1/1 1/1 0/1 1/1 1/1 1/1 1/1 SFC Annual Report 2016-17 Report Annual SFC Committee Remuneration – – – – – – – – – – – 3/4 1/1 4/4 4/4 2/4 3/4 3/4 4/4 Committee Investment – – – – – – – – – – – – – 1/1 0/1 1/1 1/1 0/1 1/1 Budget Committee – – – – – – – – – – – – – – 2/2 1/2 2/2 2/2 0/2 Audit Committee – – – 4/4 4/4 17/17 11/11 18/18 18/18 18/18 10/14 15/18 17/18 14/18 15/18 12/18 18/18 16/18 18/18 Board 1 9 6 5 3 2 7 4 meetings 8 Appointment expired on 2 May 2016. Appointment expired Appointed as a member of the Board and Remuneration Committee effective 1 January 2017. Remuneration Committee effective and Appointed as a member of the Board 2016. on 31 December Appointment expired January 2017. 1 Committee effective Appointed as Deputy Chairman of the Remuneration Committee and a member of the Budget 1 January 2017. effective Appointed as Chairman of the Budget Committee Appointed as a member of the Board and Executive Committee effective 3 May 2016. Executive Committee effective and Appointed as a member of the Board 19 June 2016. and Executive Committee effective 1 August 2016 effective Appointed as a member of the Board on 18 June 2016. Appointment expired member since 26 May 2015. a 1 January 2017, after serving as Appointed as Deputy Chairman of the Budget Committee effective Albert Au Albert Cheng Edward Keith Lui James Shipton Non-Executive Directors Christina Choi Brian Ho Julia Leung Ashley Alder Ashley Thomas Atkinson Chairman Carlson Tong Executive Directors Meetings attended/held Maureen Garrett Maureen Andrew Wan Andrew Young Andrew Interim Head, Enforcement William SC Wong, and Senior Director Chief Counsel Mary Ma Kelvin Wong Leonard Cheng Leonard Lester Huang Ko Teresa
Last year, 18 Board meetings were held with an average attendance rate of 91%. held with an average meetings were 18 Board Last year, record Meeting attendance Regular Board meetings are held at least monthly. In addition, the Board meets quarterly to conduct in-depth meets quarterly to conduct in-depth In addition, the Board held at least monthly. meetings are Regular Board meeting discusses as needed. An annual off-site issues and also convenes special meetings discussions of policy and management priorities. strategic objectives Board Corporate Governance Corporate 9 6 7 8 2 3 4 5 1 SFC Annual Report 2016-17
Corporate Governance
SFC committees Board committees Each of our four board committees is chaired by an NED and focuses on clearly-defined areas of the SFC’s operations. The presence of the NEDs serves as an effective check and balance on the SFC’s management decisions.
Committee Membership Responsibilities Meetings
Reviews annual financial statements Recommends the appointment of external auditors
Audit Coordinates the scope of the external audit and reviews audit Five NEDs Two Committee findings Examines management procedures to ensure effective financial and internal controls
Examines and approves the parameters and bases used in the annual budget Budget Four NEDs and Conducts the mid-year budget review One # Committee two EDs Reviews the annual budget and makes recommendations to the Board
Advises on the SFC’s fund management policies, strategies and investment guidelines Four NEDs, Recommends the appointment of investment managers and Investment two EDs and advisers and monitors their performance including compliance Four Committee a Senior with the investment guidelines Director# Advises on investment risk management and asset allocation and monitors the performance of investments
Reviews the structure and level of staff remuneration Reviews trends in remuneration packages and recommends Remuneration Eight NEDs adjustments One Committee Considers other matters as required, including recommendations to the Government on EDs’ remuneration and re-appointment
# In a non-voting capacity.
20 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 21 SFC Annual Report 2016-17 Report Annual SFC and mergers, or the compensation fund. Appointed by compensation fund. Appointed and mergers, or the include NEDs, EDs, representatives members the Board, were and other stakeholders. There the industry from 2017. committees as at the end of March 15 regulatory and See pages 166-174 for the responsibilities membership lists of the external committees. Executive Committee the ExCo, the highest executive body within financial and organisation, performs administrative, management functions as delegated by the Board ExCo that the SFC functions effectively. and ensures by the CEO and also includes all other EDs, is chaired and the Chief Counsel, and the Chief Financial Officer (Corporate Affairs). Senior Director to consider policy and operational ExCo meets regularly divisions different from and funding requests proposals 23 ExCo meetings of the organisation. In the year, held with an average attendance rate of 91%. were External committees up under the SFO and set External are committees members of outside made up of a large number are and concerns of the diverse interests who reflect in the They play important roles market participants. governancethe SFC. of insight and advice offers The Advisory Committee performance of the to the on policy matters related external members are functions. The majority of SFC’s appointed by the Financial Secretary representatives Chief under authority delegated by the HKSAR the Chairman Executive. The Committee is headed by than two other and includes the CEO and not more EDs. committee specialises in a particular Each regulatory investment products, supervision, market such as area listings, takeovers rights and interests, shareholders’
Edward Cheng Kong’s competitiveness as an international competitiveness as an international Kong’s financial centre. corporate governance helps organisations achieve corporate governance helps organisations achieve he emphasised, people are their goals. In particular, implementing and the key factor for establishing, clear policies and rules. reviewing The Board plays an important role in maintaining a sound regulatory regime and enhancing Hong at large, Mr Cheng noted. In his new role, he he at large, Mr Cheng noted. In his new role, his from hopes to contribute by sharing his views a public as well as from background entrepreneurial policy perspective. good believes that Cheng strongly Summing up, Mr as well as considering as well as considering the changes in rapid to new initiatives in response financial world. he served on, the SFC with other boards Compared has to keep in mind that is unique in that the Board financial industry Hong Kong’s its decisions affect Cheng quickly found Cheng quickly found that the SFC does much than monitor the more market. He saw firsthand takes an how the Board in discussing active role policies and strategies in January 2017, started his career as a solicitor in in as a solicitor his career in January 2017, started running an entrepreneur London and later became some Hong Kong. He shared public companies in on his new role. reflections Mr Board, Joining the New Non-Executive Director New Non-Executive the SFC as an NED Cheng, who joined Mr Edward Corporate Governance Corporate SFC Annual Report 2016-17
Corporate Governance
Organisational structure
Audit Advisory Committee Committee The Board
Budget Regulatory Committee committees
Investment # CEO CEO’s Office Committee
Remuneration Executive Committee Committee
Corporate Investment Supervision Enforcement Intermediaries Finance Products of Markets
Licensing Intermediaries Corporate Legal Supervision Affairs Services
External Human Information Planning and Relations Finance Resources Technology Administration
Board committees External committees
# CEO’s Office includes five units, namely the Commission Secretariat, International Affairs, Mainland Affairs, Press Office, and Risk and Strategy.
22 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 23 SFC Annual Report 2016-17 Report Annual SFC in their undertakings to manage these in their 1 that they adopt the Principles of Responsible that they adopt the Principles of Responsible Ownership investments. Financial control and reporting help for financial control Our policies and procedures of integrity and exercise us uphold a high standard on the use of public funds. We controls rigorous engage an independent external firm to conduct an and procedures of our financial control annual review practical and robust. they are policies to ensure standards reporting financial adopt the appropriate We and voluntarily observe applicable requirements in the Hong Kong Companies Ordinance stipulated adopt We our financial reports. when preparing for the Hong Kong Financial Reporting Standards financial statements and disclosing financial preparing information and follow good market practice to and transparent are that our financial reports ensure informative. divisions critically assess their resources for the for their resources divisions critically assess all requests. examine year and we carefully following after consideration by the Budget The annual budget, to is submitted Board, by the Committee and approval tabled and then for approval the Financial Secretary LegCo. before Investment importance to the prudent attach great We guided by the goal management of our reserves, Our reserves of long-term financial sustainability. to investment guidelines according managed are have We the Financial Secretary. by approved for the selection, retention delegated responsibility our Reserve and management of the investments of to externalFund and the Investor Compensation Fund their review investment managers, and we regularly performance. The external managers have confirmed Issued by the SFC in March 2016, these principles, which are voluntary, aim to provide guidance on how investors should fulfil their ownership should guidance on how investors aim to provide voluntary, principles, which are 2016, these Issued by the SFC in March to investments in Hong Kong listed companies. in relation responsibilities
1 exercise robust financial control and identify areas and identify areas financial control robust exercise to meet evolving re-deployed could be resources where priorities and operational needs, achieve regulatory During the budget process, maximise efficiency. our budget, which is prepared based on a policy of our budget, which is prepared as befits a publicly- expenditures, tightly controlling make prudent assumptions, funded organisation. We Budgeting in drawing up follow a disciplined approach We divisions, as permitted under the SFO, to facilitate the discharge of their duties in daily operations. delineate the authority of the Board and different levels and different delineate the authority of the Board delegates of the executive management. The Board powers and functions to EDs, with certain regulatory in their respective power to sub-delegate to staff Delegation of authority of delegation of authority to clearly have a system We Stringent policies and procedures are in place to ensure in place to ensure are Stringent policies and procedures fairness and transparency. that we act with credibility, to complete. Accountability and transparency manage conflicts of interest and related conduct issues. and related manage conflicts of interest code, this year of the revised aware are staff ensure To existing staff we launched an e-course for all new and Amendments to our code of conduct took effect in took effect Amendments to our code of conduct identify and that we appropriately 2016 to ensure personal investments and acceptance of gifts and and acceptance of personal investments copy of the member is given a Each staff hospitality. in to comply with the code may result code. Failure disciplinary action. relevant legal obligations, staff are required to adhere to adhere required are legal obligations, staff relevant which spells out our standards to our code of conduct of interest, conflicts and covers confidentiality, in detail As a regulator, we require a high standard of integrity a high standard we require As a regulator, and maintain to promote our staff and conduct from to complying with In addition public confidence. Standards of conduct Standards Corporate Governance Corporate SFC Annual Report 2016-17
Corporate Governance
Our practices include: As the markets we regulate are complex and develop quickly, we set up a number of cross-divisional project Selecting relevant accounting policies and applying teams to work on policies or initiatives which are them consistently related to the work of multiple divisions. This allows Appointing an external firm to conduct an interim us to coordinate the work of different parts of the review and annual audit organisation and manage our resources effectively.
Presenting our interim and annual financial Stakeholder communication statements to the Audit Committee for We engage a wide range of stakeholders including the consideration Government, LegCo members, the financial services Seeking the Board’s approval of the quarterly and industry, regulatory counterparts and the general investing annual financial statements and publishing them in public in a proactive, timely and effective manner2. our quarterly and annual reports We respond to public enquiries orally and in Reporting key financial data to the Board and ExCo writing while striving to meet the timelines set out on a monthly basis in our performance pledges. We conduct public consultations and publish consultation conclusions Providing regular reports to the Government before implementing a regulatory change. Annual and quarterly reports keep the public informed of Attending meetings at LegCo, including meetings of our key regulatory work and finances. Industry- the Panel on Financial Affairs, to present the annual related publications, reports and surveys address more budget and explain policy initiatives and other issues specialised topics. Press releases announce our latest of public interest regulatory actions and other SFC news.
Handling complaints and grievances We also work with stakeholders to explain and clarify We extend our principles of accountability and our policies and procedures and discuss specific transparency to our complaints handling procedures. regulatory areas at seminars or other events. Reports of improper practices of the SFC or our staff We adopt an open approach to disclosing information, can be made under our procedures for handling subject to the secrecy provisions of the SFO. Our complaints against the SFC or its employees. These corporate website (www.sfc.hk) provides up-to-date, cover dissatisfaction with the manner in which the easily accessible public information, which is constantly SFC or our staff carried out or failed to carry out our updated and enriched. duties. Detailed procedures for the public to lodge a complaint are available on our website. We emphasise effective internal communication within the organisation. Besides utilising our intranet and Efficient use of resources internal circulars, we organise regular CEO Sharing We regularly review our corporate resources and space Sessions and briefings by senior executives on the work requirements to ensure that we operate efficiently. of various divisions to keep staff informed of the latest developments and our current regulatory priorities.
2 See Stakeholder communication on pages 77-80.
24 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 25 SFC Annual Report 2016-17 Report Annual SFC emergencies. The scope of the plan covers office office emergencies. The scope of the plan covers and computer services. communications premises, confidentiality and integrity the on how to protect time to from of information. The policy is revised and time to keep up with changes in technology processes. access, use or modification. unauthorised from unauthorised entry to our premises. addresses readily identifiable risks, including readily addresses natural disasters and other fires, technical problems, An information security policy provides guidance An information security policy provides our information and systems protect controls Access against safeguard access controls Office A regularly updated business resumption plan business resumption updated A regularly
In addition, the annual financial control review review financial control In addition, the annual externalconducted by an independent firm includes assess to of our internal controls review a risk-based evaluate and enhance to to them and our adherence approved is each review The scope of their adequacy. and the findings, together by the Audit Committee submitted to ExCo are with recommendations, back to the Audit reported for consideration and and included banking the review This year, Committee. as well as financial transaction investment procedures led to and processes, analysis and recruitment policies and procedures. to related subsequent revisions for in place to provide following measures put the We safe and smooth operations: . 3 See Risk assessment on page 72.
3 they are current, practical and robust. practical current, they are accountability and transparency and to conform accountability and transparency use of public funds. on the controls to rigorous to ensure we conduct a holistic review Periodically, not limited to the appointment of consultants, fee and budgeting. collection, investments, expenditures designed to ensure are These policies and procedures Our financial control policies and procedures define policies and procedures Our financial control of the administrative, the scope and responsibility including but financial and management functions, threats to our information and office security. Internal security. information and office to our threats these risks. in place to address are measures control Internal risks and control subject to possible internal risks associated are We risks and with our operations, including financial to them. In addition, we began a project to enhance to them. In addition, we began a project our use of risk data setting. A regularly updated risk register provides provides updated risk register setting. A regularly of risks relevant senior management with an overview for responding to our operations as well as strategies While each division closely monitors and manages While each division closely monitors and the Risk and area, in its respective risk regulatory and strategy- Strategy Unit assists in risk identification Rehearsing the plan on a regular basis helps us react basis helps us react Rehearsing the plan on a regular manner and in a coordinated appropriately promptly, when a crisis situation arises. Our market contingency plan sets out measures for plan sets out measures Our market contingency emergency situations which may dealing with different markets. securities and futures Kong’s Hong affect in a timely and systematic manner. in a timely and systematic External risks Our market environment is dynamic. To perform our To is dynamic. Our market environment to it is essential for us functions effectively, regulatory assess and manage external and internal risks identify, Risks Corporate Governance Corporate SFC Annual Report 2016-17
Corporate Governance
Independent checks and balances Independent bodies provide external checks and balances on our operational work to ensure fairness in our decision making, observance of due process and proper use of our regulatory powers. Apart from scrutiny by the Process Review Panel and the Securities and Futures Appeals Tribunal, we are subject to judicial review by the courts and indirect oversight by the Ombudsman.
SFC-related tasks handled Independent body Relevant functions in 2016-17 Process Review Panel Reviews and advises on the adequacy Reviewed 59 cases and An independent panel established by of our internal procedures and published its annual report in the HKSAR Chief Executive in 2000 operational guidelines, including those October 2016 Comprises representatives from for the handling of complaints and various sectors and two ex-officio licensing applications, inspection of members, namely the SFC Chairman intermediaries, product authorisation, and a representative from the corporate finance transactions and Department of Justice the exercise of investigation and disciplinary powers
Securities and Futures Appeals Reviews specified decisions made by Received a request to review Tribunal the SFC one new case Chaired by current or former judges Has power to confirm, vary or set Decided on two cases brought appointed by the HKSAR Chief aside decisions made by the SFC forward from 2015-16 Executive and comprising two (and where a decision is set aside, Allowed two cases to be other members drawn from a panel substitute any other decision it withdrawn (including one appointed by the Financial Secretary considers appropriate) or refer the which was brought forward under delegated authority matter back to the SFC with directions from 2015-16)
The Ombudsman Handles public complaints against Commenced six preliminary the SFC and its staff for alleged inquiries maladministration
Courts Handle judicial reviews of SFC Handled six applications for decisions judicial review
26 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 27 99% 99% 98% 100% 100% 100% 100% 100% 100% 100% 99.9% 2014/15 99% 98% 95% 100% 100% 100% 100% 100% 100% 100% 99.9% 2015/16 SFC Annual Report 2016-17 Report Annual SFC 4 5 97% 100% 100% 100% 100% 100% 100% 100% 100% 100% Cases meeting the pledge Cases meeting the 99.7% 2016/17 2 8 weeks 2 weeks 15 weeks 10 weeks 5 business days 7 business days 7 business days 2 business days 7 business days 14 business days 5 or 2 business days 1 3 Unit trusts and mutual funds (including eligible Mainland funds seeking authorisation under the Mutual Recognition of Funds (MRF) arrangement Unit trusts and mutual funds (including eligible Mainland funds seeking authorisation under the Mutual (including pooled investment funds) fund products Mandatory provident funds Pooled retirement between the Mainland and Hong Kong with effect from 9 May 2016) from between the Mainland and Hong Kong with effect period. The completion of the vast majority of the remaining 2,365 applications was delayed for reasons beyond our control (eg, unresolved (eg, unresolved beyond our control 2,365 applications was delayed for reasons period. The completion of the vast majority of the remaining by applicants that we delay essential information, requests applicants failing to provide issues, outstanding vetting requests, fitness and properness stated. not included in the percentages our performance, these applications are accurately reflect more finalising their applications). To difficulties. resourcing in our workflow and resulting unexpected complications, such as abnormal increases – – – including MRF funds (prior to 9 May 2016), ILAS, paper gold schemes and real The pledge of two business days is applicable to other products estate investment trusts. Six cases failed to meet the pledge. During the year, we processed 14,738 applications that were subject to performance pledges, 12,373 of which were processed within the applicable processed of which were subject to performance pledges, 12,373 applications that were 14,738 we processed During the year, from usually the delay was short and resulted of which we did not meet our performance pledges, respect For cases in these categories in Different performance pledges were applicable before the implementation of the revamped fund authorisation process on 9 November 2015. fund authorisation process the implementation of the revamped applicable before performance pledges were Different The pledge of five business days is applicable to the following products: Preliminary response Preliminary Transfer of accreditation Transfer Complaints against intermediaries and market activities Representatives (normal licences) Representatives officers) (responsible Representatives Processing of licensing applications Processing Corporations licences) (provisional Representatives Enquiries replies Preliminary Preliminary response to applications after take-up for to applications after take-up response Preliminary other products Preliminary response to applications after take-up for to applications after take-up response Preliminary and paper investment-linked assurance schemes (ILAS) gold schemes Authorisation of investment products of applications upon receipt Take-up Applications for subordinated loan or modification/ Applications for subordinated under SFO waiver of requirements of application upon receipt Commence review
5 4 3 2 1 In fulfilling our regulatory roles, we pledge to be responsive to the public, market participants and the intermediaries to the public, market participants to be responsive we pledge roles, In fulfilling our regulatory under our supervision. Performance pledges Performance Corporate Governance Corporate SFC Annual Report 2016-17
Corporate Governance
This year, performance pledges for our work on takeovers and mergers matters were published on our corporate website and explained in detail in the December 2016 issue of the Takeovers Bulletin. From January to March 2017, 99.7% of takeovers and mergers-related applications and transactions met the performance pledges. Details of the response times are listed in the following table.
Consultations and rulings under sections 6 and 8 of the Introduction to the Codes on Takeovers and Mergers and Share Buy-backs (Codes)
Applications for rulings and consultations with the Executive
– All ruling applications and consultations under the Codes (except for those set out below) 5 business days6
– Applications for rulings that are conditional on Normally within 5 business days obtaining shareholders’ approval in a general meeting before the relevant general meeting
– Fast track EFM/EPT applications and EFM/EPT annual confirmations7 10 business days
– All other EFM/EPT applications 21 business days
Comments and clearance of announcements and documents under Rule 12 of the Takeovers Code
First draft of firm intention announcement under Rule 3.5 of the Takeovers Code
– No complex Code issues involved 2 business days
– Complex Code issues involved 3 business days8
All other announcements (including revised drafts)
– No complex Code issues involved 1 business day
– Complex Code issues involved 3 business days8
All drafts of shareholders’ documents9 5 business days
6 If the subject matter involves complex Code issues, the time limit will be extended to 21 business days and the applicants will be informed of this. 7 EFMs and EPTs refer to exempt fund managers and exempt principal traders as defined under the Codes. 8 The parties will be informed of the longer time needed. 9 Including offer documents, offeree board circulars, whitewash circulars, scheme documents and share buy-back circulars.
28 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 29 SFC Annual Report 2016-17 Report Annual SFC JP Chief Executive Officer From 1 October 2011 on 30 September 2020 Current appointment expires Partner (1994-2001); Associate (1986-1994) Thomas ATKINSON Enforcement Executive Director, From 3 May 2016 Current appointment expires on 2 May 2019 Investor Compensation Fund Committee and SFC (HKEC Listing) Committee Commission (2009-2016) (2001-2007) Exchange (1996-2001) (1993-1996) Ashley ALDER Ashley ALDER Committee Listing) Committee May 2016); Vice-Commissions: Chairman (since Chairman (Dec 2015-May 2016) Executive Director, Corporate Finance (2001-2004) Executive Director, (2004-2011); Herbert Smith: Partner and Head of Asia Member: Securities Compensation Fund Committee, Securities Ontario of Enforcement, Director Market Regulation Services Inc. and CEO, President Stock Regulation Services, Toronto Vice President, Ontario Court of Justice Attorney, Assistant Crown Chairman, Nominations Committee Chairman, Nominations and Investment Member: Budget Committee (HKEC Member: Advisory Committee and SFC of International Organization of Securities Board Committee HKEX Listing Nominating Member, Association Markets Treasury Council Member, The Hong Kong Institute of Bankers Vice President,
Past SFC position Past offices positions Other SFC-related Past offices Other SFC-related positions Other SFC-related Public service
SBS, JP Listing Committee, The Stock Exchange of Hong Kong Limited: Chairman (2006-2008), Member (2002-2006) Levies Management Board (2007-2013) Levies Management Board Chairman, KPMG Asia Pacific and Member, (2009-2011) KPMG Global Board Legislature, and Officials under the Political and Officials Legislature, Appointment System of the HKSAR (2012-2017) Hong Kong Monetary Authority Hong Kong Monetary Authority and the for Members of the Executive Council (HKEC Listing) Appeals Committee Current appointment expires on 19 October 2018 Current appointment expires Committee Carlson TONG Carlson TONG Chairman From 20 October 2012 Main Board and Growth Enterprise Market and Growth Main Board Chairman, English Schools Foundation (2011-2015) Chairman, English Schools Foundation Insurance Chairman, Employees’ Compensation KPMG: Chairman, KPMG China (2007-2011); Member, Independent Commission on Remuneration Member, Sports Institute Limited Chairman, Hong Kong Chairman, University Grants Committee Exchange Fund Advisory Committee, Member, Banking Advisory Committee, Member, HKEX Listing Nominating Committee Member, Member, Remuneration Committee Remuneration Member, SFC Member: Nominations Committee and Review Panel for the SFC Process Member, Chairman: Investment Committee and Advisory Chairman: Investment
Committee. See pages 166-174 for information about SFC externalCommittee. See pages 166-174 for information about committees. Except for the Chairman and CEO, other board members are listed in alphabetical order. members are Except for the Chairman and CEO, other board and Mr James Shipton served on the until 31 December 2016 as Non-Executive Director Cheng served on the Board Leonard Prof During the year, until 18 June 2016. as Executive Director Board Appeal Committee and the Disciplinary Chair Panel, the Takeovers and Mergers The Nominations Committee nominates members of the Takeovers Notes: Past offices and public service Past offices Current offices and public service offices Current Other SFC-related positions Other SFC-related Corporate Governance Corporate SFC Annual Report 2016-17
Corporate Governance
Independent Non-Executive Director, Orient Overseas Albert AU BBS (International) Limited Non-Executive Director Independent Non-Executive Director, Standard From 26 May 2015 Chartered Bank (Hong Kong) Limited Current appointment expires on 25 May 2019 Board Member, Airport Authority Hong Kong Other SFC-related positions Member, Commission on Strategic Development Chairman, Audit Committee Past SFC-related positions Deputy Chairman, Budget Committee Member: Takeovers and Mergers Panel and Member: Investment Committee and Remuneration Takeovers Appeal Committee (1994-2005) Committee Past public service Member, SFC (HKEC Listing) Appeals Committee Chairman, University Grants Committee Current offices and public service (2011-2015) Special Advisor, BDO Limited Chairman, Urban Renewal Authority (2004-2007) Independent Commission Against Corruption: Council Member, Hong Kong Polytechnic University Chairman, Corruption Prevention Advisory (2006-2009) Committee, and Member, Advisory Committee Member, Advisory Committee on Corruption, on Corruption Independent Commission Against Corruption Chairman, Professional Services Advisory (2004-2009) Committee, Hong Kong Trade Development Council Member, Steering Committee on Innovation and Vice Chairman, Hong Kong Coalition of Professional Technology (2004-2008) Services Limited Council Member, City University of Hong Kong Café de Coral Holdings Limited: Independent (2003-2007) Non-Executive Director and Chairman of Audit Council Lay Member, Hong Kong Institute of Committee Certified Public Accountants (2004-2005) Independent Non-Executive Director, Hong Kong Member, Executive Committee, Hong Kong Housing International Theme Parks Limited Society (2000-2004) Past public service Member, Operations Review Committee, Independent Member, Hong Kong Housing Authority (2011-2017) Commission Against Corruption (1997-2003) Hong Kong Productivity Council: Council Member Council Member, Education University of Hong and Chairman of Audit Committee (2010-2015) Kong (formerly known as The Hong Kong Institute of Education) (2000-2002) Member, Air Transport Licensing Authority (2007-2013) Member, General Committee, Federation of Hong Christina CHOI Kong Industries (2007-2013) Executive Director, Investment Products President, Hong Kong Institute of Certified Public From 1 August 2016 Accountants (2008) Current appointment expires on 31 July 2019 Other SFC-related positions Edward CHENG SBS, JP Chairman: Committee on Real Estate Investment Non-Executive Director Trusts and Products Advisory Committee From 1 January 2017 Member, SFC (HKEC Listing) Committee Current appointment expires on 31 December 2018 Public service Other SFC-related positions Member, Financial Services Advisory Committee, Member, Remuneration Committee Hong Kong Trade Development Council Member, SFC (HKEC Listing) Appeals Committee Member, Asian Financial Forum Steering Committee, Hong Kong Trade Development Council Current offices and public service Past SFC positions Deputy Chairman and Chief Executive, Wing Tai Properties Limited Senior Director, Investment Products (2012-2016) Chairman, Lanson Place Hospitality Management Director, Investment Products (2005-2012) Limited Past offices Partner, Clifford Chance (2001-2004)
30 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 31
SFC Annual Report 2016-17 Report Annual SFC JP Non-Executive Director From 1 August 2012 on 31 July 2018 Current appointment expires Services Salaries and Conditions of Service (2013-2016) Science and Technology and Acquisitions, China Securities Regulatory Commission (2012-2016) Hong Kong Monetary Authority (2010-2016) Services Salaries and Conditions of Services (2011-2013) Kong Limited: Chairman (2009-2012); Deputy Chairman (2006-2009) Reform (2005-2011) Hong Kong (2005-2010) Teresa KO KO Teresa Remuneration Committee Nominations Committee, Securities Compensation Fund Committee, SFC (HKEC Listing) Appeals Appeal Committee Committee and Takeovers Partner Council Member, The Hong Kong University of Council Member, Expert Advisory Committee for Mergers Member, Exchange Fund Advisory Committee, Member, Standing Committee on Disciplined Member, Listing Committee, The Stock Exchange of Hong Standing Committee on Company Law Member, Industry Council of Travel Independent Director, Deputy Chairman, Takeovers and Mergers Panel Deputy Chairman, Takeovers and Budget Committee Member: Audit Committee, Committee, Member: Investor Compensation Fund Limited Chairman, Investor Compensation Company Deringer: China Chairman and Bruckhaus Freshfields Chairman, Standing Committee on Disciplined
Past public service Other SFC-related positions Other SFC-related and public service offices Current
JP and Conditions of Service (2010-2015) Limited (2009-2016) (2007-2009) Hong Kong Monetary Authority (2010-2016) Hong Kong (2010-2016) (2013-2016) Board Groups Education and Research Lester HUANG Non-Executive Director From 15 November 2015 2017 Current appointment expires on 14 November Committee Current appointment expires on 27 August 2018 Current appointment expires and Nominations Trusts Real Estate Investment Brian HO Finance Corporate Executive Director, From 28 August 2006 Member, Standing Committee on Judicial Salaries Standing Committee on Judicial Salaries Member, Non-Executive Director, Urban Renewal Authority Non-Executive Director, The Hong Kong Mortgage Corporation Director, The Law Society of Hong Kong President, Exchange Fund Advisory Committee, Member, Ex-officio Member, Education Commission Member, Ex-officio of Advisors of Radio Television Chairman, Board PC Woo & Co: Managing Partner and Co-Chairman Managing & Co: PC Woo Hospital Authority Member, Hong Kong Federation of Youth The President, The Hong Kong Institute of Directors Fellow, Chairman, Standing Committee on Language Deputy Chairman, Remuneration Committee Budget Committee Member, SFC (HKEC Listing) Appeals Committee Member, Senior Director, Corporate Finance (2000-2006) Senior Director, Member, HKEX Listing Nominating Committee Member, Chairman, Public Shareholders Group Chairman, Public Shareholders Committee on Member: Advisory Committee,
Past public service Current offices and public service offices Current Other SFC-related positions Other SFC-related Past SFC position Public service Other SFC-related positions Other SFC-related Corporate Governance Corporate SFC Annual Report 2016-17
Corporate Governance
Julia LEUNG SBS Mary MA Executive Director, Intermediaries Non-Executive Director From 2 March 2015 From 15 November 2013 Current appointment expires on 1 March 2018 Current appointment expires on 14 November 2017
Other SFC-related positions Other SFC-related positions Chairman: Academic and Accreditation Advisory Chairman, Budget Committee Committee Member: Audit Committee, Investment Committee Member, Budget Committee and Remuneration Committee Member, SFC (HKEC Listing) Committee Member, SFC (HKEC Listing) Appeals Committee Past offices and public service Current offices Julius Fellow, International Economics, Chatham Managing Partner, Boyu Capital House (2014) Independent Non-Executive Director, Lenovo Group Under Secretary for Financial Services and the Limited Treasury, Hong Kong Special Administrative Region Non-Executive Director: Unilever PLC and Unilever Government (2008-2013) N.V. Executive Director, Hong Kong Monetary Authority Past offices and public service (2000-2008) Non-Executive Director, Stelux Holdings International Publication Limited (2012-2016) The Tides of Capital (London: OMFIF Press, 2015) Non-Executive Director, Wumart Stores (2010-2014) Member, Listing Committee, The Stock Exchange of Keith LUI Hong Kong Limited (2009-2013) Executive Director, Supervision of Markets Independent Non-Executive Director, Standard From 28 August 2006 Chartered Bank (Hong Kong) Limited (2004-2013) Current appointment expires on 27 August 2018 Non-Executive Director, Daphne International Holdings Limited (2009-2011) Other SFC-related positions Partner, TPG Capital and Co-Chairman, TPG China Chairman: Investor Compensation Fund Committee (2007-2011) and Securities Compensation Fund Committee Director, Shenzhen Development Bank (2007-2010) Member, Investment Committee Member, Dean’s Council of the Kennedy School of Member: Advisory Committee and SFC (HKEC Harvard University (2002-2007) Listing) Committee Senior Vice President and Chief Financial Officer, Director, Investor Compensation Company Limited Lenovo Group Limited (1990-2007) Public service Director, Bureau of International Co-operation, Member, HKEX Risk Management Committee Chinese Academy of Sciences (1978-1990) Past SFC positions Senior Director, Supervision of Markets (2004-2006) Senior Director, Corporate Affairs (2002-2004) Commission Secretary (2001-2004)
32 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 33
SC SFC Annual Report 2016-17 Report Annual SFC Non-Executive Director From 1 August 2014 on 31 July 2018 Current appointment expires Association Committee on China Practice Development Examination Committee on Barristers Qualification China Affairs Committee on Greater Chinese University of Hong Kong Committee on Solicitors’ Rights of Audience (1998-2000) Dr William WONG Dr William WONG Listing) Appeals Committee of Insurers Ordinance) Chairman, Hong Kong Bar Association Special Chairman, Hong Kong Hong Kong Bar Association Special Member, Hong Kong Bar Association Special Member, College, the United of Trustees, Board Trustee, Society The Hong Kong Middle Temple Director, Hong Kong Bar Association Special Member, Chairman, Remuneration Committee Chairman, Remuneration Audit Committee Member, SFC (HKEC Member: Nominations Committee and Chambers Senior Counsel, Des Voeux of Arbitrators Institute Chartered Fellow, Hong Kong Federation Appeal Tribunal, Member, (Inland Revenue of Review The Board Member, Bar Council of the Hong Kong Bar Member,
Past public service Other SFC-related positions Other SFC-related and public service offices Current JP Listing Committee, The Stock Exchange of Hong Listing Committee, The Stock Exchange Kong Limited (2007-2013) Directors (2009-2014) Directors Panel (2013-2016) Reform (2010-2016) Institute of Directors Independent Commission Against Corruption COSCO SHIPPING Ports Limited Current appointment expires on 19 October 2018 Current appointment expires Committee Dr Kelvin WONG Dr Kelvin WONG Non-Executive Director From 20 October 2012 Member, Main Board and Growth Enterprise Market and Growth Main Board Member, Council Chairman, The Hong Kong Institute of Council Chairman, The Hong Kong Institute Reporting Review Financial Convenor-cum-Member, Standing Committee on Company Law Member, Immediate past Council Chairman, The Hong Kong Immediate past Council Chairman, The Financial Reporting Council Member, Operations Review Committee, Member, Member, Remuneration Committee Remuneration Member, SFC (HKEC Listing) Appeals Committee Member, Chairman, Investor Education Centre and Deputy Managing Director, Executive Director Deputy Chairman: Audit Committee and Investment Deputy Chairman: Audit
Past offices and public service Past offices Current offices and public service offices Current Other SFC-related positions Other SFC-related Corporate Governance Corporate SFC Annual Report 2016-17
Our People
Regulating complex and fast-moving markets Accounting connects with many aspects of the SFC’s in an international financial centre requires a work and fully a quarter of our staff are qualified considerable variety of knowledge, skills and accountants. Previous accounting experience gives expertise. Our staff members include qualified them a keen sense of the market which they use to accountants, lawyers and chartered financial pick up signs of irregularities when inspecting licensed firms or conducting market surveillance. Similarly, analysts (CFAs) with extensive professional auditing experience cultivates the skills needed to experience. We also develop new talent in-house understand different business models when vetting through our Graduate Trainee programme. listing or licensing applications. Professional perspectives About one in seven of us hold a legal qualification. As regulators, much of our daily routine involves the law. High-calibre professional standards are the baseline Legal training gives an edge when it comes to grasping for the effective discharge of our regulatory the principles behind our rules, and is useful for our responsibilities, which range widely from licensing staff who handle disciplinary proceedings against and enforcement to market supervision, gate-keeping financial institutions and those who ensure appropriate and policymaking. Professionals from a wide range protections for investors in investment products. Sharp of disciplines can be found in many different roles analytical and communication skills are crucial when throughout the organisation. Nine of our people talked developing policies and drafting rules and regulations. about their professional development at the SFC.
7 3 5 1. Ron Chiong 2. Wilson Lo 3. Stephen Shek 9 2 4 6 8 4. Kenneth Lau 5. Fiona Tse 6. Raymond Kwok 1 7. Jimmy Chan 8. Suet Peng Siew 9. Annie Chan
34 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 35 SFC Annual Report 2016-17 Report Annual SFC Samuel Chan, Siki Lin, Mandy Chang and Aico Li Samuel Chan, Siki Lin, Mandy Chang and Aico helped them form an overall understanding of our helped them form an overall understanding duties sharpened their work, while handling front-line also learned from abilities. Trainees problem-solving their experience and personal mentors who shared knowledge. was programme One major benefit of the structured own interests that it allowed trainees to identify their being assigned to a specific area. and abilities before who develops staff Over the longer term, this approach sustaining mindset, thereby regulator’s have a strong culture. our professional has become an essential component of The programme ensuring a constant our people development strategy, new ideas graduates who introduce intake of fresh The environment. working a dynamic to contribute and a unique and that it provides former trainees all agreed challenging opportunity to join a specialised regulatory body. They especially appreciated well-structured training well-structured They especially appreciated which imparted technical knowledge as well as soft by the rotations provided exposure skills. The broad events to promote workplace quality and work-life events to promote balance. through different sections of the organisation before sections of the organisation before different through being assigned a full-year placement in a specific role. They also led volunteering activities and other staff To find out more, we spoke with four members of the we spoke with four members of find out more, To now in managerial roles. first intake who are years, trainees rotated Over the course of three Developing talent is programme our Graduate Trainee 2009, Launched in join the SFC. the gateway for university graduates to mission that drives us forward. of professional skills and expertise, as diversity provides provides diversity as expertise, and skills professional of decisions. perspectives when reaching for broader is the shared Doing the right thing for the markets of specific clients, take pride in serving the greater the greater of specific clients, take pride in serving expectations of good and upholding the public’s Fostering an our expertise, integrity and impartiality. is important to make the most inclusive environment also an asset for a public body. Those professionals Those professionals also an asset for a public body. they private practice, where who joined us from matters in the interests mostly focused on commercial as financial technology. is emphasis on high ethical standards Professionals’ they can readily communicate with external communicate with parties they can readily malpractice against market when handling complaints specialised topics such to enquiries on and responding evolving markets as well as skills they can use to gaugeto use well as skills they can as evolving markets such as how new initiatives the impact of our policies, markets. Withmight affect their industry knowledge The CFAs on our staff find that their training provides provides find that their training on our staff The CFAs our understanding of comprehensive for a more Our People SFC Annual Report 2016-17
Highlights of the Year
Asia Pacific Takeovers Regulators Conference First L&I product listing ceremony
IOSCO Board meeting
Photo credit: IOSCO General Secretariat
May 2016 August 2016
IOSCO appoints the SFC’s Chief Executive Officer Ms Christina Choi is appointed Executive Director of Mr Ashley Alder as Chairman of its Board. Investment Products. Mr Thomas Atkinson is appointed Executive Director of Enforcement. September 2016 The SFC hosts the fourth Asia Pacific Takeovers Implementation of mandatory clearing and related Regulators Conference. record-keeping obligations for over-the-counter Formal adoption of the revamped authorisation derivatives. process for unit trust and mutual fund applications and the six-month application lapse policy for mandatory October 2016 provident fund and pooled retirement fund products. The SFC hosts the IOSCO Board meeting. June 2016 November 2016 Ms Julia Leung is appointed Executive Director of Intermediaries. The Market Misconduct Tribunal concludes its first case involving breaches of the disclosure obligations The gazettal of an amendment ordinance enables imposed on listed companies. the introduction of a new open-ended fund company structure in Hong Kong. Launch of a consultation on proposals to enhance asset Authorisation of the first batch of leveraged and management regulation and point-of-sale transparency. inverse products for listing on SEHK. First SFC Regtech and Fintech Contact Day. The SFC and HKEX jointly issue a consultation on proposed enhancements to SEHK’s decision-making and governance structure for listing regulation.
36 SFC Annual Report 2016-17
Highlights of the Year Chairman and CEO Message from Priorities Strategic
SFC Regtech and Fintech Contact Day Shenzhen-Hong Kong Stock Connect launch SFC at a Glance Governance Corporate People Our Manager-In-Charge industry briefing of the Year Highlights
December 2016 February 2017
Trading through Shenzhen-Hong Kong Stock Connect Requirement that all individuals submit their licensing commences. applications, notifications and annual returns via the Operational
SFC Online Portal takes effect. Review The SFC signs a Memorandum of Understanding on mutual recognition of funds with FINMA. March 2017 An SFC-SEHK joint press release cautions the market Publication of a consultation on proposed changes to Social Corporate about our close scrutiny on highly dilutive rights issues Responsibility the professional investor regime. and open offers. Release of consultation conclusions on proposals to Introduction of the Manager-In-Charge initiative. enhance the position limit regime for futures and New circulars clarify licensees’ existing suitability options contracts. Developments
obligations. Corporate The SFC provides further guidance on its regulatory Relaunch of the SFC’s Enforcement Reporter. approach to GEM listing applications.
January 2017 Statements The SFC and SEHK issue a joint statement on GEM- Financial related regulatory issues. The SFC also releases guidance to intermediaries on the standards of conduct expected of sponsors, underwriters and Supplementary
placing agents when listing and placing new GEM FINMA: The Swiss Financial Market Supervisory Authority Information stocks. GEM: Growth Enterprise Market HKEX: Hong Kong Exchanges and Clearing Limited IOSCO: International Organization of Securities Commissions L&I: Leveraged and inverse SEHK: The Stock Exchange of Hong Kong Limited
37 SFC Annual Report 2016-17 Operational Review
We endeavour to ensure stability, competitiveness and orderliness in the financial markets through our principal areas of work: intermediaries, investment products, listings and takeovers, enforcement, and market infrastructure.
38 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 39 SFC Annual Report 2016-17 Report Annual SFC -related regulatory issues to ensure new issues to ensure regulatory -related 1 The total number of licensees and registrants in Hong Kong reached a record high of 42,872 a record in Hong Kong reached The total number of licensees and registrants via all individuals to submit their licensing applications, notifications and annual returns Required 1 February 2017 the SFC Online Portal from Conducted 312 risk-based on-site inspections of intermediaries of alternative liquidity pools as on algorithmic trading and commenced reviews Issued a circular services well as best execution and client facilitation Launched a public consultation on proposed enhancements to rules for prescribing professional professional enhancements to rules for prescribing on proposed Launched a public consultation investors and for futures regime to the position limit enhancements Concluded a consultation on proposed 2017 on 1 June options contracts which took effect introducing (OTC) derivatives reform, Implemented the second stage of the over-the-counter obligations in September 2016 record-keeping mandatory clearing and related introduction 2016 enabled the Ordinance (Amendment) and Futures gazettal of the Securities The Hong Kong in of a new open-ended fund company (OFC) structure accountability with new requirements taking effect on 18 April 2017 taking effect accountability with new requirements that to ensure new clause in client agreements including the incorporation of a Requirements on 9 June 2017 suitable took effect reasonably are financial products guidance on their application under certain provided Clarified existing suitability obligations and scenarios of the asset management to enhance the regulation on proposals Launched a public consultation industry and point-of-sale transparency effective practices for fund managers to ensure to set out principles and good Issued a circular SFC-authorised funds liquidity risk management of Launched a joint consultation with Hong Kong Exchanges and Clearing Limited (HKEX) on with Hong Kong Exchanges and Clearing Launched a joint consultation (SEHK) decision-making of Hong Kong Limited’s The Stock Exchange to enhancements proposed for listing regulation and governance structure dilutive rights issues with SEHK cautioning the market about highly release Issued a joint press issued two statements on GEM Also and open offers. further guidance on our regulatory provide and the listing rules applicants’ compliance with approach initiative to clarify licensed firms’ senior management the Manager-In-Charge Introduced
Growth Enterprise Market. Growth On-site inspections On-site Thematic reviews Mandatory online submissions Intermediary licensing, conduct and practices Licensing OTC derivatives OFC Position limits Position Professional investor rules Professional Liquidity risk management Suitability obligations Asset management Client agreement Client agreement requirements Senior management accountability Listing regulation Regulation
1
The following tables highlight our work during 2016-17. More details are provided in subsequent chapters. provided details are during 2016-17. More highlight our work The following tables Overview SFC Annual Report 2016-17
Overview
Market development
Stock Connect Trading under Shenzhen-Hong Kong Stock Connect commenced on 5 December 2016
Mutual recognition of funds Signed a Memorandum of Understanding (MoU) with the Swiss Financial Market Supervisory Authority on mutual recognition of funds, allowing eligible Swiss and Hong Kong public funds to be distributed in the other market through a streamlined vetting process
Fund authorisation Formally adopted the initiatives to enhance the authorisation process for new fund applications and for new mandatory provident funds and pooled retirement fund products
ETFs Authorised the first futures-based crude oil exchange-traded funds (ETFs), the first two German UCITS2 ETFs cross-listed in Hong Kong and the first batch of ETFs with US dollar, Hong Kong dollar and renminbi trading counters
L&I products Authorised the first batch of leveraged and inverse (L&I) products tracking foreign stock indices in June 2016 and the first batch tracking Hong Kong stock indices in March 2017
Futures contracts Approved HKEX’s proposal to introduce the first exchange-traded fixed income futures contract referenced to Mainland interest rates
Enforcement
Surveillance Made 8,960 requests for trading and account records from intermediaries as a result of surveillance of untoward price and turnover movements
Investigations Completed 591 investigations and laid 46 criminal charges against eight individuals and two corporations and secured convictions against two persons and two corporations
Disciplinary actions Took disciplinary action against 54 licensed corporations and individuals with total fines amounting to $93 million, imposed bans on 25 individuals, and suspended and revoked the licences of eight persons for various wrongdoing
Notable cases In two cases involving internal control failures, reprimanded Morgan Stanley Hong Kong Securities Limited and The Hongkong and Shanghai Banking Corporation Limited, and fined them $18.5 million and $2.5 million respectively
Reprimanded State Street Global Advisors Asia Limited and two JP Morgan entities, and fined them $4 million and $5.6 million respectively for separate regulatory breaches
Reprimanded and fined BNP Paribas Wealth Management $4 million for overcharging its clients
The Market Misconduct Tribunal (MMT) ruled that Greencool Technology Holdings Limited’s founder and former chairman, and four of its senior executives disclosed false or misleading information
The MMT found Andrew Left of Citron Research guilty of disclosing false or misleading information in a research report on Evergrande Real Estate Group Limited
2 Undertakings for collective investment in transferable securities.
40 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 41 SFC Annual Report 2016-17 Report Annual SFC as a biannual publication on our enforcement work to as a biannual publication on our enforcement Enforcement Reporter on 106 occasions. Established a cross-divisional working group to utilise all our available to utilise working group a cross-divisional on 106 occasions. Established 3 Published 13 thematic publications Relaunched the a compliance culture and promote transparency increase Entered into an MoU with the US Financial Industry Regulatory Authority and a separate MoU into an MoU with the US Financial Industry Entered on mutual assistance in the supervision and with the US Securities and Exchange Commission entities oversight of regulated of Japan to consult, of cooperation with the Financial Services Agency Signed a memorandum certain types of central counterparties cooperate and exchange information regarding a focus on how emerging regulatory Hosted the first SFC Regtech and Fintech Contact Day with and financial technologies intersect with securities regulation workshops to explain our rules Organised 40 Mr Ashley Alder, our Chief Executive Officer, was appointed as Chairman of the Board of the was appointed as Chairman of the Board Executive Officer, our Chief Mr Ashley Alder, Internationalin May 2016 Securities Commissions (IOSCO) Organization of committee meeting in Hong Kong meeting and its enforcement Hosted the IOSCO Board a forum for takeovers regulators Regulators Conference, Asia Pacific Takeovers Hosted the fourth the region developments in to discuss recent Regulatory joint seminars with the China Securities Organised high-level meetings and cooperation Commission to strengthen Reviewed 245 listing applications received via SEHK applications received Reviewed 245 listing transactions and applications Supervised 494 takeovers-related under section information gathering power our announcements, used In monitoring company 179 misconduct listed company-related to address tools and capabilities regulatory of inside to late disclosure the SFC in relation In the first concluded case commenced by and two of its former senior executives a total of Limited information, the MMT fined AcrossAsia $2 million
Section 179 of the Securities and Futures Ordinance gives the SFC the power to compel the production of records and documents from persons related to related persons and documents from of records gives the SFC the power to compel the production Ordinance Section 179 of the Securities and Futures a listed company. Industry briefings Industry publications Stakeholder communication Financial technology MoUs Regional Mainland China Regulatory collaboration International Corporate conduct Listing applications matters Takeovers Listings, takeovers and corporate conduct Listings, takeovers
3
Overview SFC Annual Report 2016-17
SFC activity data
These charts are intended to show at a glance some top-line data on our activities. See Breakdown of SFC activity data on pages 159-165 for more details.
Authorised collective investment schemes Risk-based on-site inspections of intermediaries
3,000 2,780 350 2,622 2,704 306 312 2,505 2,487 296 302 2,500 300 271
250 2,000 200 1,500 150 1,000 100
500 50
0 0 12/13 13/1414/15 15/16 16/17 12/13 13/1414/15 15/16 16/17
Note: Figures represent a snapshot view as at each financial year-end.
Licensing Takeovers and listing applications
50,000 600 494 500 40,000 42,751 435 38,940 39,851 41,415 384 38,629 400 30,000 290 300 251 245 218 20,000 24,097 23,121 188 19,316 21,052 200 164 16,949 124 10,000 100 7,975 5,824 6,528 7,062 7,838 0 0 12/13 13/14 14/15 15/16 16/17 12/13 13/1414/15 15/16 16/17
Total number of SFC licensees as at each financial year-end Takeovers and share buy-backs transactions handled Applications to conduct new regulated activity Listing applications reviewed under the dual filing regime Applications for SFC licences
42 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 43 66 2,322 16/17 75 41 88 196 16/17 16/17 90 136 Unlicensed activities
54 2,056 15/16 27 82 SFC Annual Report 2016-17 Report Annual SFC 2,119 14/15 124 41 137 73 Market manipulation 226
15/16 15/16 110 105 1,648 13/14 and market activities 56 28 67 Market Misconduct Tribunal proceedings Market Misconduct Tribunal
Complaints against intermediaries 1,421 12/13 107 0 30 123 500 2,500 2,000 1,500 1,000 Intermediary misconduct 88
187 14/15 14/15 108 111 53 27 65 Investigations 6,532 16/17 Disciplinary proceedings Insider dealing
41 13 91 104 15/16 7,033 136 13/14 75 13/14 74 42 41 Individuals/corporations subject to enforcement action enforcement Individuals/corporations subject to 45 5,883 14/15 Corporate misgovernance Civil proceedings
21 11 95 7,333 13/14 79 128 General public enquiries 12/13 70 12/13 67 49 42 12/13 7,746 29 Corporate disclosure Prosecutions
0 0 0 0 0 0 60 40 20 80 50 3,000 2,000 1,000 5,000 4,000 7,000 6,000 9,000 8,000 100 140 120 10 15 250 20 SFC activity data SFC activity SFC Annual Report 2016-17
Intermediaries
We license qualified corporations and individuals Enhancing regulatory standards to operate as intermediaries in our markets under the Securities and Futures Ordinance (SFO). As Senior management accountability part of our ongoing supervision, we conduct With a view to foster a stronger sense of senior on-site inspections and off-site monitoring of management responsibility and drive proper conduct 1 licensed corporations with a particular focus on and behaviour, we issued a circular in December 2016 prudential and business conduct issues. to introduce the Manager-In-Charge (MIC) initiative. Under new requirements which took effect on 18 Licence applications April 2017, corporate licence applicants must submit The number of corporate and individual licensees management structure information and organisational continued to grow during the year. We received 7,838 charts to the SFC, while existing licensed corporations new licence applications2, down 2% from last year, are required to submit this information by 17 July 2017. while the number of new corporate applications rose The circular sets out who should be regarded to 387 from 251. as members of senior management of licensed As of 31 March 2017, the number of licensees and corporations, which are expected to designate fit and registrants totalled 42,872, up 3% from a year earlier, proper individuals to be MICs of each of eight core while the number of licensed corporations increased functions. MICs of overall management oversight 13% to 2,484 in the same period. These were and key business lines are expected to be responsible both record highs since the implementation of the officers in respect of the regulated activities they regulatory regime under the SFO on 1 April 2003. oversee, or should have applied to become responsible officers by 16 October 2017. Annual licensing fees have been waived since 2012 and the current waiver extends to 31 March 2018. To facilitate the industry’s understanding of the initiative, we briefed business and industry associations To enhance the efficiency of the licensing application and addressed the Alternative Investment Management process, all individuals’ licensing applications, Association Asia Pacific (AIMA APAC) Annual Forum notifications and annual returns must be submitted 2017. We organised a series of workshops with about to us via the SFC Online Portal starting 1 February 3,000 participants in early 2017 and also published 2017. In preparation, we enhanced the portal and our more than 40 frequently asked questions (FAQs) to licensing forms and conducted six briefing sessions for provide additional guidance. more than 600 industry participants.
Licensees
Corporations# Representatives Responsible Officers Total#
As at As at As at As at As at As at As at As at 31.3.2017 31.3.2016 31.3.2017 31.3.2016 31.3.2017 31.3.2016 31.3.2017 31.3.2016 Change
Stock exchange participants 512 470 11,068 11,183 1,830 1,652 13,410 13,305 0.8%
Futures exchange participants 112 111 921 944 196 165 1,229 1,220 0.7% Stock exchange and futures exchange participants 69 67 4,914 4,797 522 498 5,505 5,362 2.7% Non-stock/non-futures exchange participants 1,791 1,560 16,086 15,772 4,730 4,196 22,607 21,528 5%
Total 2,484 2,208 32,989 32,696 7,278 6,511 42,751 41,415 3.2%
# These figures exclude 121 registered institutions as at 31 March 2017 and 119 as at 31 March 2016.
1 Broadly, licensed corporations include investment banks, securities brokers, futures dealers, leveraged forex traders, fund managers, investment advisers, sponsors and credit rating agencies. 2 The figure does not include applications for provisional licences and registered institutions. During the year, we received 3,906 provisional licence applications compared with 4,378 in the previous year.
44 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 45 SFC Annual Report 2016-17 Report Annual SFC on 20 January 2017 to remind placing to remind on 20 January 2017 6 , we are finalising proposed changes to the finalising proposed , we are 7 modifications and additional proposals to take into modifications and additional proposals account the comments and suggestions received. Professional investor rules and promote enhance market transparency To consistency in the application of the Professional public Investor Rules, we launched a one-month which aim 2017 on proposals consultation in March professional the rules for prescribing to standardise the types of assets to be investors. In specifying meeting the monetary threshold, counted towards as expanding the definition of corporations investors and allowing alternativeprofessional evidence investor qualification, the professional to demonstrate amendments cater for the business needs of proposed intermediaries and their clients without compromising Consultation conclusions will be investor protection. published in due course. Financial resources rules Following a 2015 public consultation and a 2016 survey Rules (FRR) (Financial Resources) Securities and Futures to capital and other prudential requirements relating in over-the-counter for licensed corporations engaging target to issue the (OTC) derivatives activities. We later this year with necessary consultation conclusions GEM initial public offerings GEM initial public significant the to address As part of our initiative Enterprise on the Growth price volatility of listings of conducted a thematic review Market (GEM), we whose practices had resulted selected placing agents amongst a of shareholdings in a high concentration Based on our findings and small number of placees. we issued with the industry, after soft consultation guidelines under the agents and sponsors of their obligations Code and Corporate Finance Adviser Code of Conduct guidance on the standards provide of Conduct and to placings of conduct expected of them when arranging for GEM listings. to financial advisers in relation circular issued a We involving listed to valuations in corporate transactions the issuance companies in May 2017 to coincide with duties in the context directors’ of a guidance note on of such valuations.
. A 5 in 3 . 4 Ms Julia Leung, Executive Director of Intermediaries, addresses of Intermediaries, addresses Ms Julia Leung, Executive Director Annual Forum 2017 on the MIC regime the AIMA APAC This refers to the requirement in paragraph 5.2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission the Securities and Futures with paragraph 5.2 of the Code of Conduct for Persons Licensed by or Registered in to the requirement This refers and solicitation made to a client is reasonable. of a recommendation the suitability (Code of Conduct) to ensure with existing clients. agreements in re-executing encounter practical difficulties See also Listings and takeovers on page 55. companies. The survey collected information on OTC derivatives activities carried out by intermediaries and their affiliated See also Investment products on page 54. See also Investment products intermediaries, despite their best efforts, where following an 18-month transitional period to cater for circumstances introduced were These requirements
6 7 3 4 5 client identities in non-face-to-face situations such as clients online. on-boarding more guidance to the industry on compliance with more for opening accounts, requirements the regulatory to verify particularly the Code of Conduct requirement Account opening practices to provide In addition, we issued an advisory circular is inconsistent with their obligations under the Code of Conduct or mis-describe their services to clients published in September 2016 provided and FAQs circular guidance on the new requirements. more sale of, or recommend, to clients are reasonably suitable reasonably to clients are sale of, or recommend, not allowed to intermediaries are for them. Also, which the client agreements clause in incorporate any From 9 June 2017, all intermediaries are required to required 9 June 2017, all intermediaries are From to incorporate a new clause into client agreements the which they solicit that the financial products ensure for investment recommendations New client agreement requirements communications between licensees and clients. In communications between licensees and licensees’ addition, we issued further guidance on such as product compliance with suitability obligations of the rationale due diligence and the documentation the absence of a direct communication with a client. the absence of a direct guidance and examples of when also provided We by interactive suitability obligations would be triggered 2016, we clarified that posting an advertisement for 2016, we clarified that posting an advertisement or disseminating a research an investment product trigger the suitability obligations may not report Suitability obligations issued in December and updated FAQs In circulars Intermediaries SFC Annual Report 2016-17
Intermediaries
Regulated activities In Hong Kong, companies and individuals must be licensed by or registered with the SFC before they can engage in regulated activities, as defined under the SFO, in the securities and futures markets and the non-bank leveraged foreign exchange market. The following table lists the current 10 types of regulated activities together with examples.
Dealing in securities Trade stocks, stock options, bonds or mutual funds for clients 1 Place and underwrite securities
Dealing in futures Trade futures contracts (eg, index or commodities futures) for clients 2 contracts
Leveraged forex Buy or sell foreign exchange for clients on a margin basis 3 trading
Advising on Give investment advice to clients relating to trading securities securities 4 Issue research reports or analyses on securities
Advising on futures Give investment advice to clients relating to trading futures contracts 5 contracts Issue research reports on futures contacts
Advising on corporate Act as a sponsor for a listing applicant 6 finance Advise on the Codes on Takeovers and Mergers and Shares Buy-backs and compliance with the Listing Rules
Automated trading Operate an electronic trading platform for matching client orders 7 services
Securities margin Provide financing to clients for the purchase of stocks using clients’ stocks 8 financing as collateral
Asset Manage public or private funds management 9 Manage funds or a portfolio of securities or futures contracts for clients on a discretionary basis
Credit rating Prepare reports on the creditworthiness of companies, bonds and sovereigns 10 services
46 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 47 28 40 307 236 117 381 1,109 2014/15 to be 9 45 41 571 388 223 416 SFC Annual Report 2016-17 Report Annual SFC 1,684 2015/16 62 58 598 441 201 395 1,755 2016/17 The consultation followed a thematic review in late review The consultation followed a thematic to hacking risks of brokers 2016 of the resilience a comprised engaged in internet trading. The review onsite inspections, discussions with fact-finding survey, local and system vendors and benchmarking against market practices. and requirements overseas regulatory our findings and discussed the proposed shared We in industry workshops and baseline requirements in January 2017. associations meetings with broker on the Protected Arrangements Regulation Arrangements on the Protected legislation under the FIRO. The made as subsidiary 2017. issued in April were consultation conclusions Cybersecurity in hacking incidents to the increase In response years, we in recent by securities brokers reported in May 2017 on launched a public consultation and to reduce requirements baseline proposed internetmitigate hacking risks associated with trading. organised to brief the industry on Seminars were The proposed the consultation following its launch. on guidance further provide baseline requirements in the Code of Conduct while existing requirements various controls also leveraging and consolidating the issued since suggested in cybersecurity circulars mandates two-factor early 2014. A key proposal at login. authentication to verify client identity
, 8 b a Comprised deficiencies in management review and supervision, operational controls over the handling of client accounts, segregation of duties, over the handling of client accounts, segregation and supervision, operational controls Comprised deficiencies in management review sectors, as well as certain financial market infrastructure. of certain key specified financial arrangements. in a manner that might undermine the economic effect exercised the FIRO are information management, adequacy of audit trail for internal control purposes, among other weaknesses. information management, adequacy of audit trail for internal control Commonly related to risk management, record keeping, client agreements, safeguarding of client assets and management responsibilities. safeguarding keeping, client agreements, to risk management, record Commonly related Financial institutions within the regime’s scope include systemically important financial institutions in the banking, insurance, and securities and futures scope include systemically important financial institutions in the banking, insurance, and securities and futures Financial institutions within the regime’s powers under constraints on the authorities to mitigate the risk that resolution designed to impose appropriate Arrangements Regulation is The Protected Others Total Failure to safekeep client money Failure to safekeep client securities Failure Breach of Code of Conduct Breach Non-compliance with anti-money laundering guidelines Internal control weaknesses Internal control
8 9 a b details. of SFC activity data on page 161 for more 4 in Breakdown Note: Also see Table Breaches noted during on-site inspections two-month joint consultation in November 2016 two-month joint consultation in November Authority to prepare for the new regime, which is for the new regime, Authority to prepare second half of expected to come into operation in the with the other authorities, we began a 2017. Together in June 2016. We continued to work with the in June 2016. We the Hong Bureau, Treasury Financial Services and the the Insurance Kong Monetary Authority (HKMA) and (FIRO), which establishes a regime in Hong Kong for (FIRO), which establishes a regime of financial institutions resolution the orderly Legislative Council and gazetted was passed by the Financial resolution regime Ordinance The Financial Institutions (Resolution) the FRR, such as requiring them to provide voluntary them to provide requiring the FRR, such as licensing undertakings or imposing appropriate compliance. conditions to ensure to ensure compliance with the FRR at all times. Where FRR at all times. Where compliance with the to ensure we may consider taking proportionate appropriate, to manage their risk of breaching action regulatory thinly capitalised. We aim to motivate these brokers brokers aim to motivate these capitalised. We thinly to cover liquid capital buffer a sufficient to maintain of the need raise their awareness their losses and also In view of the increasing number of loss-making number In view of the increasing to the approach we adopted a pre-emptive brokers, which are risks of brokers supervision of the financial Loss-making brokers Intermediaries SFC Annual Report 2016-17
Intermediaries
Industry trends understand the industry landscape and obtain an overview of the types and value of investment products We completed a number of ad hoc surveys and sold, this survey helps us supervise the selling practices assessments during the year, including an investment of licensed corporations. product sales survey, a study of retail futures brokers, and money laundering and terrorist financing risk assessment of the securities sector. We also Futures brokers commenced a review of our current data and We conducted a fact-finding exercise on the business information collection channels, and specifically the profiles and risk management controls and practices need to collect any additional information about the of a number of exchange participants of Hong Kong operational and control measures which licensed Futures Exchange Limited (HKFE) that mainly serve corporations adopt to manage risks associated with retail clients. The results of the exercise were published their business activities. in April 2017. We will provide further guidance on the key areas of concern identified, such as the assessment Sale of non-exchange traded investment criteria for established clients under the rules of the products HKFE and setting-off arrangements between a client’s different trading accounts. We conducted a biennial survey on the sale of non- exchange traded investment products10 and published the results in December 2016. By enabling us to better
Statistical information and financial position of the Hong Kong securities industrya
As at As at As at 31.12.2016 31.12.2015 31.12.2014
Securities dealers and securities margin financiers 1,104 1,002 951
Active clients 1,556,695 1,501,816 1,339,192
Total assets ($ million) 1,078,521 1,089,976 1,080,545
12 months to 12 months to 12 months to 31.12.2016 31.12.2015 31.12.2014
Total value of transactionsb ($ million) 63,495,134 84,787,467 57,970,022
Total operating profit ($ million) 14,131 26,404 15,390
a Data were extracted from the monthly financial returns submitted under the Securities and Futures (Financial Resources) Rules by corporations licensed for dealing in securities or securities margin financing. Figures reported by an overseas incorporated licensed corporation that carries out its principal business activities outside Hong Kong and operates in Hong Kong as a branch office were excluded. b The total value of transactions includes trading in equities, bonds and other securities in Hong Kong and overseas. Note: Also see Table 8 in Breakdown of SFC activity data on page 165 for more details.
10 Previous surveys were conducted and published in 2012 and 2014.
48 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 49 a b 5 2 1 0 2 70 430 As at 2,284.8 2,214.8 2014/15 (million) 31.3.2015 4 14 39 19 450 413 2% 2015/16 -0.1% -0.2% Change 0 4 1 SFC Annual Report 2016-17 Report Annual SFC 10 19 14 2016/17 71.4 As at 2,282.3 2,210.9 (million) 31.3.2016 3.1% 2.1% 3.1% Reconsidered Compensation payments made Rejected Withdrawn Change
Notice in January 2015. Including 427 claims against a broker on which we issued a Restriction Including 427 claims against a broker Including the last claim related to a broker which defaulted in 2007. to a broker Including the last claim related – Received Processed – – –
a b we conducted a study of the current During the year, which helped us investor compensation regime for better protection consider enhancements to provide on proposed investors. A public consultation is planned changes to the regime. Investor Compensation Fund Investor Compensation Company Limited (ICC), The Investor Compensation 10 claims received subsidiary, a wholly-owned SFC on a defaulting broker including five against this year, Restriction Notice in January 2015. which we issued a the year. 19 claims during The ICC processed claims Investor compensation 72.9 As at 2,353.5 2,280.4 (million) 31.3.2017 a b See pages 145-158 for the financial statements of the Unified Exchange Compensation Fund (UECF). The Investor Compensation Fund (ICF) was See pages 145-158 for the financial statements of the Unified Exchange Compensation Fund (UECF). established by the SFO on 1 April 2003 to replace the UECF. After settlement of all claims against the UECF and its other liabilities, any remaining balance After settlement of all claims against the UECF and its other liabilities, any remaining the UECF. established by the SFO on 1 April 2003 to replace to the ICF. will be transferred See pages 126-144 for the financial statements of the ICF. See pages 126-144 for the financial Investor Compensation Fund Total Unified Exchange Compensation Fund
b a also revamped to make it more user-friendly. to make it more also revamped Net asset value of compensation funds published a new Licensing Handbook in April 2017 issued in our consolidating information previously Licensing Information Booklet and in a number of FAQs The licensing section of our website was and circulars. Licensing Handbook easier access to licensing information, we provide To seminar presentations on anti-money laundering to seminar presentations about 1,800 industry participants. agency workshop in which the World Bank provided Bank provided agency workshop in which the World assessment. The assessment report comments on our we gave is expected to be issued in 2017. Additionally, conducted according to the Financial Action Task Force Force to the Financial Action Task conducted according we engaged Recommendations. During the exercise, agencies and law enforcement with other regulators, also participated in a joint industry practitioners. We We completed an assessment of the securities completed We and terrorist sector as part of the money laundering in Hong Kong risk assessment exercise financing Anti-money laundering Intermediaries SFC Annual Report 2016-17
Intermediaries
Intermediary inspection focuses Best execution and client facilitation A November 2016 circular notified the industry of While all licensed corporations are subject to risk- the start of a thematic review in response to the based routine inspections, we increasingly use thematic market’s demand for more prescriptive guidelines and reviews to address specific and more complex risks in further regulations related to best execution and client the market. facilitation. The review focuses on understanding current market practices and assessing licensed Areas of our inspection focus during the year included: corporations’ compliance controls. We will share our findings with the industry in a thematic report and issue Selling practices further guidance. We noted major deficiencies and non-compliance in the sale of certain investment products including improper Conflicts of interest – Review with HKMA product due diligence, inadequate know-your-client In February 2017, we completed a joint offsite review processes and insufficient suitability assessments. For with the HKMA which assessed potential conflicts of example, some corporate bonds carry complex features interest arising from the sale of in-house products or inherent risks such as the lack of a secondary among the licensed corporations and the registered market. We initiated investigations into the more institution within a global financial group. Deficiencies serious breaches. We also issued circulars and FAQs to were identified in structured products distribution, provide further guidance on licensed firms’ suitability product due diligence and management supervision, obligations. among other areas. Cybersecurity Investment banks and sponsors In early 2017, we completed a thematic review of Our inspections of selected investment banking groups the resilience to hacking risks of brokers engaged in revealed control deficiencies and non-compliance internet trading. After considering local and overseas related to ALPs, corporate governance, front-office market practices and regulatory requirements, the supervision and client facilitation trades, as well as the effectiveness and relevance of various controls, inappropriate involvement of research analysts in an implementation costs and the potential impact on the initial public offering (IPO) deal. Our inspections of IPO user experience, we proposed baseline requirements, sponsors revealed substandard due diligence and issues including two-factor authentication for client login, to with the disclosure of information in prospectuses. help internet brokers reduce and mitigate hacking risks.
Algorithmic trading Broker activities We identified non-compliance with the requirements A thematic review of licensed firms assessed whether relating to licensing, the Code of Conduct and the they have appropriate and specific policies, procedures anti-money laundering guideline1 by some introducing and controls in place to ensure compliance with the brokers and their connected execution brokers. We algorithmic trading requirements stipulated in the Code issued a circular outlining our concerns and preventive of Conduct. Following the review, our observations, measures. A separate circular followed on our the identified good practices and further guidance to inspections of licensed firms’ business activities under elaborate on the algorithmic trading requirements in Shanghai-Hong Kong Stock Connect. the Code of Conduct were shared with the industry in a December 2016 circular as well as a May 2017 forum. Anti-money laundering Alternative liquidity pools We conducted thematic inspections of anti-money laundering and counter-terrorist financing compliance. In September 2016, we commenced a thematic review A January 2017 circular to licensed corporations of the operations of selected licensed corporations’ highlighted common deficiencies in firm-level risk alternative liquidity pools (ALPs) to assess whether they assessment, customer due diligence, monitoring and are in compliance with the relevant requirement in reporting suspicious transactions and monitoring the Code of Conduct and to gather information about compliance. Practical examples and detailed guidance market developments. Our observations and good were provided to help strengthen anti-money practices will be shared with the industry in 2017. laundering and counter-terrorist financing systems.
1 The Guideline on Anti-Money Laundering and Counter-Terrorist Financing.
50 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 51 35 37 26 94 294 185 108 As at 2,045 2,622 2014/15 31.3.2015 94 85 34 37 26 301 173 As at 2,133 2,704 2015/16 31.3.2016 SFC Annual Report 2016-17 Report Annual SFC c a b 84 100 34 26 35 300 182 As at 2,203 2,780 2016/17 31.3.2017
a
b Comprising 15 paper gold schemes and 11 real estate investment Comprising 15 paper gold schemes and 11 real related to the default investment strategy (DIS). related trusts (REIT). authorised during the investment products of unlisted structured investments and deposits. equity-linked period, most of which were to the Hong Kong public. offered investment products On a “one product per key facts statement” basis, the number per key facts statement” On a “one product 56 authorised constituent funds under these MPF schemes were schemes were 56 authorised constituent funds under these MPF Of which 20 were DIS-related. Of which 20 were of unlisted structured documents and advertisements Offering Unit trusts and mutual Unit trusts and mutual funds ILAS Pooled retirement funds MPF schemes MPF pooled investment funds Others Total Unlisted structured Unlisted structured investment products Authorisations granted of under section 105 the SFO
Authorised CIS b c Unlisted structured investment products a b a 735 16/17 15/16 % 14/15 in five years 13/14 +140
12/13 305
0 800 700 600 500 400 300 200 100 We also authorised 100 unlisted structured investment also authorised 100 unlisted structured We during the year. for public offering products investment-linked assurance schemes (ILAS) and 20 fund (MPF) pooled investment mandatory provident funds. schemes (CIS) were on offer to the public as of 31 on offer schemes (CIS) were we authorised 202 CIS, 2017. During the year, March comprising 180 unit trusts and mutual funds, two Facilitating market development Authorisations A total of 2,780 SFC-authorised collective investment Hong Kong-domiciled SFC-authorised funds Hong Kong-domiciled SFC-authorised Kong as a full-service asset management centre and asset management centre Kong as a full-service funds domicile. place of preferred Our major policy initiatives are formulated to are Our major policy initiatives innovation and product facilitate market growth overall goal of developing Hong while supporting the offered to the public and monitor their ongoing to the public and offered requirements. regulatory compliance with We maintain a robust regulatory regime for regime regulatory a robust maintain We products investment authorising and regulating Investment products Investment SFC Annual Report 2016-17
Investment products
Renminbi products In June 2016, we authorised the first batch of This year, we authorised one unlisted fund and one leveraged and inverse (L&I) products tracking foreign exchange-traded fund (ETF) investing onshore in the stock indices and in March 2017 we authorised the Mainland securities markets1. The total number of first batch tracking Hong Kong stock indices. A total of these authorised unlisted funds and ETFs stood at 67 30 L&I products were authorised during the year. and 26 respectively, and the aggregate RQFII quota REITs utilised by these funds amounted to RMB10.9 billion as of 31 March 2017. As of 31 March 2017, there were 11 SFC-authorised REITs with market capitalisation of about US$28.9 billion. During the year, we authorised 98 unlisted structured investment products that can be denominated in MPF schemes renminbi, including a gold-linked deposit, or that can To prepare for the implementation of the default be linked to renminbi-denominated reference assets. investment strategy (DIS) launched on 1 April 2017, together with the Mandatory Provident Fund Schemes ETFs and leveraged and inverse products Authority we authorised 28 DIS-related constituent We authorised 46 new ETFs for listing on The Stock fund applications and seven DIS-related pooled Exchange of Hong Kong Limited, including the first investment fund applications. futures-based crude oil ETF, the first two German UCITS2 ETFs cross-listed in Hong Kong and the first batch of ETFs with US dollar, Hong Kong dollar and renminbi trading counters.
SFC-authorised renminbi investment products
As at 31.3.2017
Unlisted products
Unlisted funds investing onshore through RQFII, Stock Connect and CIBM 67
Unlisted funds investing primarily in offshore dim sum bonds, fixed income securities and money market 19 instruments
Paper gold schemes with renminbi features 1
Recognised Mainland funds under Mainland-Hong Kong Mutual Recognition of Funds 49
Unlisted structured investment products with renminbi featuresa 98
Listed products
ETFs investing onshore through RQFII and Stock Connectb 26
Renminbi gold ETFsc 1
Renminbi REITs 1
a The number is on a “one product per key facts statement” basis. b These ETFs adopt a dual-counter model, offering investors both a Hong Kong dollar counter and a renminbi counter for secondary trading purposes. c Only includes gold ETF denominated in renminbi.
1 These unlisted funds and ETFs are renminbi-denominated funds which primarily invest in Mainland securities markets through the Renminbi Qualified Foreign Institutional Investor (RQFII) quota, Stock Connect and the China Interbank Bond Market (CIBM). 2 Undertakings for collective investment in transferable securities.
52 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 53 SFC Annual Report 2016-17 Report Annual SFC As of 31 March 2017, we authorised 49 Mainland 2017, we As of 31 March MRF scheme funds under the Mainland-Hong Kong and the China Securities Regulatory Commission to work continue authorised six Hong Kong funds. We the refining closely with the Mainland authorities in initiative. Open-ended fund companies companies A legal framework for open-ended fund following the (OFCs) in Hong Kong was established (Amendment) gazettal of the Securities and Futures will 2016. The OFC regime on 10 June Ordinance fund of investment flexible choices more provide preparing are vehicles in addition to unit trusts. We a consultation on subsidiary legislation and an OFC code. regulatory Mutual recognition of funds Mutual recognition Switzerland a Memorandum of signed we On 2 December 2016, on MRF with the Swiss Financial Understanding (MoU) allows eligible MoU The Authority. Market Supervisory funds to be distributed public Swiss and Hong Kong vetting streamlined a through in the other market local Hong Kong This marks the first time process. access to the investing public in a funds have direct market. European held for this arrangement, we facilitate preparations To 2016 a total of four industry briefings in December frequently also issued a circular, and January 2017. We to asked questions and an information checklist and on specific requirements guidance provide application procedures. Mainland China and none of these 3 Most of these applications were DIS-related constituent fund applications which were highly standardised. constituent fund applications which were DIS-related Most of these applications were
3 how our procedures for approving scheme changes approving for how our procedures documents could be offering and authorising revised further streamlined. To facilitate the management of SFC-authorised funds To reviewing by asset management companies, we are classified as standard or non-standard applications. or non-standard classified as standard time for standard The target average processing applications is between one to two months. revamped process until the end of March 2017 was 3.6 until the end of March process revamped 5.6 months. With from months, down 36% from effect 19 December 2016, Mainland MRF applications were approach given that the Mainland MRF scheme was given that the Mainland MRF scheme approach The average in the early stage of implementation. time for these applications under the processing extended to Mainland mutual recognition of funds of extended to Mainland mutual recognition initially classified as (MRF) applications which were applications under the two-stream non-standard constituent funds was 2.9 months applications lapsed. was process Also on 9 May 2016, the revamped with an average processing time of 1.4 months for with an average processing and 2.7 months for non-standard applications standard time for MPF applications. The average processing overall average processing time for fund applications average processing overall by 51% decreased process under the revamped to 2.2 months, the revamp before 4.5 months from fund authorisation process for unit trusts and mutual fund authorisation process policy for funds and the six-month application lapse 2017, the As of the end of March MPF products. Streamlined processing the revamped On 9 May 2016, we formally adopted Ms Christina Choi, Executive Director, Investment Products, addresses addresses Investment Products, Ms Christina Choi, Executive Director, seminar the Hong Kong Securities and Investment Institute Investment products Investment SFC Annual Report 2016-17
Investment products
Fund management activities Enhancing regulation We published the 17th annual Fund Management Activities Survey in July 2016. Amid a tumultuous year Online distribution and advisory for the global markets, Hong Kong’s combined fund platforms management business decreased slightly by 1.6% year- In view of the increasing popularity of online on-year to $17,393 billion as of 31 December 2015. investment services, we have reviewed how the existing conduct requirements, including the suitability The number of corporations licensed for asset obligations, should be implemented in the context management in Hong Kong increased by 10.1% in of online distribution and advisory platforms. In 2015, while the number of staff engaged in core asset this connection, we launched a three-month public management activities increased by 4.3%. consultation on proposed guidelines for online platforms in May 2017. Corporations licensed for asset management in Hong Kong Asset management 1,400 To enhance the regulation of the asset management 1,200 1,135 1,031 industry and point-of-sale transparency in Hong Kong, 950 1,000 892 844 we launched a three-month public consultation in 800 November 2016. We reviewed major international
600 regulatory developments and considered the views of the industry in formulating our proposals. Key 400 topics covered include commissions and independent 200 advice, securities lending and repurchase agreements, 0 custody of fund assets, liquidity risk management and 2011 2012 2013 2014 2015 disclosure of leverage by fund managers. We will issue Source: SFC the consultation conclusions after careful review and consideration of the comments received. Staff engaged in core asset management activities To align our regulatory requirements with international developments and standards, we are conducting a 5,000 4,394 4,581 holistic review of the Code on Unit Trusts and Mutual 4,047 4,000 Funds with an aim to launch a public consultation on 3,480 3,277 proposed enhancements. 3,000
2,000 Liquidity risk management Following a focused review of the liquidity risk 1,000 management practices of a number of asset managers of SFC-authorised funds, we issued a circular to 0 2011 2012 2013 2014 2015 provide guidance to the industry based on our findings as well as on international regulatory principles and Source: Fund Management Activities Survey good practices.
54 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 55 SFC Annual Report 2016-17 Report Annual SFC Mr Brian Ho (left), Executive Director, Corporate Finance, at the Mr Brian Ho (left), Executive Director, briefing SFC-HKEX press 17 June Annual review of SEHK’s work Annual review of SEHK’s on our 2015 In June 2016, we published a report performance in its regulation of SEHK’s annual review focused on the of listing matters. The review of the and procedures decision-making processes issuance of Listing Department, particularly in the of reverse guidance, processing Listing Rules-related as the monitoring of takeovers transactions, as well products performance of structured liquidity provision issuers. operational procedures concluded that SEHK’s We other than certain and decision-making processes, issuance of guidance to the involving the procedures to enable it to discharge its appropriate market, were informed statutory obligations to maintain an orderly, also and fair market during the period. The report for SEHK to enhance its identified certain areas performance. on the standards of conduct expected of sponsors, of conduct expected on the standards listing and placing agents when and underwriters placing new GEM stocks. to provide 13 March issued another statement on We guidance on our regulatory an update and further in which we raise This includes the way approach. applicants, sponsors, with listing concerns directly decisions placing agents, and take and underwriters under the pursuant to the powers granted to us (SFO). Ordinance Securities and Futures
the same day, we issued guidance to intermediaries we issued guidance to intermediaries the same day, including unusual price volatility, high shareholding high shareholding including unusual price volatility, new concentration and headcount planting to ensure On GEM Listing Rules. applicants’ compliance with On 20 January 2017, the SFC and SEHK issued a On 20 January 2017, the issues regulatory joint statement on GEM-related SEHK plans to issue a consultation paper on a review SEHK plans to issue a consultation paper on a review a concept paper of of GEM, in parallel with the release a New Board. to introduce proposal on SEHK’s Growth Enterprise Market (GEM) the SFC and SEHK conducted a holistic review Jointly, to GEM. of the Listing Rules including those relating interests of non-subscribing minority shareholders will of non-subscribing minority shareholders interests be kept under close scrutiny. Together with SEHK, we issued a joint press release release we issued a joint press with SEHK, Together 2016 cautioning the market that rights in December which substantially dilute the issues and open offers responses received. responses Rights issues and open offers and maintain our competitiveness as an internationalour competitiveness and maintain The consultation period ended on financial centre. analysing the and the SFC and SEHK are 18 November, regulation. The proposals aim to enhance coordination aim to enhance coordination proposals The regulation. the address between the SFC and SEHK to proactively securities market of Hong Kong’s needs regulatory and Clearing Limited (HKEX) launched a joint and Clearing Limited (HKEX) launched enhancements to SEHK’s consultation on proposed listing for decision-making and governance structure Listing regulation Exchanges On 17 June 2016, the SFC and Hong Kong securities market in Hong Kong. securities market Listing policy Exchange of Hong Kong Limited (SEHK). We also Kong Limited (SEHK). We Exchange of Hong policies to listing and takeovers-related review orderly the development of a fair and promote the dual filing regime for listing applicants, for listing applicants, the dual filing regime corporate conduct requirements, disclosure Stock functions of The and the listing-related We oversee listing and takeovers matters in Hong oversee listing and takeovers matters We and merger activities, Kong, including takeovers Listings and takeovers Listings SFC Annual Report 2016-17
Listings and takeovers
Initial public offerings (IPOs) We received 245 listing applications via SEHK during the year – a record high since the dual filing regime We vet listing applications alongside SEHK under the commenced on 1 April 2003 and shared with SEHK dual filing regime which allows us to raise enquiries on our comments or concerns on 238 of them. Five the basis of insufficient or inadequate disclosures and listing applications were returned by SEHK, and an to object to a listing if it appears to us that it would eight-week moratorium1 was imposed, because the not be in the interest of the investing public or in the application proofs or related documents were not public interest for the securities to be listed (please substantially complete. refer to the sidebar below).
New listing applications
2016/17 2015/16 2014/15
Total listing applicationsa 245 218 164
Cases lapsed/withdrawn/rejected during the year 38 26 13
Cases returnedb 5 3 6c
New listings 148d 131 125
a Including applications for transfer from GEM to the Main Board (2016/17: 18; 2015/16: 12; 2014/15: 17). b These listing applications were returned by SEHK because the application proofs or related documents were not substantially complete. c Including one listing application which was returned after 31 March 2015. d Including six successful transfers from GEM to the Main Board (2015/16: 12; 2014/15: 8).
Listing applications submitted under the dual filing regime
Under the dual filing regime, listing applicants and into question the truthfulness and fairness of the listed companies file applications and disclosure applicant’s financial information, including payments materials with the SFC via SEHK. Among the 245 from customers through third-party payers and the listing applications received during the year, we cancellation of a purchase of machinery after making identified a number of problematic cases in which a large prepayment. fundamental issues were not properly identified and addressed before the initial listing applications were We had grave concerns about the accuracy of submitted. another applicant’s financial information in view of the seriousness of the outstanding audit In two cases, we noted that the reporting issues raised by its former reporting accountants. accountants engaged for listing applicants’ earlier These included material differences between its listing attempts raised significant audit issues which Mainland subsidiaries’ financial information filed remained unresolved when the listing applications with Mainland authorities and that set out in the lapsed. In both cases, the applicants submitted their subsidiaries’ respective Mainland audit reports. current listing applications with a different set of sponsors and reporting accountants about two years In a third case, the applicant’s shareholders had a after postponing their previous listing plans. history of selling off their entire equity interests in a similar business shortly after listing it, casting doubt In one case, the applicant was unable to address on their commitment to the applicant’s business irregular audit findings identified by, and failed and raising questions about whether the listing to highlight certain unusual business practices application was made with a view to manufacturing to, its former reporting accountants. This called a shell.
1 The respective applicants can only submit a new listing application with a new application proof no less than eight weeks after the return.
56 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 57 34 2H2016 20 41 SFC Annual Report 2016-17 Report Annual SFC 1H2016 43 Governance 31 Corporate Regulation Newsletter 2H2015 41 Disclosure 21 1H2015 20 0 attention. There was a notable increase in the total number notable increase was a There January from of inside information announcements came into regime 2013, when the new disclosure the number of inside 2016. This year, to March effect, lower than in the information announcements was 6% but 29% higher than in 2013/14. year, previous Tribunal In November 2016, the Market Misconduct Limited, its former (MMT) ruled that AcrossAsia failed chairman and former chief executive officer to disclose inside information as soon as reasonably practicable and fined them a total of $2 million. This marks the first time the MMT made a finding of imposed on obligations of the disclosure breaches in 2013. listed companies since they became effective Corporate Regulation Newsletter to enhance the quality of As part of our efforts by listed companies and to improve disclosures corporate behaviour in general, we published the fourth issue of our latest issue encouraged listed in December 2016. The meaningful disclosures more companies to provide to their changes in accounting standards and brought Cases with S179 directions Cases with S179 50 40 30 20 10 SFC Source: cases mainly involved late or inadequate disclosure, Note: Disclosure of false or misleading omission of material information or disclosure to overvalued acquisitions, information. Governance related cases were of funds and misstatements in company financials, misappropriation highly dilutive fund raising transactions. 1,822 16/17 6,494 of the SFO on 106 106 on SFO the of Profit warnings and alerts 1,634 2 15/16 6,909 1,580 14/15 6,574 1,304 13/14 Inside information announcements 5,045 0 relation to fraud or other misconduct. relation Section 179 of the SFO gives the SFC the power to compel the production of records and documents from persons related to a listed company in persons related and documents from of records Section 179 of the SFO gives the SFC the power to compel the production
2 additional attention to transactions and events which Such cases potentially detrimental to shareholders. are to previous complex compared tended to be more years. During the year, we focused on more significant we focused on more During the year, to listed companies, paying governance issues related Source: HKEX Source: 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 profit warnings and alerts occasions. Inside information announcements, information in a timely manner and false or misleading information in a timely manner and false we raised 108 enquiries During the year, disclosures. used our information with listed companies. We 179 section under power gathering basis to identify corporate misconduct and disclosure and disclosure basis to identify corporate misconduct to behaviour that is prejudicial including irregularities, inside of non-disclosure of shareholders, the interests Oversight of listed companies company announcements on a daily monitor We there may not have been an open market in the shares. may not have been an open there Post-IPO section 8 of the Securities and Futures (Stock Market and Futures section 8 of the Securities to suspend dealings in a SEHK Listing) Rules, we directed that day of trading as it appeared GEM stock on its first our enquiries in relation to a number of GEM listing to a number our enquiries in relation whether the conditions for an applications to establish exist at the time of listing. Under open market would Following the issuance of the 20 January 2017 joint of the 20 Following the issuance with SEHK GEM stocks, we shared statement regarding Listings and takeovers Listings SFC Annual Report 2016-17
Listings and takeovers
Takeovers matters In September, the Panel upheld the Takeovers Executive’s4 ruling that the consideration in the form In Hong Kong, takeovers, merger, privatisation and of cash and securities offered by Favourite Number share buy-back activities affecting public companies Limited for shares of L&A International Holdings are regulated by the Codes on Takeovers and Mergers Limited already complied with the Takeovers Code and and Share Buy-backs (Codes). The Codes aim to afford that there was no basis to alter it as requested by L&A. equality of treatment of shareholders, to mandate disclosure of timely and adequate information to enable shareholders to make an informed decision, as Supervision of takeovers activities well as to ensure a fair and informed market in the Both the number and complexity of takeovers-related shares of companies affected by such activities. transactions and applications increased during the year. In addition, we handled an increased number of Takeovers and Mergers Panel rulings investigations and enquiries related to the Takeovers Code and sanctioned a number of parties. We The Takeovers and Mergers Panel met twice this year anticipate that investigations and enquiries will remain to rule on certain Takeovers Code-related matters. an important focus of our supervision of takeovers In April, the Panel ruled that Alibaba Group Holding activities in Hong Kong for some time. Limited3 breached the Takeovers Code in its 2014 We publicly criticised China New Way Investment Limited acquisition of CITIC 21CN Company Limited, as and their related parties in May and Southwest Securities certain agreements between Alibaba Group and a International Investment Limited and their related parties shareholder of CITIC 21CN during the acquisition in December for acquiring shares in offeree companies process constituted a special deal with favourable within six months after the close of an offer at above the conditions which was not extended to all shareholders. offer price in contravention of the equality of treatment The whitewash waiver granted to Alibaba Group in principle under the Takeovers Code. April 2014 was thus invalidated and a mandatory general offer obligation was triggered. However, the Panel waived the obligation in light of difficulties in determining the general offer price.
Multi-disciplinary efforts to address listed company misconduct
In 2016, we established a cross-divisional working For example, the group may consider key areas of group to develop and implement an organisation- concern in prioritising enforcement cases as well as wide strategy to tackle listed company-related the most appropriate measures to hold both firms misconduct. This includes corporate fraud and and their senior management accountable for their misbehaviour as well as market manipulation, failings. It also promotes coordination across the whether committed by management alone or aided organisation as in our recent interventions in the by intermediaries. GEM IPO process.
The working group, designated ICE (Intermediaries, Listed company-related misconduct poses one of Corporates, Enforcement), comprises our Chief the greatest threats to the interests of the investing Executive Officer and Executive Directors of the public and the integrity of the Hong Kong markets. Intermediaries, Corporate Finance and Enforcement Drawing on all our available regulatory tools, powers divisions, together with the Legal Services Division. and capabilities, the working group maximises our It meets regularly to review and discuss our strategy ability to manage complex operational matters and and approach. to develop and implement appropriate policies to address this threat.
3 Alibaba Group refers to Alibaba Group Holding Limited separately or together with any its subsidiaries. 4 This refers to the Executive Director of the SFC’s Corporate Finance Division or his delegate.
58 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 59 3 9 7 31 55 279 384 to 6 , we of the 2014/15 5 3 7 1 50 51 323 435 to the SFC which is 7 2015/16 SFC Annual Report 2016-17 Report Annual SFC Takeovers Bulletin Takeovers 2 4 13 37 73 365 494 2016/17 false or misleading in a material particular. In the December issue of the handling published our performance pledges for 28). transactions and applications (see page whitewash waivers for transactions which do not whitewash waivers and other applicable with the Listing Rules comply rules and regulations. information of full and prompt uphold the principle To by all persons concerned with an offer, disclosure update announcements to regular we now require Codes transactions until the be made in all potential of a firm intention to make time of an announcement period is a lengthy when there as well as an offer, firm intention to of a between the announcement document and the time when the offer make an offer is issued. all a new filing form for we introduced In September, 8 applications for rulings made under section warned that to the Codes. Applicants are Introduction 384(3) of the SFO under section offence an it is or document record any provide # # Also see Table 3 in Breakdown of SFC activity data on page 160 for more details. of SFC activity data on page 160 for more 3 in Breakdown Also see Table should be comprehensive and contain all relevant information which the Executive will require to render a fully informed decision. to render the Executive will require information which and contain all relevant should be comprehensive commits an document. A person who or to the record the SFC, in relation prior written warning from and he has received in a material particular, a fine and imprisonment. under section 384(3) is liable to offence Including stand-alone applications and those made during the course of a Code-related transaction. of a Code-related Including stand-alone applications and those made during the course Section 384(3) provides that a person commits an offence if he knowingly or recklessly provides any record or document which is false or misleading misleading or false is which document or record any provides recklessly or knowingly he if offence an commits person a that provides 384(3) Section in connection with the matter. or documents provided Including any subsequent records This requires all applications for a ruling under the Codes to take the form of a written submission addressed to the Executive. The submission to the all applications for a ruling under the Codes to take the form of a written submission addressed This requires Other applications under the Code on Share Buy-backs Other applications under the Code on Share Total Other applications under the Code on Takeovers and Mergers Other applications under the Code on Takeovers buy-backs share and general offer Off-market General and partial offers under the Code on Takeovers and Mergers under the Code on Takeovers General and partial offers Privatisations Whitewash waiver applications
# Note: 6 7 5 and informed the market that we may not grant and informed the market that we may activities Takeovers promote the orderly conduct of takeovers activities orderly the promote or a parties to an offer reminded in Hong Kong. We suspensions, transaction to avoid unnecessary trading Promoting compliance we took a number of steps to During the year, was crossed. This deprived shareholders of the right This deprived shareholders was crossed. given the as not all of them were offer an to receive opportunity to exit. Dunxin, and imposed a 24-month cold shoulder order shoulder order Dunxin, and imposed a 24-month cold under offer for failing to make a mandatory general threshold creeper 2% Code when the the Takeovers In November, we publicly censured Zheng Dunmu, we publicly censured In November, of Changgang chairman and executive director Lynch Group for failing to disclose dealings in relevant dealings in relevant for failing to disclose Group Lynch under in 2015 as required securities in two transactions Code. the Takeovers transparency, which in turn is essential to the efficient which in turn to the efficient is essential transparency, market. In June, we publicly functioning of the of America Merrill two units of the Bank censured Fulfilling disclosure obligations during an offer or a during an offer obligations Fulfilling disclosure of a high degree is important to ensure offer possible Listings and takeovers Listings SFC Annual Report 2016-17
Market infrastructure
To ensure orderly markets, we supervise and Shanghai-Hong Kong Stock Connect and Shenzhen- monitor exchanges and clearing houses in Hong Hong Kong Stock Connect are each subject to Kong. During the year, we made progress on a northbound daily quotas of RMB13 billion and number of initiatives to enhance the securities southbound daily quotas of RMB10.5 billion. and futures markets. Aggregate quotas under Shanghai-Hong Kong Stock Connect were abolished in August 2016 following Supervision of HKEX our joint announcement with the China Securities We worked with Hong Kong Exchanges and Clearing Regulatory Commission on the in-principle approval Limited (HKEX) during the year to implement our for Shenzhen-Hong Kong Stock Connect. There are no enhanced supervisory approach which includes regular aggregate quotas under Shenzhen-Hong Kong Stock on-site inspections of HKEX’s non-listing related Connect. operations. Separately, we are working with HKEX to enhance its clearing risk management processes in Derivatives products approved view of the expansion of its business and the latest international regulatory developments. Trading commenced
We approved HKEX’s introduction of a Closing Auction Four cash-settled renminbi 30 May 2016 Session (CAS) and Volatility Control Mechanism (VCM) currency futures contracts against: to align with international standards and maintain US dollar market efficiency. The CAS was launched on 25 July euro 2016 to facilitate trade execution of certain securities, Japanese yen including major index constituents and all exchange- Australian dollar traded funds, at closing prices. The VCM, which imposes a price limit for trading in major constituent Mini-Hang Seng China Enterprises 5 September 2016 stocks and futures contracts for short periods under Index options contract extreme price movements, was introduced in the One renminbi options contract 20 March 2017 securities market on 22 August 2016 and in the against US dollar derivatives market on 16 January 2017. Five-year China Ministry of 10 April 2017 We also approved various derivatives products Finance Treasury Bond Futures proposed by HKEX to meet the trading and hedging contract needs of market participants (see table). In March 2017, we approved HKEX’s proposal to introduce a five-year China Ministry of Finance Treasury Bond Investor identification Futures contract, which was Hong Kong’s first We discussed with HKEX the development of exchange-traded fixed income futures contract an investor identification model to improve our referenced to Mainland interest rates. capability to conduct effective surveillance of the Hong Kong markets and are working on the details Stock Connect of a mechanism to enable us to capture client identification-related information for orders submitted The launch of Shenzhen-Hong Kong Stock Connect by brokers. Separately, to facilitate market surveillance on 5 December 2016, two years after the launch by Mainland exchanges, an investor identification of Shanghai-Hong Kong Stock Connect, marked a model is also being considered for northbound trading milestone which further strengthened Hong Kong’s under Stock Connect. role as a “Super Connector” between the Mainland and the rest of the world. The Stock Connect scheme provides for mutual trading access between the Mainland and Hong Kong stock markets by allowing investors to trade eligible shares listed on the other market subject to daily quotas (see sidebar on page 62).
60 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 61 32 25 As at As 31.3.2015 38 24 As at As 31.3.2016 SFC Annual Report 2016-17 Report Annual SFC 49 24 As at As 31.3.2017 ATS providers ATS Under Part III Under Part V Over the past year, we approved eleven applications we approved Over the past year, exchanges, clearing houses regulated overseas from trading facilities; of these, we granted and electronic authorisations to LCH Limited, Japan Securities Exchange Clearing Corporation and Chicago Mercantile mandatory clearing services for OTC Inc. to provide were Trades derivatives transactions in Hong Kong. and futures mainly in stock options, benchmark index and commodity futures. rate futures options, interest from The average daily trading volume originating Hong Kong to these overseas exchanges was about 293,000 contracts for the 12 months ended 31 March 2017. To enhance clearing choices for market participants, enhance clearing To including OTC four clearing houses we approved as designated Clear) (OTC Kong Limited Clearing Hong for OTC derivatives in August central counterparties subsidiary of HKEX, 2016. A Hong Kong-incorporated standardised clearing services for provides OTC Clear product Clear’s OTC approved also We derivatives. OTC swaps and currency for cross and service proposals client clearing. Automated trading services (SFO), two Ordinance Under the Securities and Futures automated trading services (ATS) regulate regimes facilities similar offer those that Typically, providers. clearing house to those of a traditional exchange or a by Part III under the SFO. Intermediaries authorised are as an added dealing services with ATS that provide under Part V of the SFO. licensed facility are
1 2 See Intermediaries on pages 44-50. Interest rate, foreign exchange, equity, credit and commodity derivatives. credit exchange, equity, rate, foreign Interest
1 2 Futures (Financial Resources) Rules relating to capital Rules relating (Financial Resources) Futures for licensed and other prudential requirements corporations engaging in OTC derivatives activities. requirements to transactions in five key asset classes to transactions requirements commence in July 2017. Meanwhile, we are will changes to the Securities and finalising proposed implemented in September 2016 with the introduction implemented in September 2016 with the introduction record-keeping of mandatory clearing and related obligations. The expansion of mandatory reporting mandated by the G20 aims to improve transparency, transparency, mandated by the G20 aims to improve market abuse. mitigate systemic risk and prevent was The second stage of the OTC derivatives reform OTC derivatives (OTC) derivatives reform The over-the-counter to monitor short selling activities and allowed us to to monitor short selling activities and short positions for all relevant publish aggregated securities to enhance market transparency. to the effective date, we arranged a two-month pilot to the effective for the new prepare test for market participants to our ability The expansion improved requirements. short position reporting requirements to all securities requirements short position reporting for short selling under the rules permitted which are Limited. Prior of The Stock Exchange of Hong Kong Short position reporting we expanded the 2017, 15 March With from effect related legislative amendments took effect on 1 June amendments took effect legislative related 2017. regime remains appropriate to the needs of the Hong appropriate remains regime The majority of respondents Kong financial market. published We indicated their support for the proposals. 2017 and the the consultation conclusions in March which aim to expand the scope of excess position which aim to expand to qualified market limits that can be granted the help to ensure participants. The enhancements In September 2016, we began a two-month In September 2016, to the enhancements consultation on proposed and options contracts for futures limit regime position Position limit regime Position limit Market infrastructure Market SFC Annual Report 2016-17
Market infrastructure
Mainland-Hong Kong Stock Connect The launch of Shenzhen-Hong Kong Stock Connect From 5 December 2016 to 31 March 2017, average daily on 5 December 2016 expanded mutual stock market trading (Shanghai plus Shenzhen) was RMB5.8 billion access between the Mainland and Hong Kong and through the northbound link (of which 67% to Shanghai further consolidated Hong Kong’s position as a major and 33% to Shenzhen), representing 0.7% of trading in offshore renminbi centre. Following on the introduction the Mainland market. In the same period, average daily of Shanghai-Hong Kong Stock Connect two years earlier, trading was RMB6 billion through the southbound link Shenzhen-Hong Kong Stock Connect expanded the (of which 86% from Shanghai and 14% from Shenzhen), number of Hong Kong shares eligible for trading through representing 4.7% of trading in the Hong Kong market. southbound links from 313 (representing approximately 84% of Hong Kong market capitalisation) to 421 (87%). While Stock Connect provides unprecedented opportunities for investors, it also presents new challenges Both trading links have run smoothly. Under Shanghai- for regulators charged with market oversight. To Hong Kong Stock Connect, from 17 November 2014 to strengthen cross-boundary regulatory and enforcement 2 December 2016, average daily northbound trading cooperation, we signed memoranda of understanding with (including buy and sell trades) was RMB4.9 billion, or the China Securities Regulatory Commission in October 0.3% of trading in the Mainland markets, and average 2014 and November 2016, and together we closely daily southbound trading (including buy and sell trades) monitor the trading links for conduct and operational was RMB2.8 billion, or 1.9% of trading in the Hong Kong risks. market.
Daily trading Cumulative Eligible shares quota net buya Shanghai-Hong Kong Stock Connect
Northbound Shanghai Trading Link Constituents of the SSE 180 Index and SSE 380 RMB13 billion RMB146.4 billion Index Shares listed on the Shanghai Stock Exchange (SSE) of companies which have issued both A shares and H shares
Southbound Hong Kong Trading Link Constituents of the Hang Seng Composite RMB10.5 billion RMB377 billion LargeCap Index and Hang Seng Composite MidCap Index Shares listed on The Stock Exchange of Hong Kong Limited (SEHK) of companies which have issued both A shares on the SSE and H shares on SEHK
Shenzhen-Hong Kong Stock Connect
Northbound Shenzhen Trading Link Constituents of the SZSE Component Index and RMB13 billion RMB48 billion SZSE Small/Mid Cap Innovation Index which have a market capitalisation of RMB6 billion or above Shares listed on the Shenzhen Stock Exchange (SZSE) of companies which have issued both A shares and H shares
Southbound Hong Kong Trading Link Constituents of the Hang Seng Composite RMB10.5 billion RMB25.1 billion LargeCap Index and Hang Seng Composite MidCap Index Constituents of the Hang Seng Composite SmallCap Index which have a market capitalisation of $5 billion or above Shares listed on SEHK of companies which have issued both A shares and H shares
a From launch to 31 March 2017.
62 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 63 and 1 issued SFC Annual Report 2016-17 Report Annual SFC 126 548 153 individuals and from intermediaries notifications received corporations subject to corporations subject about suspicious trading compliance advice letters ongoing civil proceedings 46 criminal charges laid ^ We have broad powers to hold directors and powers to hold directors have broad We committed for misconduct individuals responsible can discipline manage. We by the companies they fines reprimands, through licensed intermediaries and can apply of licences, suspensions or revocations against orders and remedial to the court for injunctive in favour of victims. wrongdoers misconduct, such as insider In dealing with market can institute dealing and market manipulation, we to the or bring cases directly criminal prosecutions (MMT). Market Misconduct Tribunal 27 in fines 8,960 intermediaries restorative orders disqualification and account records from account records requests for trading and
$93 million
# cases initiated
4 414 81 27 disciplinary actions taken cases initiated concentration before the MMT
announcements high shareholding
These requests were made as a result of our surveillance of untoward price movements and turnover. of our surveillance of untoward made as a result were These requests Data as of 31 March 2017. Data as of 31 March Fines paid by intermediaries in disciplinary actions go into the general revenue of the Government. Fines paid by intermediaries in disciplinary actions go into the general revenue
1 # ^ Our work in figures available to us under the Securities and Futures and Futures available to us under the Securities (SFO). Ordinance Our tools under the SFO full spectrum of sanctions and remedies use the We of our enforcement approach, tools and priorities approach, of our enforcement strategy and allocate to focus our enforcement appropriately. our resources the greatest risks to the investing public. During risks to the investing public. the greatest review a comprehensive we conducted the year, To send strong deterrent messages, it is essential deterrent send strong To high-impact cases which pose that we focus on Enforcement SFC Annual Report 2016-17
Enforcement
During the year, we commenced 414 investigations and laid 46 criminal charges against eight individuals and two corporations and secured convictions against four persons and two corporations.
We applied for disqualification and restorative orders against 26 persons and one corporation. Civil actions seeking financial redress and other remedial orders against 126 persons and corporations in 29 cases are pending before the court.
Disciplinary action was taken against 29 persons and 25 corporations. In addition, we commenced four cases before the MMT against nine corporations and persons for alleged insider dealing or market manipulation. Enforcement actions We also issued 548 compliance advice letters to Corporate fraud and misbehaviour address areas of regulatory concern and to raise standards of conduct and compliance in the industry. This is a top enforcement priority, especially when it relates to listed companies. Notable cases included:
Surveillance work The MMT found that between 2001 and 2005, Gu We monitor trading on The Stock Exchange of Hong Chujun, Greencool Technology Holdings Limited’s Kong Limited and the Hong Kong Futures Exchange founder and former chairman, and four of its Limited on a daily basis and conduct preliminary senior executives disclosed false or misleading inquiries to detect possible market manipulation or information. As a result, Greencool’s consolidated insider dealing. We also engage with firms to review net asset value was exaggerated in several annual how they perform their monitoring and surveillance reports and results announcements. We are functions. conducting proceedings under section 2133 of the SFO against Gu in the Court of First Instance (CFI). Our surveillance of untoward price and turnover movements resulted in 8,960 requests for trading and We commenced legal proceedings in three cases in account records from intermediaries. We also received the CFI: and assessed 153 notifications from intermediaries2 – We are seeking disqualification orders against regarding suspicious equity and derivative trading. Hanergy Thin Film Power Group Limited’s Year-on-year, the total number of market surveillance former chairman, Li Hejun, and four current cases rose 5%. independent non-executive directors for alleged In addition, we posted 27 announcements on our breach of directors’ duties, and also a regulatory website reminding the investing public to exercise order to facilitate the payment of outstanding caution when trading in shares of listed companies receivables due to Hanergy. where a small number of shareholders hold a high concentration of shares.
2 Intermediaries are required to report clients’ suspected market misconduct to the SFC in accordance with the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. 3 Section 213 of the SFO gives the SFC the power to apply to the CFI for injunctions and other orders under specified conditions.
64 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 65 investors Aug 2016 Commenced SFC Annual Report 2016-17 Report Annual SFC distributing assets to Over 300 May 2015 and its associated the return of $230 assets for the fund million to the fund companies, including Recovered substantial of their investment investors recouped part administrators as well as injunction orders to freeze to freeze as injunction orders administrators as well appointed, After administrators were assets. the fund’s up in its place of incorporation. the fund was wound for $230 million was subsequently recovered Around including about 340 overseas distribution to creditors, investors. outcomes, In achieving successful enforcement and we draw on a wide range of our expertise close cooperation among our various maintain Legal Services and divisions, including Enforcement, of the multi-disciplinary Intermediaries. The joint efforts with a recognised team which handled this case were in 2016. team SFC Employee Award administrators May - Aug 2009 The Court appointed 9 r 200 Ap assets and appoint to freeze the fund's interim administrators Obtained a court order Mar 2009
investigation conducted an Division which
to the Enforcement Recovered The case was referred for investors complaints fund upon made enquiries Nov 2008 th the The Intermediaries wi receiving $230 million $230 Division Prompted by concerns that client monies were at risk at risk by concerns were that client monies Prompted urgent of dissipation, the High Court granted our of application in April 2009 seeking the appointment Athena Fund SPC Our investigation into Descartes sent false documents to investors which appeared to be to be appeared sent false documents to investors which issued by a major accounting firm. Our Intermediaries receiving Division made enquiries with the fund upon the case to the investors’ complaints and referred Division for investigation. Enforcement Our timely and concerted efforts to combat fraud to combat fraud efforts Our timely and concerted in Descartes Athena Fund SPC, enabled most investors of their part fund, to recover a collapsed private hedge investments. for pressed were operators When the fund’s and they purported to liquidate the fund redemptions, Seeking redress for investors Seeking redress Enforcement SFC Annual Report 2016-17
Enforcement
– We sought disqualification orders against The MMT found that Yorkey Optical International Quincy Hui Kwong Hei, managing director, (Cayman) Limited, its chief executive officer Nagai Andrew Liu, former non-executive director, Michio and financial controller Ng Chi Ching failed and eight current and former directors of to disclose inside information as soon as reasonably Freeman Financial Corporation Limited4 for practicable. The company and Nagai were each alleged breach of directors’ duties in Freeman’s fined $1 million. Nagai and Ng were disqualified acquisition and disposal of a stake in Liu’s from serving as a director or being involved in the Holdings Limited. We also sought a court order management of any listed corporation in Hong that Hui and Liu compensate Freeman $76.8 Kong for 18 and 15 months respectively. million, equivalent to the alleged loss it suffered in the transactions. The MMT ruled that Mayer Holdings Limited and nine of its current and former senior executives – We sought disqualification orders against Tse failed to disclose inside information as soon as On Kin, former chairman and executive director reasonably practicable. The company and nine of Kong Sun Holdings Limited and China Sandi current and former senior executives were fined Holdings Limited, for allegedly concealing his $10.2 million. Two of the senior executives were interests in the companies’ share placements disqualified from serving as directors or being in 2009. We also sought court orders that Tse involved in the management of a listed corporation account for his alleged profit from the sale of for 20 months while the rest were disqualified for the shares and compensate Kong Sun. 12 months.
The CFI disqualified senior executives of two companies from being directors or being involved in the management of any listed or unlisted company in Hong Kong:
– three former senior executives of China Best Group Holding Limited were disqualified for breaching their duties in handling a proposed acquisition of interests in a coal mine in 2008. One executive was disqualified for 10 years, and two others for six years.
– three former executive directors, including the chairman, of First Natural Foods Holdings Limited were disqualified for providing false bank statements to the company’s auditors and obstructing its provisional liquidators from performing their duties. The chairman was disqualified for 12 years and ordered to Insider dealing and market manipulation repay $84 million, and the other two executive Key enforcement actions included: directors were disqualified for eight years. The MMT found Andrew Left of Citron Research In the first concluded case commenced by the SFC guilty of disclosing false or misleading information in relation to late disclosure of inside information, in a research report on Evergrande Real Estate the MMT ruled that AcrossAsia Limited, its former Group Limited. He was banned from trading chairman Albert Saychuan Cheok and its chief securities in Hong Kong for the maximum period of executive officer Vicente Binalhay Ang failed to five years and ordered to disgorge his $1.6 million disclose inside information as soon as reasonably profit from shorting Evergrande shares. Left is practicable and fined them a total of $2 million. appealing certain aspects of the MMT decision.
4 Now known as Freeman FinTech Corporation Limited.
66 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 67 SFC Annual Report 2016-17 Report Annual SFC on the Growth Enterprise Market (GEM). on the Growth 7 We revoked the licences of Goodcape Securities revoked We Capital Limited $800,000 for fined Quam We BOCOM International and fined reprimanded We We reprimanded and fined Morgan Stanley and fined Morgan Stanley reprimanded We the licences of Richmond Asset revoked We soliciting clients to invest in a company and a land soliciting clients to invest in a company and his wife held plot in Thailand in which Bibby substantial undisclosed interests. Lin Sun Tang officers, Limited and its responsible client and Chang Siu Ming, for misappropriating re- from prohibited and Chang were funds. Tang years and three entering the industry for life respectively. to discharge its duties as a sponsor when failing of Gayety Holdings the listing prospectus preparing Limited (Asia) Limited $15 million for failing to discharge listing to the its duties as a sponsor in relation application of China Huinong Capital Group Company Limited. Hong Kong Securities Limited $18.5 million Hong Kong Securities the In making failures. over its internal control Morgan Stanley’s determination, we considered its cooperation during our investigation and reviewer engage an independent to agreement compliance with regulatory future to ensure requirements. its Bibby, Management Limited and Graham Frank and banned and sole owner, officer responsible years for the industry for 10 re-entering Bibby from
Intermediary misconduct 25 corporations, four we disciplined During the year, and 25 licensed representatives, officers responsible Key disciplinary in total fines of $93 million. resulting actions included: , Wu Hsiu Jung and Chen Hsiu Jung , Wu 5 . Two of Yik’s alleged associates were were associates alleged of Yik’s . Two 6 Interactive Brokers LLC and Interactive Brokers LLC and Interactive Brokers Interactive Brokers Kingsway Financial Services Group Limited Kingsway Financial Services Group Hong Kong Limited were prohibited from from prohibited Hong Kong Limited were the dealing with certain client assets which are of market manipulation or suspected proceeds fraud. and BOCI Securities Limited were prohibited prohibited and BOCI Securities Limited were held in and cash the shares processing from client accounts which may be connected with the withdrew suspected insider dealing. We notice issued to Kingsway after restriction the CFI. Our from obtaining court orders investigations continue. Court-appointed administrators finished returning Court-appointed administrators finished returning We issued restriction notices to four companies issued restriction We We obtained an interim freezing order from the from order an interim freezing obtained We Proceedings were commenced in the MMT against were Proceedings The MMT found that Augustine Cheong Kai Tjieh, The MMT found that $43.7 million to nearly 1,600 investors who were $43.7 million to nearly 1,600 investors who were Tiger dealing by insider of victims Management Asia LLC and two of its senior officers. – alleged insider dealing. subjects of our investigations: not which are – CFI prohibiting Yik Fong Fong from removing from from removing Fong Fong from Yik CFI prohibiting in Hong Kong assets valued up to $26 million suspected into investigation ongoing our to relation Holdings of TeleEye insider dealing in the shares Limited to pay $13 million order under a consent required the from made into court, equivalent to the profit Samantha Keung Wai Fun, former CEO of China AUChina of CEO former Fun, Wai Keung Samantha Limited Holdings Group from shares Kuo-chen for false trading in China AU 25 August 2009 to 21 April 2010. Gan Ser Soon, engaged in insider dealing in the Gan Ser Soon, engaged Cheong and of Titan.shares ordered The MMT million in losses avoided and Gan to disgorge $2.4 financial dealing in regulated them from prohibited year respectively. for two years and one products a former senior executive of an affiliate of Titan of an affiliate a former senior executive Limited, and his mother Group Petrochemicals Now known as Food Idea Holdings Limited. Idea Holdings Now known as Food Now known as Food Idea Holdings Limited. Idea Holdings Now known as Food Now known as Skynet Group Limited. Now known as Skynet Group International Holdings Limited. Now known as CircuTech
6 5 6 7 Enforcement SFC Annual Report 2016-17
Enforcement
Other disciplinary actions Market manipulation
Company/Name Conduct Action Date
Derek Ong Conspired to manipulate the Korea Composite Banned from re-entering 17.11.2016 Stock Price Index 200 the industry for 10 years
Wong Lap Yin Manipulated the share price of China Nonferrous Banned from re-entering 1.8.2016 Metals Company Limited and carried out the industry for three years unauthorised trades in a client’s account
Ku Yuen Leung Created a false or misleading appearance in the Suspended for 18 months 23.8.2016 market for shares of Agricultural Bank of China Limited to drive up the prices of five related call warrants
Unauthorised trading
Company/Name Conduct Action Date
29.12.2016 Lam Yuk Wai Committed misconduct including over 100 Banned from re-entering 29.12.2016 unauthorised transactions the industry for life
Ma Yu Lung Accepted order instructions from unauthorised Banned from re-entering 26.1.2017 individuals and colluded with account holders the industry for eight years
Chan Hau Wing Conducted unauthorised trades in a client’s Banned from re-entering 13.6.2016 account the industry for two years
Ko Cho Ting Executed suspicious client orders and operated a Suspended for two years 3.8.2016 secret securities account
Internal control failures The following companies were reprimanded and fined:
Company/Name Conduct Fine Date
Merrill Lynch Far East Limited Failures related to the reporting of large open positions, $15 million 24.3.2017 and Merrill Lynch (Asia Pacific) electronic trading systems and research reports Limited
BNP Paribas Wealth Overcharged its clients $4 million 31.8.2016 Management
SynerWealth Financial Limited Failures related to 65 short-selling orders and the $2.7 million 31.5.2016 obligation to report deficiencies in its trading system to the SFC in a timely manner
The Hongkong and Shanghai Failures related to position limits and regulatory breaches $2.5 million 14.9.2016 Banking Corporation Limited
DBS Vickers (Hong Kong) Limited Failures related to under-segregation of client money and $2 million 16.3.2017 regulatory breaches
GMO-Z.com Forex HK Limited Failures in its electronic trading system for leveraged $1.6 million 9.2.2017 foreign exchange contracts, deficiencies in order execution and slippage in handling procedures
68 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 69 30.5.2016 Date 19.10.2016 15.6.2016 20.10.2016 3.1.2017 6.3.2017 14.3.2017 25.1.2017 15.6.2016 Date 21.4.2016 27.6.2016 7.9.2016 5.10.2016 13.2.2017 SFC Annual Report 2016-17 Report Annual SFC $1.3 million Fine $4 million $4 million Morgan Securities J.P. (Asia Pacific) Limited – $3 million JPMorgan Chase Bank, National Association – $2.6 million $3 million $3 million $2.6 million $2 million each $1.8 million guidelines when c Conduct theft Convicted of fraud and Convicted of fraud Convicted of fraud Convicted of bribery to an agent an advantage Convicted of fraud and offering when handling third-party fund deposits when handling third-party in requirements to comply with regulatory Failure managing two SFC-authorised funds in Hong to disclose notifiable interests Failure held in its client portfolios Kong-listed shares its subsidiaries plc and managed by Schroders of details of the ultimate clients to provide Failure certain transactions Breaches in relation to disclosure failures in failures to disclosure in relation Breaches index offshore-listed and offering reports research licences options without the required requirements to comply with regulatory Failure and the Fund under the SFC Code on MPF Products Manager Code of Conduct to comply with AML Failure payments handling third-party requirements to comply with AML regulatory Failure Conduct exchange order to its foreign in relation Breaches execution practices requirements to comply with regulatory Failure Fund of Hong of the Tracker in the management Kong a d b Now known as Rakuten Securities Hong Kong Limited. Now known as Rakuten Securities Now known as Sinolink Securities (Hong Kong) Company Limited. Now known as Zhongtai International Securities Limited. Anti-money laundering. (Hong Kong) Limited Management (Hong Kong) Limited Securities Guotai Junan Value Partners Hong Value Kong Limited Investment Schroder Qilu International Securities Limited Partners Limited and Value Guangdong Securities Limited MIS Services Limited JPMorgan Chase Bank, National Association Advisors Asia Limited Morgan Securities J.P. (Asia Pacific) Limited and FXCM Asia Limited Global State Street Company/Name Li Lee Chau Hang Yu and Chow Chun Yin Steve and Chow Chun Yin Chau Hang Yu Chen Chia Hui Chow Ho Cheung Andrew Chow Ho Cheung Andrew Liu King Yee Company/Name
c d a b Regulatory breaches and fined: reprimanded The following companies were The following individuals were banned for life: were The following individuals Criminal convictions Enforcement SFC Annual Report 2016-17
Enforcement
Enhanced cooperation have been considerably enhanced, while turnaround time for cases submitted to the DoJ for advice has We are actively building a long-term strategic been reduced. relationship with the China Securities Regulatory Commission (CSRC) to ensure effective enforcement collaboration in surveillance and joint investigations. Cross-jurisdictional market manipulation was also the subject of the joint CSRC-SFC enforcement seminar in Xi’an.
Locally, we collaborate closely with the Hong Kong Monetary Authority when investigating authorised institutions’ misconduct under the SFO. During the year, we held joint training and sharing sessions to gain more understanding of one another’s regulatory work.
Since we entered into a memorandum of Mr Thomas Atkinson, Executive Director, Enforcement, addresses understanding with the Department of Justice (DoJ) the Pan Asian Regulatory Summit 2016 in March 2016, the efficiency and effectiveness of our Photo credit: Thomson Reuters joint efforts with the DoJ in handling criminal cases
Our approach to enforcement In November 2016, we completed a strategic review In addition, we will recognise cooperation and of our enforcement priorities, tools and policies in timely, transparent disclosure of material misconduct response to the increasing volume and complexity of by companies and individuals. These facilitate our our enforcement caseload. The review aimed to align investigations and may promote early settlements. They our enforcement work with organisation-wide priorities, also help enable prompt remedial actions. maximise deterrent effects, enhance collaboration with our regulatory partners and ensure efficient resource New structure allocation. Our focused enforcement approach was complemented by establishing four specialised teams targeting key risks New enforcement focus identified during our strategic review. These include We now focus our resources on high-priority cases corporate fraud and misfeasance, insider dealing and which pose the greatest threats to investors and the market manipulation as well as intermediary misconduct Hong Kong markets, particularly those related to such as conflicts of interest, misappropriation of client corporate fraud and misbehaviour, market manipulation assets and investment bank malpractice. and intermediary misconduct. We also formed four temporary specialised teams We will take a more holistic enforcement approach to tackle serious emerging risks, including sponsor targeting systemic issues. For multiple failings identified misconduct in initial public offerings, irregularities on within a company or a corporate group, we will assess GEM, know-your-client and AML control failings and whether they are attributable to systemic weaknesses. mis-selling of specific investment products. When trends in misconduct or criminal behaviour Other teams will be formed as we identify new risks become apparent, we will find ways to address them and likewise teams will be disbanded when we consider which look beyond individual cases. that the relevant risks have been addressed.
To effectively protect Hong Kong’s world-class markets, we must develop a multi-dimensional approach to securities regulation where all functions such as regulatory gatekeeping, supervision and enforcement work as a team to further our regulatory objectives. Thomas Atkinson, Executive Director, Enforcement
70 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 71 15 71 36 46 93 53 21 302 553 553 362 2014/15 252 (70%) 293 (9,752) 24 20 35 42 31 507 515 436 107 100 453 SFC Annual Report 2016-17 Report Annual SFC 2015/16 222 (51%) 286 (7,997) 27 10 46 49 56 34 407 414 591 126 548 2016/17 270 (46%) 301 (8,960) of licensed brokers with suspected inadequate with suspected of licensed brokers our concerns and shared we AML internal controls, this area. in efforts firms to enhance their reminded as a issued 5 4 Enforcement Reporter Enforcement Reporter issued 6 inquiries commenced inquiries commenced (number of letters sent) issued directions 1 2 3 Also see Table 7 in Breakdown of SFC activity data on page 164 for more details. of SFC activity data on page 164 for more 7 in Breakdown Also see Table of the ultimate clients, the particulars and instructions relating to the transactions. of the ultimate clients, the particulars and instructions relating or not fit and proper. to fraud or other misconduct. Section 181 of the SFO gives the SFC the power to require information from intermediaries about trading transactions, including the identity information intermediaries information from require Section 181 of the SFO gives the SFC the power to fraud, misfeasance and disciplinary misconduct. market misconduct, investigate SFO offences, Section 182 of the SFO gives the SFC the power to total of 46 criminal charges against eight individuals and two corporations. a The SFC brought that they appear to be guilty of misconduct its disciplinary powers, on grounds to exercise persons that it proposes A notice issued by the SFC to regulated persons. to take disciplinary action against regulated decision and its reasons A notice that sets out the SFC’s Section 179 of the SFO gives the SFC the power to compel the production of records and documents from persons related to a listed company in relation to a listed company in relation persons related and documents from of records production compel the Section 179 of the SFO gives the SFC the power to Cases with search warrants executed Cases with search Individuals/corporations subject to ongoing civil proceedings issued Compliance advice letters Notices of Proposed Disciplinary Action Disciplinary of Proposed Notices of Decision Notices Individuals/corporations charged in criminal proceedings Criminal charges laid Investigations completed Investigations completed within seven months (%) S182 Investigations started S179 S181
5 6 Note: 2 3 4 1 Enforcement activities We provided the public with timely updates on provided We In a September emerging risks as we identified them. on our investigations into a number release press speech by Mr Thomas Atkinson, Executive Director of Director speech by Mr Thomas Atkinson, Executive at the Thomson Reuters 7th Pan Asian Enforcement, Regulatory Summit in November 2016. During the year, we also explained our enforcement our enforcement we also explained During the year, at various public and private philosophy and approach first public speaking engagements, including the stakeholders with regular information and advice on information stakeholders with regular actions and priorities. our enforcement We relaunched the relaunched We in December 2016 to increase biannual publication a compliance of our work, promote the transparency industry the industry and provide in culture Promoting compliance Promoting Enforcement SFC Annual Report 2016-17
Risk assessment
We adopt a holistic approach using a variety risk identification to intermediary monitoring of tools to identify and deal with complex risks and market surveillance, and to broaden our relating to the securities and futures markets, understanding of the latest trends in the markets. including through active communication with the Elements of the strategy include reviewing the industry and other stakeholders. risk data we collect, benchmarking against major overseas regulators and analysing social Risk data strategy media information. To identify, assess and mitigate risks associated with the industry, our regularly updated internal risk register Crisis simulation exercise provides an overview of potential emerging and In March 2017, we hosted an introductory briefing systemic risks related to financial activities, institutions, for industry participants in a whole industry crisis infrastructures and products. The register serves as simulation exercise to be held later this year which aims the basis for our senior management’s risk-focused to increase the industry’s awareness of existing and discussions and strategic decision making. emerging threats facing the financial services sector, such as cyber attacks, and provides an opportunity for This year, we launched a new risk data strategy them to review their crisis response strategies. which aims to use technology to enhance our daily work, including processes ranging from regulatory
72 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 73 111 1,058 Made 94 2014/15 110 Received SFC Annual Report 2016-17 Report Annual SFC 160 . 1 1,104 Made 92 2015/16 124 Received to facilitate discussion of the impact of European European to facilitate discussion of the impact of on financial markets in the Asia Union regulations The inaugural forum took place in Pacific region. October 2016. in Singapore serves as Viceon Chair of the Committee Strategy, Emerging Risks. co-chairs the Committee on Payments and co-chairs the Committee IOSCO Steering (CPMI) – Market Infrastructure to work related which focuses on policy Group, and on monitoring the central counterparties the Principles for Financial implementation of Market Infrastructures Conduct, which focuses on on Market Force Task in particularly responsibility, and behaviour individual Its final the fixed income and commodities markets. to be published in mid-2017. is expected report May 2016. Pacific Regional Committee (APRC) until leadership, the APRC established Under Mr Alder’s Commission an annual forum with the European Securities and Markets Authority and the European Ms Bénédicte Nolens, Senior Director of Risk and Ms Bénédicte Nolens, Senior Director As Chairman of the IOSCO Board, Mr Alder IOSCO Board, As Chairman of the the Mr Alder has chaired Since November 2015, Asia- Mr Alder was the Chairman of the IOSCO
112 1,101 Made 2016/17 155 125 Received
meeting in Hong Kong where senior regulators senior regulators meeting in Hong Kong where than 30 member jurisdictions discussed more from the work and reviewed the prioritisation of IOSCO’s requirements, on margin of workstreams progress and central counterparties, asset management market conduct. IOSCO Board, the organisation’s governing and the organisation’s IOSCO Board, the IOSCO During the year, body. setting standard to help IOSCO a holistic approach endorsed Board to benefit focus on useful and impactful projects the wider securities sector. Ashley Alder was appointed as Chairman of the the of Ashley Alder was appointed as Chairman In October 2016, we hosted the IOSCO Board Board In October 2016, we hosted the IOSCO In May 2016, Our Chief Executive Officer (CEO) Mr In May 2016, Our Chief Executive Officer In April 2012, the Committee on Payment and Settlement Systems and IOSCO published the report on Principles for Financial Market Infrastructures, which on Principles for Financial Market Infrastructures, In April 2012, the Committee on Payment and Settlement Systems and IOSCO published the report and repositories, securities settlement systems, central counterparties and trade for central securities depositories, establishes new international standards systemically important. payment systems that are Licensing-related requests for assistance requests Licensing-related Enforcement-related requests for assistance requests Enforcement-related
1 Requests for regulatory cooperation internationally-recognised standards for securities standards internationally-recognised regulation. The SFC plays a leading role in the International in role The SFC plays a leading which Commissions (IOSCO) Organization of Securities to adherence develops, implements and promotes IOSCO international bodies and our rule-setting Mainland and regional engagement with regulators. We take an active part in global regulatory take an active part in global regulatory We in our involvement policymaking through Global regulatory engagement regulatory Global SFC Annual Report 2016-17
Global regulatory engagement
The SFC is represented in all eight IOSCO policy Financial Stability Board committees, the Assessment Committee and all key The SFC is an active participant in the work of the task forces. Financial Stability Board (FSB). We collaborate closely Mr Stephen Po, former Senior Director of with the Hong Kong Monetary Authority, the Office of Intermediaries Supervision2, chaired the Committee the Commissioner of Insurance and the Government of on Regulation of Market Intermediaries until the Hong Kong Special Administrative Region (HKSAR) December 2016. on FSB initiatives related to the securities sector.
We actively participate in IOSCO’s Committee on As Chairman of the IOSCO Board, Mr Alder is Enforcement and the Exchange of Information and a member of the FSB’s Plenary and its Steering the Multilateral Memorandum of Understanding Committee, which focus on monitoring the Screening Group, which aims to prevent and detect progress of the Group of Twenty reforms from breaches of securities laws and regulations in global a financial stability perspective. The SFC is also financial markets and seeks to implement global a member of the FSB’s Standing Committee on enforcement cooperation under the international Standards Implementation and participates in standard for cooperation and information exchange. its Implementation Monitoring Network which We hosted the committee’s meeting in Hong Kong conducts an annual exercise to review the progress in November 2016. of global financial reforms.
The SFC is also a member of the FSB Regional Consultative Group for Asia, where it contributes to the monitoring of global financial reforms and provides policy input from the Hong Kong perspective.
To ensure the views of Asian markets and securities regulators are reflected in policy recommendations, we participated in various FSB workstreams during IOSCO’s enforcement committee meeting in Hong Kong the year, including the Workstream on Other Shadow Banking Entities and the OTC Derivatives Working Group. Additionally, in the Workstream on Structural Vulnerabilities we actively took part in the FSB’s January 2017 recommendations to address vulnerabilities from asset management activities, which have implications for open-ended funds.
2 Mr Po retired from the SFC in January 2017.
74 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 75 SFC Annual Report 2016-17 Report Annual SFC . 4 SFC-CSRC enforcement seminar in Xi’an SFC-CSRC enforcement To strengthen collaboration in surveillance and joint collaboration in surveillance and joint strengthen To co-hosted an investigations, the SFC and the CSRC seminar in November 2016 in Xi’an enforcement the US, UK, Canada and Australia from experts where issues. market manipulation and misconduct discussed the HKSAR Government support in strengthening We with Guangdong, cooperative relationship Hong Kong’s to Mainland regions Shenzhen, Shanghai and other facilitate Hong Kong financial institutions’ access to market the Mainland we met with Mainland government During the year, agencies, exchanges and think-tanks to explore opportunities for Hong Kong amid the Mainland’s integration with the global economy. increasing also jointly organised seminars and training We Mainland authorities for senior with programmes executives to enhance their understanding of one work. regulatory another’s In light of the recent growth in the number of in the number growth In light of the recent institutions establishing subsidiaries Mainland financial maintain close communication in Hong Kong, we including the regulators with Mainland financial Regulatory Commission and CSRC, China Banking Commission to ensure China Insurance Regulatory operations. In early supervision of cross-border proper jointly organised a seminar with November 2016, we and fund brokers for Mainland the CSRC in Shanghai Hong Kong. managers with business operations in . We also regularly interact with the also regularly . We 3 SFC Chairman Mr Carlson Tong and CSRC Chairman SFC Chairman Mr Carlson Tong for Shenzhen- Mr Liu Shiyu at the signing ceremony Hong Kong Stock Connect See Market infrastructure on pages 60-62. See Market infrastructure to set up operations approved the first two Hong Kong-funded securities companies were In 2016, under the Closer Economic Partnership Arrangement, fund management company was established in Qianhai, Shenzhen. majority-owned joint-venture in Shanghai, and the first foreign
3 4 first market manipulation case under Stock Connect. first market manipulation case under Stock closer operational collaboration. Effective SFC-CSRC closer operational collaboration. Effective facilitated the completion in efforts enforcement investigations into the CSRC’s the November 2016 of programme policies CSRC in high-level discussions on cross-border cooperation initiatives, as well as for and regulatory We worked closely with the CSRC and other Mainland worked We the smooth launch to ensure authorities regulatory as Stock Connect as well of Shenzhen-Hong Kong Stock Connect the stable operation of the expanded the People’s Bank of China on regulatory developments Bank of China on regulatory the People’s securities markets. the affecting with the Chairman of the China Securities Regulatory with the Chairman of the China Securities regulatory cross-border Commission (CSRC) to discuss the Governorcooperation, and held discussions with of to exchange views on connectivity between Hong to exchange views as well as Kong and the Mainland capital markets They also met interactions between China and IOSCO. markets. and CEO Mr Carlson Tong In June 2016, our Chairman of the State Council a ViceMr Alder met with Premier We collaborate with Mainland and local authorities to collaborate with Mainland We long-term strategic development support Hong Kong’s opening of Mainland financial amid the continuous Mainland China Global regulatory engagement Global SFC Annual Report 2016-17
Global regulatory engagement
Bilateral agreements In December 2016, we signed a Memorandum of Understanding (MoU) on Switzerland-Hong Kong Mutual Recognition of Funds and Asset Managers with the Swiss Financial Market Supervisory Authority (FINMA). The MoU allows eligible Swiss and Hong
Kong public funds to be distributed in the other Signing MoU with FINMA market through a streamlined vetting process5.
To facilitate mutual assistance in the supervision and Other engagement oversight of regulated entities that operate on a cross- In May 2016, we hosted the fourth Asia Pacific border basis in Hong Kong and the US, we entered Takeovers Regulators Conference, a forum for into an MoU with the US Financial Industry Regulatory takeovers regulators to discuss recent developments Authority in May 2016, as well as a separate MoU with in the region. More than 20 participants from eight the US Securities and Exchange Commission in January countries in the region attended the conference to 2017. discuss topics including shareholder activism, crowd- funding, special deals and waivers from mandatory In August 2016, the SFC and the Financial Services offers. Agency of Japan signed a memorandum of cooperation to consult, cooperate and exchange information In November 2016, we organised the eighth MoU regarding certain types of central counterparties which meeting with the Taiwan Financial Supervisory provide services in our respective jurisdictions. Commission where we discussed various cooperation initiatives and shared Hong Kong’s experience in regulating financial intermediaries.
Global rule setting Our participation in global standard-setting bodies we organised the IOSCO Board meeting in ensures that we are able to contribute to the process Hong Kong. for formulating regulations which may have an impact on our markets. In addition, we became increasingly involved in the work of the Financial Stability Board whose focus has This is particularly important for Hong Kong, which recently expanded to take in the securities sector, hosts a large number of international firms that form particularly in areas such as market conduct and an integral part of our open and dynamic financial asset management. industry. More broadly, we worked closely with overseas This year marked a number of important milestones regulators, authorities and industry bodies to for the SFC’s international work. In May 2016, our formulate and implement a variety of initiatives to CEO Mr Alder was appointed to lead the global help keep our regulatory framework aligned with securities rule-setter IOSCO. In October 2016, international standards and to promote Hong Kong’s status as an international financial centre.
5 See Investment products on pages 51-54.
76 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 77 8 6 7 15 48 137 5,883 44,954 2014/15 5 9 3 11 68 114 SFC Annual Report 2016-17 Report Annual SFC 7,033 51,020 2015/16 4 2 4 13 74 134 6,532 59,952 2016/17 consultation papers and two consultation conclusions. consultation papers and two consultation organise meetings and briefings to keep regularly We regulatory industry participants well-informed about we organised developments. During the year, 10 40 workshops to explain our rules, including for initiative workshops on the Manager-In-Charge about 2,200 industry participants. 2016 launch of the SFC Fintech Since the March enquiries receive Contact Point as a dedicated portal to the financial technology (Fintech) from and requests Industry dialogue with productive and an open maintain We bodies and other professional industry associations, this dialogue During the year, industry participants. variety of topics such as listing focused on a wide accountability and senior management regulation, suitability obligations. and under the Securities rules When we propose statutory we consistently exceed Ordinance, Futures for public consultation by consulting on requirements and amended non-statutory codes and both proposed issue We guidelines prior to their implementation. and proposals consultation papers containing detailed formal and informal discussions with conduct both to seek their views as part of the stakeholders relevant After we complete our analysis, consultation process. summarising we issue a consultation conclusions paper and setting out our the main comments received we published four conclusions. Over the past year, culars meetings and visits Briefings, Publications and cir # and Enquiries Speaking complaints engagements Stakeholder communication
website Corporate The average number of web pages browsed per day during the reporting period. reporting per day during the The average number of web pages browsed General public enquiries Circulars to industry Circulars Corporate website average daily page views Industry-related publications Industry-related Codes and guidelines Consultation papers Consultation conclusions Press releases Press Consultations
# Publications and other communications Multiple stakeholder communication channels Multiple stakeholder keep them informed about up-to-date regulatory about up-to-date regulatory keep them informed information. timely, concerted and effective outreach which outreach effective concerted and timely, understand our work and to helps stakeholders Through our organisation-wide stakeholder our organisation-wide stakeholder Through promote we strive to engagement programme, Stakeholder communication Stakeholder SFC Annual Report 2016-17
Stakeholder communication
community, we have engaged with a wide range of relaunched the Enforcement Reporter, a biannual stakeholders including financial institutions, industry publication which aims to provide the market with organisations and start-ups. Through this dialogue, updates on our key enforcement priorities. we hope to see better investor outcomes such as easier comparability of investment options, fees and Circulars and frequently-asked questions are posted on investment returns as well as greater investor choice the SFC website to help the industry better understand and diversification. In November 2016, we hosted the regulatory issues. We issued 74 circulars this year. SFC Regtech and Fintech Contact Day (see sidebar below).
During the year, our senior executives proactively interacted with the industry, taking part in 85 speaking engagements on a wide range of topics within our remit. We also supported 13 seminars or events organised by industry bodies.
Our publications aim to provide updates on our regulatory work, topical issues and other developments. During the year, we published 13 thematic publications, including periodic newsletters, Photo credit: Thomson Reuters market reviews and surveys. In December 2016, we
Regtech and Fintech Contact Day
More than 150 senior delegates from financial Opening remarks were delivered by Mr James Lau, institutions attended the first SFC Regtech and Fintech Acting Secretary for Financial Services and the Treasury Contact Day which we hosted on 7 November as part of the Hong Kong Special Administrative Region, of the inaugural Hong Kong Fintech Week1. followed by a welcome address by Mr Ashley Alder, SFC Chief Executive Officer, who highlighted that the event is part of a series of initiatives to enhance our understanding of Fintech.
Professor Douglas Arner from the Faculty of Law of the University of Hong Kong delivered a keynote speech on the role of Regtech in regulating rapidly transforming financial systems. Also at the event, a number of service providers gave presentations on robo-advice, automation and big data analytics.
The day concluded with a panel discussion on the The full-day event, sponsored by InvestHK and regulatory implications of new technologies featuring supported by the Asia Securities Industry and Financial representatives of the SFC, Hong Kong Monetary Markets Association and the Hong Kong Investment Authority, Hong Kong Exchanges and Clearing Limited Funds Association, focused on how regulatory and the Office of the Privacy Commissioner for Personal technology (Regtech) and financial technology (Fintech) Data. intersect with our regulatory remit.
Hong Kong is an ideal place for Fintech entrepreneurs Regtech presents enormous opportunities to both to set up as it is a leading international financial centre regulatees, in helping them ensure compliance and provides first-class market access to the Mainland with regulatory standards, and regulators, in the and the rest of Asia. performance of their functions. James Lau Ashley Alder
1 Held from 7 to 11 November 2016, Hong Kong Fintech Week highlighted the latest trends in Fintech development.
78 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 79 1 30 80 40 30 532 277 206 251 672 2,119 2014/15 9 34 21 128 220 338 631 265 310 100 SFC Annual Report 2016-17 Report Annual SFC 2,056 2015/16 8 39 185 411 739 221 116 141 330 132 2,322 2016/17 Mr Brian Ho, Executive Director of Corporate Finance, addresses the Hong Kong of Corporate Finance, addresses Mr Brian Ho, Executive Director China INED Forum Greater Association’s Independent Non-Executive Director To foster effective regulatory cooperation, we maintain cooperation, regulatory foster effective To local, Mainland and overseas close contact with counterparts. Withregulatory other authorities signed four memoranda of and exchanges, we than 40 MoU and held more understanding (MoU) visitors and received We year. meetings during the authorities. Mainland and overseas delegates from c a b Primarily, alleged market manipulation and insider dealing. Primarily, Such as identity fraud and impersonation. For example, bullion trading, banking complaints. Total Scams and frauds by SFC Other financial activities not regulated Breach of offers of investments of offers Breach and suspicious websites Boiler rooms Product disclosure Product Unlicensed activities Listed companies and disclosure of interests Listed companies and disclosure Market misconduct Conduct of licensees institutions Conduct of registered
b c a Complaints against intermediaries and market activities Complaints against intermediaries International Organization of Securities Commissions (see Global regulatory and the Financial Stability Board engagement on pages 73-76). Regulatory counterparts in international regulatory role play an active We our participation in the cooperation through information to other government bureaux and and information to other government bureaux departments on various issues. close liaison with the Financial Services and the close liaison with the Financial Services updates on our regulatory and provide Bureau Treasury assistance and we provide initiatives. Furthermore, us or raised by LegCo members and other governmentus or raised by LegCo agencies. we maintain meetings and reports, regular Through with details of our policy initiatives, explain the with details of our work and answer questions. We rationale behind our to referred to enquiries and complaints also respond We attend Legislative Council (LegCo) meetings, attend Legislative Council (LegCo) We of the Panel on Financial Affairs including meetings legislators to provide Bills Committees, and relevant Government Stakeholder communication Stakeholder SFC Annual Report 2016-17
Stakeholder communication
The public We seek to address enquiries and public concerns regarding the markets we regulate. During the year, we received a total of 6,532 general enquiries by phone or in writing.
General public enquiries Securities and Others not related Futures Ordinance to SFC 3% 9%
To increase public understanding of Hong Kong’s financial regulatory framework and of our work, we Other general received over 260 visitors from local and overseas enquiries about Intermediaries SFC’s work institutions and our senior executives delivered key 43% 28% messages in media interviews. We issued 134 press releases to inform the public of the latest regulatory actions and other SFC news. Listed companies Market operators We published our Annual Report 2015-16 and three 11% and trading quarterly reports. Our reporting efforts were recognised infrastructure with a Gold prize in the Hong Kong Management 3% Investment products Association’s Best Annual Reports Awards 2016, and a 3% Gold award, public sector category, in the Hong Kong Institute of Certified Public Accountants’ 2016 Best Complaints against intermediaries and market Corporate Governance Disclosure Awards. activities are first reviewed by our Complaints Control Committee, comprising senior executives from across Our corporate website provides stakeholders with the organisation, and are then allocated to responsible up-to-date information about our work. Website divisions for assessment where appropriate. enhancements this year included revamping the codes and guidelines section to make it easier to search During the year, we handled 2,322 complaints. A for both current and archived information as well as total of 1,229 cases1 were allocated for further review adding quick links to circulars and a list of designated and 455 were referred to Hong Kong Exchanges and central counterparties under the over-the-counter Clearing Limited or other financial regulators. derivatives regime.
1 One case may comprise multiple complaints.
80 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 81 SFC Annual Report 2016-17 Report Annual SFC
the community, protecting the environment and the environment protecting the community, wellness. staff promoting Our corporate social responsibility initiatives focus social responsibility Our corporate for sustainable markets, caring on supporting
Responsibility Corporate Social Responsibility Corporate Social Corporate SFC Annual Report 2016-17
Corporate Social Responsibility
As a regulator in an international financial centre, we are committed to acting as a socially Focus 2016/17 2017/18 responsible organisation. We strive to incorporate Commission Community Making a Reach out, corporate social responsibility (CSR) principles Volunteers difference help out, into our daily operational decisions and practices. Group through volunteer volunteering Governance Our CSR efforts are coordinated by a dedicated committee which reports directly to the SFC’s Executive Committee (ExCo). The CSR Committee is chaired Green Environment Think green, Environmental by the Chief Financial Officer and Senior Director of Working live green sustainability Corporate Affairs, and includes members from different Group is our units across the organisation. It is charged with: responsibility formulating and developing our CSR vision, principles, framework and policies
organising and promoting CSR activities Wellness People Your health, Good health setting objectives, targets and key performance Group we care is your wealth indicators to measure the effectiveness of our CSR efforts
The CSR Committee has three working groups. Each is responsible for planning and implementing initiatives under a specific theme.
We explain our CSR goals, principles and activities Our efforts to care for the community, the environment on both our corporate website and intranet, and we and our employees were recognised by the Hong Kong circulate an internal quarterly e-newsletter to update Council of Social Service which named us a “Caring staff about our CSR activities and outcomes. The Organisation” for the eleventh consecutive year. newsletter also provides a platform for participants to share first-hand accounts of our CSR activities and for all staff to provide feedback.
Hike for Hunger
Making sticky-rice dumplings with the Hong Chi Association
82 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 83 SFC Annual Report 2016-17 Report Annual SFC WiFA’s panel on environmental, social and corporate governance panel on environmental, WiFA’s social environmental, The SFC hosted a panel on and corporate governance organised by Women in May 2016. At the event, in Finance Asia (WiFA) our Corporate Finance and senior executives from to improve Intermediaries divisions discussed ways corporate behaviour and corporate governance as well responsible towards approaches as asset managers’ educational session also hosted a WiFA ownership. We on climate change and sustainable investment in 2017. March Every year, we fund the Hong Kong Securities and we fund the Hong Every year, in support of its training and Investment Institute also provide We regimes. examinations on regulatory Reporting Council which aims funding to the Financial of listed companies’ financial to uphold the quality Dispute Resolution as well as to the Financial reporting and cost-efficient an effective to provide Centre institutions and their individual channel for financial disputes. their monetary customers to resolve to 1 dealing disclosures dealing disclosures 2 on licensees to maintain their 3 Rule 22 of the Code on Takeovers and Mergers requires parties to an offer and their respective associates to disclose dealings in relevant securities associates to disclose dealings in relevant and their respective parties to an offer and Mergers requires Rule 22 of the Code on Takeovers clients conducted for themselves or on behalf of discretionary exchange offer) (in the case of a securities company and the offeror of the offeree period. during an offer calendar year hours per to complete a minimum of five CPT required licensees are Training, Professional Guidelines on Continuous Under the SFC’s activity. for each type of regulated We will continue to issue printed licences for licensed corporations and certificates of registration for registered institutions, and these must be institutions, and these for registered of registration certificates continue to issue printed licences for licensed corporations and will We business. at their places of exhibited prominently
2 3 1 professional competence. This year, our senior competence. This year, professional training 28 hours of CPT-eligible executives delivered to licensees. Promoting professional competence training (CPT) impose continuous professional We requirements application forms for public offers so long as the application forms for public offers is available online. prospectus The Mixed Media Offer process, another measure another measure process, The Mixed Media Offer paper consumption, allows listed which aims to reduce to distribute paper applicants and listed companies submission and posting of Rule 22 and Mergers has been in under the Code on Takeovers operation since 2014. Registered Institutions. Registered the In addition, an online system to streamline licensed individuals as of November 2015. Details of licensed individuals as now only available on are of licensed individuals Persons and our online Public Register of Licensed the efficiency of the licensing application process. the efficiency and paper compliance burden the industry’s reduce To licences consumption, we ceased issuing printed applications, notifications and annual returns via returns applications, notifications and annual to handle an the SFC Online Portal. This enables us and helps enhance of applications number increasing During the year, we implemented a mandatory During the year, individual online submission initiative which requires applicants and licensees to submit licensing Raising industry-wide operational Raising industry-wide operational efficiency industry-wide operational efficiency, minimise resource resource minimise efficiency, industry-wide operational for burden the paperwork consumption and reduce participants. both the SFC and industry As a statutory body, we consider the impact of our we consider As a statutory body, financial markets. work on Hong Kong’s regulatory to enhance have taken measures Over the years, we Marketplace support Marketplace Corporate Social Responsibility Corporate SFC Annual Report 2016-17
Corporate Social Responsibility
Community Community Chest events: Dress Casual Day, Skip Lunch Day and Green Day. The Commission Volunteers Group We provide staff with volunteering and engagement made a general call for donations in August 2016 opportunities to make a positive impact on the which exceeded its target of $15,000 to raise $17,300 community. We offer volunteering leave to encourage to fund a household renovation project (see sidebar on staff participation in community service. page 86). This year, 110 staff spent a total of 471 hours Donating used items to charities allows us to give back volunteering. Our staff engaged with different to the community and reduce wastage. This year, we members of the community, including minorities, the donated used personal computers (PCs), printers and single elderly and the intellectually challenged. servers to Caritas Hong Kong’s computer refurbishment Our staff also support community services through project which prolongs the lifecycle of computers and donations and fundraising events. This year, we raised accessories and reduces landfill usage. We participated a total of $70,648 through the Standard Chartered in the 2017 Suits for Success initiative organised by Marathon, a Christmas charity sale and three WiFA to donate professional clothing for young adults in need.
Volunteering for the community The Commission Volunteers Group (CVG) aims to funds to benefit the children who took part. More encourage a culture of volunteerism by organising significantly, the activity instilled in the children a sense activities for our staff. The group’s current and former of achievement. chairpersons discussed how they put CSR principles into Lie explained that each year CVG members try to come action. up with new ideas. Sometimes inspiration comes from previous events or community service, as when Lie visited a single elderly person and noticed the flat was in need of serious repair. He decided to take action to improve the living environments of those in need and this led to the CVG’s household renovation project (see sidebar on page 86).
Ignatius Lie and Shanice Kwan, current and former CVG chairpersons
According to the current CVG chairperson, Ignatius Lie, the group seeks to reach out to a variety of disadvantaged groups via activities which have a long- term impact. It also aims to increase staff’s sense Christmas charity sale of belonging and self-fulfilment while providing memorable experiences which encourage future Lie’s experience with the CVG taught him that people volunteering. need to make human connections. Just having a conversation with a needy person can make a greater During Shanice Kwan’s term as chairperson, she was difference than providing material things, he concluded. most proud of a Christmas fundraiser which involved Both Lie and Kwan are gratified that CVG activities are making festive gifts with needy children. All the gifts consistently oversubscribed, and they encouraged staff were bought up at an in-house charity sale, raising to spend even more time volunteering for the benefit of the community.
84 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 85
SFC Annual Report 2016-17 Report Annual SFC (see sidebar on page 86) 29 volunteers made Christmas ornaments together with needy for an in-house charity sale, children raising nearly $3,700 for the Hong of Kong Society for the Protection Children King’s 26 volunteers hiked from Reservoir and raised Tam Road to Tai $5,700 for Sunshine Action Outcome the from with members Together Hong Chi Association, 22 volunteers made sticky-rice dumplings for Hong 17 volunteers raised $1,800 Kong Dog Rescue donated blood for Nearly 50 staff Blood the Hong Kong Red Cross Service Transfusion 25 volunteers visited and delivered lucky bags to the elderly Mid-Autumn Sin in collaboration with Tai in Wong the Community Chest of Hong Kong 10 17 volunteers renovated households at So Uk Estate To raise funds for food and daily To necessities for orphans and street in Cambodia children To connect with the elderly To community enhance the quality and safety of To homes for those in need interact with and raise funds for To underprivileged children Purpose for opportunities more provide To socialisation for the intellectually challenged about animal raise awareness To welfare of the importance raise awareness To of maintaining a stable blood supply Making ornaments with needy children Hike for Hunger Household renovation project Household renovation Making Christmas gifts with children Blood donation home visit Elderly Making sticky-rice dumplings Making sticky-rice dumplings Boat to celebrate the Dragon Festival Dog walking Activity Mar 2017 Dec 2016 Nov 2016 Sep 2016 Jul 2016 Jul 2016 Month Jun 2016 Volunteering events Volunteering Corporate Social Responsibility Corporate SFC Annual Report 2016-17
Corporate Social Responsibility
Contributions
2016/17 2015/16 2014/15
Number of staff participating in volunteering activities 110 137 134 Total volunteering hours 471 548 558 Funds raised for community causes ($) 70,648 186,789 128,980 Corporate sponsorships for community causes# ($) 9,000 18,000 12,000
# Including donations in lieu of corporate gifts made in the names of guest speakers invited to our in-house training seminars. Certificate for Friends of the Earth’s Plant a Tree project
Homes get a makeover In November 2016, our volunteers teamed up with On renovation day, the volunteers put their skills to Repair Fairy, an external volunteering group, to take work painting internal walls, installing curtain rails part in the SFC’s first household renovation project. and fixing door locks. Installing flooring was the most Funded by an organisation-wide donation drive which demanding task, as it involved crouching or squatting raised $17,300, the project aimed to improve the living for more than five hours to chip away gravel, cement environments of low-income families and single elderly. over uneven areas and glue down tiles.
After attending a three-hour training session to learn Aside from acquainting volunteers with home repair basic home-improvement techniques, 17 volunteers skills, the project encouraged problem-solving and spent more than 150 hours refurbishing 10 homes teamwork. Most importantly, it achieved a meaningful at So Uk Estate, a public housing estate undergoing outcome for residents, and the most rewarding part redevelopment. of the day came when they were able to see the completed renovations.
86 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 87 1,035 12,191 25,933 2014/15 3,973,481 Organic Farm 4 1,008 11,831 26,048 2015/16 4,078,591 SFC Annual Report 2016-17 Report Annual SFC 1,130 10,857 30,852 2016/17 4,770,712 Walking the dog Walking organisation-wide policy pledging not to serve organisation-wide policy pledging not sharks’ fins at any SFC event. event by part in this annual energy conservation lights for one hour. to switch off encouraging staff No Shark Fins Policy: We have in place an have in No Shark Fins Policy: We we took Earth Hour 2017: This is the seventh year Consumption Paper (pieces/head) Electricity (kWh) Recycling Paper (kg) and printer Toner ink cartridges
Throughout the year, we engaged with our staff on we engaged with our staff the year, Throughout initiatives to raise awareness protection environmental These included an eco- about ecological sustainability. Tin and Yim Mangrove Coastal Wetlands O’s tour to Tai as well as a visit to the HKFYG Forest, organic food. Together for farming and producing with Friends of the Earth Hong Kong, we also planted of the Dongjiang River in the headstream 35 trees while of Jiangxi Province to enrich the biodiversity of water for Hong Kong. conserving a vital source Consumption and recycling Consumption and the workplace by beyond efforts green extend our We global Widesupporting the World Fund for Nature’s conservation and environmental warming prevention causes: A . Tai O eco-tour Tai Action’s campaign. Action’s expense claims, overseas travel records, pay slips, expense claims, overseas travel records, diaries leave applications, appraisals and paperless to save time and paper; hours; office course enrollment, conference room booking, room conference course enrollment, replacing paper holiday greeting cards with e-cards; cards holiday greeting paper replacing packets in support of Greeners red used recycling reducing electricity usage at our data centres; electricity reducing newspapers; bins for recycling providing sorting cans and bottles for recycling; using auto timers to adjust indoor lighting after using auto timers to adjust indoor lighting sharing meeting materials on tablet PC’s; for training processes using internal electronic Hong Kong Federation of Youth Groups. Hong Kong Federation of Youth
4 We adopt a number of green practices in our practices in our adopt a number of green We including workplace to drive smarter use of resources paper and power: and stakeholders. We encourage staff to reduce, reuse, reuse, reduce, to staff encourage We stakeholders. and our internal protocol, through and recycle repair the SFC “Green” at guide to working Being an environmentally-friendly organisation means Being an environmentally-friendly our impact on the and reduce we need to manage amongst staff awareness and raise green environment Environment Corporate Social Responsibility Corporate SFC Annual Report 2016-17
Corporate Social Responsibility
All in the family At another event, she joined children and teenagers from Po Leung Kuk for a tour at The Chinese University As part of our community engagement efforts, CSR of Hong Kong to learn about ecological sustainability activities are open to family members and friends of our and green living. Most importantly, Audrey was able staff. For three consecutive years, Audrey, aged seven, to share the experience with children from different joined CSR events along with her father, Henry To, backgrounds who provided her with a new perspective. Manager, Supervision of Markets.
“I would like my daughter to know that we all have social responsibility,” To related. “Also, these CSR events are great opportunities to spend quality time with my family while working together for a meaningful cause.”
For one CSR activity, Audrey visited Silverstrand Beach to clean up the shoreline together with her father and his colleagues. They collected a variety of items from bottle caps to styrofoam and shoes. It made a visible difference by the end of the day and brought home to Audrey the importance of keeping the environment clean. Beach clean-up
Workplace Staff wellness is essential for a more productive free on-site influenza vaccinations and health and healthier workforce. We launched a number of screening; and initiatives during the year to enhance wellness and health awareness in the workplace: talks on neck and back care, stress management and worksite ergonomics. introductory Thai boxing and fitness class; For more on our employee engagement and distribution of fitness bands to promote a healthy development opportunities, see Corporate living; Developments on pages 90-97.
sharing healthy lunch recipes;
Visiting an organic farm
88 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 89 SFC Annual Report 2016-17 Report Annual SFC Community Chest Skip Lunch Day Red packet recycling Earth Hour Massage day Hike for Hunger sharing Healthy lunch recipe HKFYG Organic Farm visit HKFYG Organic Farm influenza vaccinations and health on-site Free screening stress Health talk on neck and back care, management and worksite ergonomics So Uk Estate at project Household renovation Making Christmas gifts with children
January – March 2017 January – March October – December 2016 October – December CSR Activity Calendar CSR Activity Elderly home visit Elderly Community Chest Dress Casual Day Community Chest Dress O eco-tour Tai Blood donation day band distribution Fitness the dog for animals: Walk Care Making sticky-rice dumplings with the Hong Chi Making sticky-rice dumplings with the Association project Plant a Tree Community Chest Green Day Community Chest Green and fitness class Thai boxing Introductory
July – September 2016 April – June 2016 Corporate Social Responsibility Corporate SFC Annual Report 2016-17
Corporate Developments Developments
Building an efficient organisation driven by an effective and engaged workforce is crucial for us to carry out our regulatory work.
90 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 91 164 32.1 91% 2014/15 175 34.2 95% 2015/16 SFC Annual Report 2016-17 Report Annual SFC 31 198 95% 2016/17 “Ask Me Anything” luncheon series We continued our Leading with Effectiveness and with Effectiveness Leading our continued We which supports (LEAP) programme Professionalism teams. By helps build effective and employee growth our people managers had 78% of the end of the year, completed the programme. six graduate trainees we recruited During the year, in the eighth annual intake for our Graduate Trainee 38 summer and winter interns placed We Programme. in various divisions. performance outstanding acknowledge and reward To to strive for continuous and encourage our staff four individuals and 13 development, we recognised teams in our annual Employee Awards. Our Chief Executive Officer (CEO) communicated (CEO) Officer Our Chief Executive matters, discussed regulatory important organisational CEO regular questions at staff initiatives and addressed new senior management shared sharing sessions. Other Connection at Commission staff developments with Series events. engagement initiatives, As part of our employee of our “Ask Me Anything” we held two sessions with young professionals luncheon series to provide or concernsopportunities to raise ideas, suggestions a member of the Executive Committee. with directly and their career The senior management also shared kept personal journeys during the sessions, which are interaction among participants. small to foster greater # #
Including lectures, workshops and seminars. Including lectures, Number of employees who undertook e-learning Percentage of employees who participated in internal training Percentage hours of internalper employee training Average
# Training and e-learning Training China Securities Regulatory Commission, visits to counterparts in Shenzhen and Shanghai and regulatory themes. workshops on Mainland-related including financial products, regulatory changes and regulatory including financial products, market developments on the Mainland and overseas. to the also arranged secondments of 19 staff We To keep staff updated about the market and other keep staff To and issues, we invited local and overseas regulators to discuss a variety of topics industry professionals and organised briefing sessions to increase staff staff and organised briefing sessions to increase available resources. of awareness development, this year we launched a cross-divisional cross-divisional development, this year we launched a work their to broaden for staff exchange programme short-term internal secondments experience through courses, including workshops, seminars and training courses, including workshops, seminars programmes. for career a supportive environment provide To We offer training based on identified learning and offer We each employee development needs. During the year, learning 31 hours on structured spent an average of incorporates our core values – “professional”, values – “professional”, incorporates our core count”. and “people “proactive” of our staff and equipping them with the right of our staff for the SFC to knowledge and skills is important Our work in people development operate effectively. Professional development capabilities Continually enhancing the professional services to support our regulatory work. our regulatory services to support People our information technology systems up-to-date, our information technology our stakeholders in a timely communicating with legal a full range of manner and providing Our organisational support focuses on ensuring on ensuring support focuses Our organisational keeping used appropriately, are our resources Corporate Developments Corporate SFC Annual Report 2016-17
Corporate Developments
Mentoring talent The experience was also rewarding for Judith, who enjoyed guiding a new colleague to a better We introduced an organisation-wide mentoring understanding of the SFC’s operations. Advising Josie programme to enhance the professional and personal helped Judith look at things from different perspectives development of our staff. Over the course of a year, and improve her mentoring skills. committed senior staff met regularly with more junior colleagues to share their knowledge and experience. Mark Kong, Assistant Manager, developed confidence and polished his interpersonal skills through his We organised sharing sessions, workshops and other participation in the programme. He particularly events to create a supportive environment for mentors appreciated that his mentor, Guan Tan, Senior Manager, and mentees to connect. To keep the momentum going, was keen to share his institutional knowledge about the participants received regular newsletters with mentoring SFC and its role in the development of global financial tips. regulations.
Josie Chan, Manager, felt more engaged with her work For Guan, sharing his knowledge with new colleagues after hearing firsthand about the experiences of her was a gratifying experience. Because mentors were mentor, Judith Yuen, Associate Director. Being mentored paired up with mentees from different divisions, the also made Josie more self-aware and better prepared to programme fosters personal connections across the map out her career path. organisation. He encouraged more colleagues to take part in the future.
Judith Yuen and Josie Chan Mark Kong and Guan Tan
Breakdown of staff
As at 31.3.2017 As at 31.3.2016 As at 31.3.2015 As at 31.3.2014 Actual Budget Actual Budget Actual Budget Actual Budget
Professional 677 729 651 698 608 666 571 610
Support 190 188 190 195 185 186 182 184
Total 867 917 841 893 793 852 753 794
Employee statistics
As at As at As at 31.3.2017 31.3.2016 31.3.2015
Male 283 278 258
Female 584 563 535
Average years of service 7.7 7.2 7
Female staff at Senior Manager grade or above 59% 59% 57%
92 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 93
SFC Annual Report 2016-17 Report Annual SFC Basketball Supervisory Cup Badminton Tournament information from online media and other regulators online media and other regulators information from users’ preferences. to according system to receive information directly from licensed from information directly system to receive SFC Online corporations and fund houses via the internal processes; Portal and standardise within the enhance the sharing of case information organisation; and efficiently; information more A revamped investment product authorisation authorisation investment product A revamped to A new enterprise case management system tool to look up search and centre A new search to collect financial market An internal news centre
To meet rising demand, we broadened access to demand, we broadened meet rising To to facilitate our daily online information resources our in-house library expanded work. During the year, legal its collection of specialised financial and databases and digitalised amendments to research which were Ordinance the Securities and Futures 2017, online. As of end-March unavailable previously databases. to 60 electronic we subscribed Technology Enhancing efficiency of information a number This year we introduced (also see sidebar on efficiency to increase systems page 94):
, United 2 Basketball Supervisory Cup organised activities for all 1 Team building Team The SFC Women’s Network aims to enhance professional development and inspire women for leadership roles. women development and inspire Network aims to enhance professional The SFC Women’s and targeted platform for men to a systematic approach gender equality by providing the HeForShe initiative promotes by UN Women, Created engage and become change agents.
1 2 environment for post-natal employees where for post-natal employees where environment practicable. In support of the breastfeeding-friendly workplace In support of the breastfeeding-friendly and friendly an appropriate initiative, we provide corporate governance as well as HeForShe gender equality in Nations (UN) initiative to promote the workplace. Our Women’s Network Our Women’s health, of topics, including women’s on a variety staff and personal branding. We executive presence event on in Finance Asia (WiFA) supported a Women in basketball and badminton tournaments with fellow regulators. divisional and cross-grade opportunities for staff to for staff opportunities divisional and cross-grade our teambuilding activities mingle. During the year, as dragon boat races as well included participation in safe, quality work environment. inter- a sense of belonging through promote We in addition to other cross- organisational activities As an equal opportunity employer and an employer of As an equal opportunity practices that foster employment choice, we promote rights as well as a for employees’ diversity and respect Quality workplace Corporate Developments Corporate SFC Annual Report 2016-17
Corporate Developments
Information security To ensure that information is shared appropriately and effectively on an as-needed basis, we introduced guidelines for sharing case information across the organisation and updated our information security policy accordingly. Our information system security was also enhanced to protect us from unauthorised access and cyber attacks. Separately, we provided an e-learning course to increase staff awareness of information security and the risks of using internet and electronic communications. Dragon boat race
Advancing with technology
Following a recent strategic review to ensure our efficient manner. To address this, we provided new information technology resources remain aligned with electronic platforms and upgraded case management our regulatory mission, we took a number of steps systems which support more efficient information to more fully integrate our systems across the entire retrieval and promote collaboration. In addition, we organisation, streamline our operational processes, revamped our intranet to make it more user-friendly and support internal collaboration and upgrade our provide additional utilities, including a news centre and investigatory and supervisory capabilities. a more powerful search tool.
Having a robust information technology strategy Another new system helps analyse the growing number helps us quickly introduce new systems when market of paper and electronic documents generated by the conditions or practices change, as when we developed increased volume and complexity of our enforcement technical infrastructure and made system enhancements and legal actions. As the volume and types of to monitor trading conducted through the new stock information we handle will no doubt increase, we are market connections with Shanghai and Shenzhen. focusing more on how to improve the processes for submitting information to us electronically, including One major challenge we face is the need to share through the SFC Online Portal, to ensure timeliness, information across the organisation in a secure and accuracy, efficiency and ease of use.
Our internal systems handle Our surveillance system monitors 30,000
100 million new applications and market orders each day investigations each year +22% +10% document management e-submissions via system utilisation the SFC Online Portal
94 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 95 10% 7.6% 0.7% 81.7% 2014/15 . 4 0.6% 0.5% 8.1% 90.8% 2015/16 SFC Annual Report 2016-17 Report Annual SFC 0.5% 14.4% 74.6% 10.5% 2016/17 Net investment income Others Levies Fees and charges annual review of our internal controls conducted by of our internal controls annual review banking and an independent external firm covered financial transaction analysis investment procedures, and led to subsequent processes, and recruitment and procedures policies related to revisions Income income for the year was $1,363 million, down Total million a year ago. Due to lower $1,622 16% from dropped our levy income securities market turnover, Our year. by 31% to $1,017 million in the current by 8%, from fees and charges increased income from mainly $132 million last year to $143 million this year, attributable to higher licensing application fees and We takeovers and mergers document fees received. of income as a result higher net investment recorded the better performance of our equity fund investments. Income breakdown Finance Funding operationally independent of the Government are We levies and funded mainly by transaction and are levy rate The current market participants. fees from transactions, which is is 0.0027% for securities rate of 0.0125% when the initial significantly less than mechanism was set up in 1989. the transaction levy our fees and charges since 1994. revised have not We for annual waivers we have offered Additionally, waiver current licensing fees four times since 2009. The two years beginning 1 April 2016. for is in effect follow a As a publicly-funded organisation, we in drawing up our budget. We disciplined approach appoint external investment managers to manage to investment guidelines according our reserves the This year, the Financial Secretary. by approved
and quarterly . 3 Annual Report 2015-16 See Stakeholder communication on pages 77-80. See Corporate Governance on page 25.
3 4 engagements and responded to 6,532 general engagements and responded enquiries orally or in writing and consultation conclusions during the year. We also We during the year. and consultation conclusions published our we took part in 85 speaking Additionally, reports. To help the industry and the public better understand To our work as well as specific topical issues, we issued andpublications industry-related 13 releases, press 134 as well as six consultation papers 74 industry circulars website (www.sfc.hk) provides timely and easily provides website (www.sfc.hk) accessible public information. enhances the transparency of our operations and enhances the transparency public understanding of our regulatory promotes actions and policies. Our constantly updated corporate parties through different channels. Our press office’s office’s channels. Our press different parties through engagement with the media, which includes proactive enquiries and issues management, handling press Communications active communications with external emphasise We Association to conduct an ergonomic assessment of Association to conduct an ergonomic and results selected workstations in late 2016. The in April 2017. staff with shared were recommendations To assess the suitability of our existing office furniture, of our existing office assess the suitability To Physiotherapy we appointed the Hong Kong plan addressing readily identifiable risks, including readily plan addressing natural disasters and other fires, technical problems, emergencies, is also in place. Our office access controls safeguard against unauthorised safeguard access controls Our office properly Access rights are premises. entry to our office resumption assigned and closely managed. A business upgraded audio-visual equipment. Secure workplace projected operational requirements. To keep our To operational requirements. projected safe, we workplaces well-equipped and occupationally and maintenance work and repair carried out office needs are met. During the year, we completed a we completed met. During the year, needs are looked into and premises office of our review rent alternative scenarios to cater for accommodation Corporate resources including our corporate resources, review regularly We that our operational to ensure space requirements, Administration Corporate Developments Corporate SFC Annual Report 2016-17
Corporate Developments
Expenditure Income vs market turnover (2014/15-2016/17) The costs of our operations were $1,719 million, Income Market turnover $140 million below our original budget of ($ million) ($ million) $1,859 million. Over the past three years, our 2,000 100,000 staff costs increased 34% while our regulatory 1,600 80,000 work increased in both volume and complexity (see chart on page 97). 1,200 60,000
Expenditure breakdown 800 40,000
400 20,000 2016/17 2015/16 2014/15
0 0 Staff costs 69.9% 69.3% 68.3% 2014/15 2015/16 2016/17
Premises and related 15.1% 15.6% 15.9% Levy Fees and charges Net investment income
expenses Average daily market turnover
Other expenses 12.3% 11.9% 12%
Depreciation 2.7% 3.2% 3.8% Income and operating expenses (2014/15-2016/17) $ million 1,800 1,719 1,622 The ratio of average expenses to income for the past 1,586 1,600 1,457 1,381 1,363 three years was 109%. In the same period, the average 1,400 increase in expenses and income was 9% and 6% 1,200 respectively. 1,000 800 Owing to the reduction in income, we recorded a 600 deficit of $356 million for the year, compared to a 400 surplus of $36 million last year. As of 31 March 2017, 200 our reserves stood at $6.9 billion, of which $3 billion 0 was set aside for possible future acquisition of office 2014/15 2015/16 2016/17 premises. Income Operating expenses
Finances
2016/17 2015/16 2014/15 2013/14
Income ($ million) 1,363 1,622 1,381 1,200
Expenses including depreciation ($ million) 1,719 1,586 1,457 1,339
(Deficit)/Surplus ($ million) (356) 36 (76) (139)
96 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 97 / 41% market against activities Complaints intermediaries SFC- products 117% renminbi SFC Annual Report 2016-17 Report Annual SFC authorised investment SFC- funds 57% domiciled authorised Hong Kong- 61% Circulars to industry 63% trading services Automated new activity 20% regulated to conduct disclosure requirements, as well as on administrative as well as on requirements, disclosure procurement and employment including affairs it contributed to a number of contracts. This year, key policy initiatives including the Manager-In-Charge the consultation on online distribution and and regime advisory platforms for investment products. our Legislative drafting work is crucial to keep sync with market developments. During in regulations legal support facilitated the enactment the year, of a new of legislation to enable the introduction in Hong Kong open-ended fund company structure contracts limits and as well as rule changes regarding short positions. Applications 26% Licensed corporations 70% handled activities Takeovers Listing 30% reviewed applications 57% records Requests for trading and account 85% completed Investigations Staff Three-year change in staff costs and regulatory activities (2013/14-2016/17) activities costs and regulatory change in staff Three-year costs 34% % 0% . 60% 40% 20% 80% 5 100 120% See Enforcement on pages 63-71. See Enforcement
5 enforcement investigations and compliance with enforcement the MMT guidance and advice provides it work, day-to-day our In matters such as licensing, takeovers, on regulatory against the SFC. Of the matters it handled during the against the SFC. Of the matters it handled in litigation, including 18 civil cases, resulted 43 year, and 10 cases in nine criminal cases, six judicial reviews criminal cases and manages civil litigation and Market criminal cases and manages civil litigation initiated by the SFC, (MMT) cases Misconduct Tribunal and other cases brought and defends judicial reviews Legal support range of Our in-house legal team performs a full and conducts services to support our work. It prepares Corporate Developments Corporate SFC Annual Report 2016-17
Securities and Futures Commission
Independent auditor’s report to the Securities and Futures Commission (Established in Hong Kong under the Securities and Futures Commission Ordinance)
Opinion Basis for opinion We have audited the consolidated financial statements We conducted our audit in accordance with Hong Kong of Securities and Futures Commission (the SFC) and its Standards on Auditing (HKSAs) issued by the HKICPA. subsidiaries (the Group) set out on pages 102 to 125, which Our responsibilities under those standards are further comprise the consolidated statement of financial position described in the Auditor’s responsibilities for the audit of as at 31 March 2017, the consolidated statement of profit the consolidated financial statements section of our report. or loss and other comprehensive income, the consolidated We are independent of the Group in accordance with the statement of changes in equity and the consolidated cash HKICPA’s Code of Ethics for Professional Accountants (the flow statement for the year then ended and notes to the Code) and we have fulfilled our other ethical responsibilities consolidated financial statements, including a summary of in accordance with the Code. We believe that the audit significant accounting policies. evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position Key audit matters of the Group as at 31 March 2017 and of its consolidated financial performance and its consolidated cash flows Key audit matters are those matters that, in our for the year then ended in accordance with Hong Kong professional judgement, were of most significance in Financial Reporting Standards (HKFRSs) issued by the Hong our audit of the consolidated financial statements of Kong Institute of Certified Public Accountants (HKICPA). the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
98 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 99 SFC Annual Report 2016-17 Report Annual SFC in performing independent valuations for all financial in performing independent valuations for profit through value as at fair designated instruments the or loss and comparing these valuations with 1 financial instruments, valuations. For Level Group’s fair the our internal valuation specialists compared with publicly available values applied by the Group our market data. For Level 2 financial instruments, models, independent valuations included developing the obtaining inputs independently and verifying inputs; and “held-to-maturity” classification for certain debt inspection of movements in investments through the “held-to-maturity” portfolio and on-going the Group’s communication with management about intention to hold the “held-to-maturity” investments to maturity. by the external auditors of the Group’s external by the external auditors of the Group’s design, investment managers who assessed the of implementation and operating effectiveness over the investment managers’ internal controls sales and investment authorisation, purchases, payments and evaluating the auditors’ reputation, independence; competence and professional engaging our internal our engaging us assist to specialists valuation of the appropriateness the ongoing assessing inspecting the internal control reports prepared prepared reports inspecting the internal control
How the matter was addressed in our audit addressed How the matter was and the valuation to address Our audit procedures the following: classification of investments included to-maturity investments. significance in the context of the consolidated financial of management of the degree because statements and judgement involved in classifying debt investments as held- We identified assessing the valuation and classification We of investments as a key audit matter because of their For held-to-maturity investments, management is required required is For held-to-maturity investments, management to hold such to demonstrate their intention and ability to classify these debt investments to maturity in order investments as held-to-maturity investments. inputs are obtained from readily available data for liquid readily obtained from inputs are markets. designated as at fair value through profit or loss is based on profit designated as at fair value through models which a combination of market data and valuation theseof Many inputs. of number considerable a require often total value of HK$30 million which were designated as total value of HK$30 million which were held-to-maturity investments. debt and equity investments The valuation of the Group’s which HK$942 million and HK$716 million were classified were which HK$942 million and HK$716 million Level 1 and 2 financial as under the fair value hierarchy and debt investments with a instruments respectively, The investment portfolio comprised debt and equity The investment portfolio comprised debt million which investments with a total value of HK$1,658 or loss, of profit at fair value through designated as were As at 31 March 2017 the aggregate value of the Group’s value of the Group’s 2017 the aggregate As at 31 March which investment portfolio was HK$1,688 million, of consolidated assets as at that date. 24% represented The Key Audit Matter (Established in Hong Kong under the Securities and Futures Commission Ordinance) under the Securities and Futures (Established in Hong Kong and classification of investments the valuation Assessing accounting policies on page 109. financial statements and the 20(e) to the consolidated and Refer to notes 9, 10 Independent auditor’s report to the Securities and Futures Commission (continued) and Futures Commission auditor’s report to the Securities Independent Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Independent auditor’s report to the Securities and Futures Commission (continued) (Established in Hong Kong under the Securities and Futures Commission Ordinance)
Information other than the consolidated Auditor’s responsibilities for the audit of financial statements and auditor’s report the consolidated financial statements thereon Our objectives are to obtain reasonable assurance about The directors are responsible for the other information. The whether the consolidated financial statements as a whole other information comprises all the information included are free from material misstatement, whether due to fraud in the annual report, other than the consolidated financial or error, and to issue an auditor’s report that includes our statements and our auditor’s report thereon. opinion. This report is made solely to you, as a body, and for no other purpose. We do not assume responsibility Our opinion on the consolidated financial statements does towards or accept liability to any other person for the not cover the other information and we do not express any contents of this report. form of assurance conclusion thereon. Reasonable assurance is a high level of assurance, but is In connection with our audit of the consolidated financial not a guarantee that an audit conducted in accordance statements, our responsibility is to read the other with HKSAs will always detect a material misstatement information and, in doing so, consider whether the other when it exists. Misstatements can arise from fraud or information is materially inconsistent with the consolidated error and are considered material if, individually or in the financial statements or our knowledge obtained in the aggregate, they could reasonably be expected to influence audit or otherwise appears to be materially misstated. the economic decisions of users taken on the basis of these consolidated financial statements. If, based on the work we have performed, we conclude that there is a material misstatement of this other As part of an audit in accordance with HKSAs, we information, we are required to report that fact. We have exercise professional judgement and maintain professional nothing to report in this regard. scepticism throughout the audit. We also:
Responsibilities of the directors for the Identify and assess the risks of material misstatement of the consolidated financial statements, whether consolidated financial statements due to fraud or error, design and perform audit The directors are responsible for the preparation of the procedures responsive to those risks, and obtain audit consolidated financial statements that give a true and fair evidence that is sufficient and appropriate to provide view in accordance with HKFRSs issued by the HKICPA a basis for our opinion. The risk of not detecting and for such internal control as the directors determine a material misstatement resulting from fraud is is necessary to enable the preparation of consolidated higher than for one resulting from error, as fraud financial statements that are free from material may involve collusion, forgery, intentional omissions, misstatement, whether due to fraud or error. misrepresentations or the override of internal control.
In preparing the consolidated financial statements, the Obtain an understanding of internal control relevant directors are responsible for assessing the Group’s ability to the audit in order to design audit procedures that to continue as a going concern, disclosing, as applicable, are appropriate in the circumstances but not for the matters related to going concern and using the going purpose of expressing an opinion on the effectiveness concern basis of accounting unless the directors either of the Group’s internal control. intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates The directors are assisted by the Audit Committee in and related disclosures made by the directors. discharging their responsibilities for overseeing the Group’s financial reporting process.
100 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 101 SFC Annual Report 2016-17 Report Annual SFC
communication. in this on the audit resulting The engagement partner Oldenziel. is Arend report independent auditor’s KPMG Certified Public Accountants Building Prince’s 8th Floor, 10 Chater Road Central, Hong Kong 23 May 2017 We also provide the Audit Committee with a statement the Audit Committee provide also We ethical requirements with relevant that we have complied them with independence and communicate regarding and other matters that may reasonably all relationships our independence and, where be thought to bear on safeguards. applicable, related Committee,Audit the with matters communicated the From of most significance we determine those matters that were statements of the in the audit of the consolidated financial the key audit matters. We therefore period and are current unless law or report describe these matters in our auditor’s about the matter or public disclosure precludes regulation a that determine we circumstances, rare extremely in when, because our report matter should not be communicated in be reasonably the adverse consequences of doing so would of such benefits expected to outweigh the public interest responsible for our audit opinion. responsible the financial information of the entities or business the financial information an opinion to express activities within the Group on the consolidated financial statements. We supervision and for the direction, responsible are solely remain audit. We performance of the group content of the consolidated financial statements, the content of whether the and including the disclosures, the consolidated financial statements represent that underlying transactions and events in a manner achieves fair presentation. statements or, if such disclosures are inadequate, to are if such disclosures statements or, based on modify our opinion. Our conclusions are of our the audit evidence obtained up to the date events or conditions future However, report. auditor’s to continue as a going to cease may cause the Group concern. a material uncertainty exists related to events or a material uncertainty exists related on the conditions that may cast significant doubt a going concern. ability to continue as If we Group’s we are conclude that a material uncertainty exists, to report attention in our auditor’s to draw required in the consolidated financial disclosures the related use of the going concernof accounting and, basis evidence obtained, whether based on the audit Obtain sufficient appropriate audit evidence regarding audit evidence regarding appropriate Obtain sufficient Evaluate the overall presentation, structure and structure Evaluate the overall presentation, Conclude on the appropriateness of the directors’ of the directors’ Conclude on the appropriateness
during our audit. We communicate with the Audit Committee regarding, Committee regarding, communicate with the Audit We among other matters, the planned scope and timing of findings, including any the audit and significant audit that we identify significant deficiencies in internal control (cont’d) (Established in Hong Kong under the Securities and Futures Commission Ordinance) under the Securities and Futures (Established in Hong Kong audit for the responsibilities Auditor’s financial statements of the consolidated Independent auditor’s report to the Securities and Futures Commission (continued) and Futures Commission auditor’s report to the Securities Independent Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Consolidated statement of profit or loss and other comprehensive income For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
Note 2017 2016 $’000 $’000 Income Levies 2(a) 1,017,453 1,472,476 Fees and charges 142,990 132,078
Investment income 5 202,623 13,791 Less: custody and advisory expenses (5,894) (3,424) Investment income net of third party expenses 196,729 10,367 Recoveries from Investor Compensation Fund 5,574 5,398 Other income 6 525 2,006 1,363,271 1,622,325 Expenses Staff costs and directors’ emoluments 7 1,201,936 1,098,575 Premises Rent 208,744 202,097 Rates, management fees and others 49,888 46,159 Other expenses 8 211,594 188,691 Depreciation 11(a) 46,749 50,456 1,718,911 1,585,978
(Loss)/surplus and total comprehensive income for the year (355,640) 36,347
The notes on pages 107 to 125 form part of these financial statements.
102 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 103 – – 2016 8,405 $’000 25,847 42,840 25,649 73,247 30,009 121,969 130,374 654,585 122,458 103,256 461,781 7,234,700 7,277,540 7,303,387 7,277,540 7,200,131 7,330,505 6,066,032 – 2017 9,210 $’000 34,164 42,840 75,462 63,455 63,455 30,003 128,218 137,428 716,403 941,911 158,450 SFC Annual Report 2016-17 Report Annual SFC 3,000,000 3,879,060 6,921,900 6,956,064 6,921,900 6,892,609 7,030,037 5,107,808 9 9 16 22 14 12 10 10 15 12 11(a) Note Ashley Alder Chief Executive Officer Creditors and accrued charges Creditors Fees received in advance Fees received Fixed deposits with banks hand Cash at bank and in Held-to-maturity debt securities or loss profit through Financial assets designated at fair value Debtors, deposits and prepayments Held-to-maturity debt securities Held-to-maturity debt Fixed assets Carlson Tong Chairman Approved and authorised for issue by the SFC on 23 May 2017 and signed on its behalf by Approved Reserve for property acquisition Reserve for property Accumulated surplus Initial funding by Government Net assets Funding and reserves Total assets less current liabilities assets less current Total liabilities Non-current assets Net current
Current liabilities Current
Debt securities Debt funds Pooled
assets Current
The notes on pages 107 to 125 form part of these financial statements. The notes on pages 107 to Non-current assets Non-current At 31 March 2017 (Expressed in Hong Kong dollars) in Hong 2017 (Expressed At 31 March Consolidated statement of financial position Consolidated Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Statement of financial position At 31 March 2017 (Expressed in Hong Kong dollars)
Note 2017 2016 $’000 $’000 Non-current assets Fixed assets 11(b) 63,167 72,701 Held-to-maturity debt securities 9 – 30,009 63,167 102,710 Current assets Held-to-maturity debt securities 9 30,003 461,781 Financial assets designated at fair value through profit or loss Debt securities 10 716,403 – Pooled funds 10 941,911 654,585 Debtors, deposits and prepayments 15 158,516 134,872 Fixed deposits with banks 5,107,808 6,066,032 Cash at bank and in hand 71,262 5,058 7,025,903 7,322,328 Current liabilities Fees received in advance 9,210 8,405 Creditors and accrued charges 123,796 113,246 133,006 121,651
Net current assets 6,892,897 7,200,677
Total assets less current liabilities 6,956,064 7,303,387 Non-current liabilities 14 34,164 25,847 Net assets 6,921,900 7,277,540 Funding and reserves Initial funding by Government 16 42,840 42,840 Reserve for property acquisition 22 3,000,000 – Accumulated surplus 3,879,060 7,234,700 6,921,900 7,277,540
Approved and authorised for issue by the SFC on 23 May 2017 and signed on its behalf by
Carlson Tong Ashley Alder Chairman Chief Executive Officer
The notes on pages 107 to 125 form part of these financial statements.
104 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 105 – Total $’000 36,347 (355,640) 7,241,193 7,277,540 6,921,900 $’000 36,347 SFC Annual Report 2016-17 Report Annual SFC surplus (355,640) 7,198,353 7,234,700 3,879,060 (3,000,000) Accumulated – – – – $’000 property 3,000,000 3,000,000 Reserve for acquisition – – – $’000 Initial 42,840 42,840 42,840 funding by funding Government The notes on pages 107 to 125 form part of these financial statements. The notes on pages 107 to Transfer to reserve for property acquisition for property to reserve Transfer income for the year Loss and total comprehensive 2017 Balance at 31 March Surplus and total comprehensive income for the year Surplus and total comprehensive 1 April 2016 2016 and Balance at 31 March Balance at 1 April 2015 For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 Consolidated statement of changes in equity statement of changes in Consolidated Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Consolidated cash flow statement For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
Note 2017 2016 $’000 $’000 Cash flows from operating activities (Loss)/surplus for the year (355,640) 36,347 Adjustments for: Depreciation 46,749 50,456 Investment income (202,623) (13,791) Exchange difference (2,069) (944) Loss/(gain) on disposal of fixed assets 7 (14) (513,576) 72,054 (Increase)/decrease in debtors, deposits and prepayments (26,861) 25,351 Increase/(decrease) in fees received in advance 805 (372) Increase/(decrease) in creditors and accrued charges 6,249 (88) Increase in non-current liabilities 8,317 4,478 Net cash (used in)/generated from operating activities (525,066) 101,423 Cash flows from investing activities Decrease/(increase) in fixed deposits other than cash and cash equivalents 63,022 (1,340,718) Interest received 68,786 72,733 Debt securities designated at fair value through profit or loss purchased (1,449,334) – Debt securities designated at fair value through profit or loss sold or redeemed 726,299 – Pooled funds purchased (155,133) – Pooled funds sold 2,448 2,532 Held-to-maturity debt securities redeemed at maturity 460,553 616,372 Fixed assets purchased (36,964) (34,830) Fixed assets sold – 280 Net cash used in investing activities (320,323) (683,631)
Net decrease in cash and cash equivalents (845,389) (582,208) Cash and cash equivalents at beginning of the year 1,522,116 2,104,324 Cash and cash equivalents at end of the year 12 676,727 1,522,116
Analysis of the balance of cash and cash equivalents
2017 2016 $’000 $’000 Fixed deposits with banks 601,265 1,496,467 Cash at bank and in hand 75,462 25,649 676,727 1,522,116
The notes on pages 107 to 125 form part of these financial statements.
106 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 107 SFC Annual Report 2016-17 Report Annual SFC Basis of preparation historical cost as the measurement basis except that historical cost as the measurement profit financial assets designated at fair value through value (see note 3(h)). stated at their fair or loss are consistentlyThe accounting policies have been applied entities. by the Group the financial statements in conformity prepare We management to make with HKFRSs which require the that affect judgements, estimates and assumptions assets,of amounts reported and policies of application make estimates expenses. We liabilities, income and and associated assumptions based on historical believed experience and various other factors that are the results under the circumstances, to be reasonable of which form the basis of making the judgements about carrying values of assets and liabilities that are Actual results other sources. from apparent not readily these estimates. from may differ the estimates and underlying assumptions review We the revisions recognise on an ongoing basis. We period in which the to accounting estimates in the only that affects if the revision revised estimates are and future of the revision the period period, or in and future both current affects periods if the revision periods. The HKICPA has issued certain new and revised has issued certain new and revised The HKICPA for early or available first effective HKFRSs that are accounting period of the adoption for the current on any information Note 3(q) provides Group. initial from policies resulting changes in accounting developments to the extent that application of these and for the current to the Group relevant they are in these financial prior accounting periods reflected statements. or standard have not applied any new We for the current effective that is not yet interpretation accounting period (see note 23). the these financial statements using prepared have We (b) services according to the provision of subsidiary to the provision services according legislation. Kong Limited (SEHK) and Hong Kong Futures Kong Limited (SEHK) and Hong Kong Futures Exchange Limited (HKFE) on transactions Exchanges at rates specified by on the recorded the Chief Executive in Council. levies collected by The Stock Exchange of Hong levies collected by The Stock Exchange of to its functions and fees and charges in relation Statement of compliance Financial Reporting Standards, Hong Kong Accounting Financial Reporting Standards, issued by the and Interpretations (HKASs) Standards Hong Kong Institute of Certified Public Accountants and accounting principles generally accepted (HKICPA) in Hong Kong. Significant accounting policies adopted set out below. are by the Group These financial statements have been prepared in These financial statements have been prepared with all applicable Hong Kong Financial accordance (HKFRSs), which collective Reporting Standards Hong Kong term includes all applicable individual The SFC also generates investment income from fixed The SFC also generates investment income from deposits, debt securities and pooled funds. (a) (b) Details of the funding of the SFC are set out in Details of the funding of the SFC are Major Sections 394 to 396 of the SFO. Section 14 and of funding include: sources awareness in Hong Kong’s securities, futures and securities, futures in Hong Kong’s awareness the performing its duty, financial markets. In related of the public to act in the interest SFC is required activities market and illegal that improper and ensure and office The registered investigated. properly are 35/F Cheung principal place of business of the SFC is Road Central, Hong Kong. 2 Queen’s Kong Center, The Securities and Futures Commission (SFC) is The Securities and Futures governed Part II of the Hong Kong Securities and by SFO, the SFC has (SFO). Under the Ordinance Futures and transparent fair efficient, an a duty to ensure confidence and investor public market and to promote Significant accounting policies Status and principal activities Status and principal (a) 3. 2. Income For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 1. Notes to the consolidated financial statements Notes to the Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Notes to the consolidated financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
3. Significant accounting policies (cont’d) (e) Operating leases We treat the rent payable under operating leases as (c) Basis of consolidation an expense in equal instalments over the accounting Subsidiaries are entities controlled by the SFC. The SFC periods covered by the lease term. We recognise lease controls an entity when it is exposed, or has rights, to incentives received in the statement of profit or loss variable returns from its involvement with the entity and other comprehensive income as an integral part and has the ability to affect these returns through its of the aggregate net lease payments made. power over the entity. When assessing whether the SFC has power, only substantive rights are considered. (f) Employee benefits An investment in a subsidiary is consolidated into the We make accruals for salaries and allowances, annual consolidated financial statements from the date that leave and contributions to defined contribution control commences until the date that control ceases. schemes in the year in which the associated services are rendered by employees. Other benefits for (d) Recognition of income services received are accrued when a contractual or constructive obligation arises for the Group. We recognise income in the statement of profit or loss and other comprehensive income provided it is probable that the economic benefits will flow to the (g) Fixed assets and depreciation Group and we can measure reliably the revenue and We state fixed assets at cost less accumulated costs. We record our income as follows: depreciation and any impairment losses (see note 3(o)). We charge depreciation to the statement of profit or loss and other comprehensive income (i) Levies to write off the costs of fixed assets using the We record levies from SEHK and HKFE as income on straight-line method over the estimated useful lives as an accrual basis. follows:
(ii) Fees and charges Leasehold improvements – 5 years or, if shorter, We record annual fees as income on a straight-line the life of the respective basis over the periods to which they relate. We record leases other fees and charges as income when they are Furniture and fixtures – 3 to 5 years receivable. Office equipment – 5 years Personal computers and – 3 years (iii) Interest income software We record interest income as it accrues using the Computer application – 4 years systems effective interest method. It comprises (a) interest earned on bank deposits and debt securities; and Motor vehicles – 4 years (b) the amortisation of premiums or discounts on purchases of held-to-maturity debt securities. We capitalise subsequent expenditure only when it increases the future economic benefits embodied in (iv) Revaluation gain/loss the fixed assets. We recognise all other expenditure in the statement of profit or loss and other Gains and losses from changes in fair value of comprehensive income as an expense as incurred. financial assets are recognised in profit or loss as they arise. We recognise gains or losses arising from the retirement or disposal of an item of fixed assets, being the difference between the net disposal proceeds and the carrying amount of the item, in the statement of profit or loss and other comprehensive income on the date of retirement or disposal.
108 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 109 SFC Annual Report 2016-17 Report Annual SFC is determined based on the Group’s share in the share is determined based on the Group’s by the net assets of the equity funds as determined custodian. the contractual when a financial asset derecognise We the financial the cash flows from rights to receive the financial asset together with or where asset expire of ownership substantially all the risks and rewards have been transferred. the financial assets and financial liabilities offset We the net amount in the statement of and report is a legally enforceable there financial position where is an amounts and there the recognised right to offset the asset intention to settle on a net basis, or realise simultaneously. and settle the liability We use settlement date accounting to record regular regular record settlement date accounting to use We we date, this From assets. sale of financial or purchase losses arising from in our books any gains and record fair at held assets financial the of value fair in changes or loss. profit value through of financial instruments determine the fair value We a recognised based on their quoted market prices on for a broker/dealer stock exchange or a price from at the non-exchange-traded financial instruments without any deduction period end of the reporting costs. Financial assets are selling for estimated future while financial liabilities bid prices, priced at current Unlisted equity asking prices. priced at current are The fair value funds. in equity shares investments are Fair value measurement principles (iii) Derecognition (iv) Offsetting (ii) (cont’d) Financial instruments and intention to hold to maturity are classified as and intention to hold to maturity are held-to-maturity securities. Held-to-maturity securities stated at amortised cost less impairment losses are (see note 3(o)). income. The net gain or loss recognised in the income. The net gain or loss recognised or loss and other comprehensive statement of profit earned on these income does not include any interest accordance in recognised investments as these are with the policies set out in note 3(d)(iii). Dated debt securities that we have the positive ability profit or loss upon initial recognition and classified or loss upon initial recognition profit transaction costs assets. Any attributable as current or loss and in the statement of profit recognised are At the end income as incurred. other comprehensive period the fair value is remeasured, of each reporting in the recognised being gain or loss with any resultant or loss and other comprehensive statement of profit below. These investments are subsequently accounted These investments are below. for as follows, depending on their classification: funds that Investments in debt securities and equity internally on a we manage, evaluate and report at fair value through designated fair value basis are price unless it is determined that the fair value at price unless it is determined that the fair price the transaction from differs initial recognition price and that fair value is evidenced by a quoted or liability in an active market for an identical asset only data based on a valuation technique that uses includes attributable observable markets. Cost from indicated otherwise where transaction costs, except for which the assets were acquired. The categories acquired. for which the assets were or loss, held-to-maturity, profit fair value through are: financial liabilities. and other loans and receivables funds are Investments in debt securities and equity transaction initially stated at fair value, which is their We classify our financial instruments into different our financial instruments into different classify We on the purpose categories at inception, depending Initial recognition Significant accounting policies Significant accounting (h) (i) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 3. Notes to the consolidated financial statements Notes to the Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Notes to the consolidated financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
3. Significant accounting policies (cont’d) Close members of the family of a person are those family members who may be expected to influence, (i) Related parties or be influenced by, that person in their dealings For the purpose of these financial statements, we with the entity. As the SFC is a statutory body with consider that the following are related parties of the its Board members appointed by the Chief Executive Group: of the Government of the Hong Kong Special Administrative Region under the SFO, any transactions (a) A person, or a close member of that person’s with other government departments and agencies family, is related to the Group if that person: under normal dealings are not necessarily regarded as related party transactions in the context of HKAS 24 (i) has control or joint control over the Group; Related party disclosures. (ii) has significant influence over the Group; or (j) Translation of foreign currencies (iii) is a member of the key management We translate foreign currency transactions during the personnel of the Group. year into Hong Kong dollars at the exchange rates (b) An entity is related to the Group if any of the ruling at the transaction dates. We translate monetary following conditions applies: assets and liabilities denominated in foreign currencies into Hong Kong dollars at the exchange rates ruling (i) the entity and the Group are members of at the end of the reporting period. We recognise the same group (which means that each exchange gains and losses on translation in the parent, subsidiary and fellow subsidiary is statement of profit or loss and other comprehensive related to the others). income.
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint (k) Debtors and other receivables venture of a member of a group of which We state debtors and other receivables initially at the other entity is a member). their fair value and thereafter at amortised cost less impairment losses. We review the carrying amount (iii) Both entities are joint ventures of the same of debtors and other receivables at the end of third party. each reporting period to determine whether there is objective evidence of impairment. If any such (iv) One entity is a joint venture of a third entity evidence exists, we reduce the carrying amount to and the other entity is an associate of the the estimated recoverable amount by means of a third entity. charge to the statement of profit or loss and other (v) The entity is a post-employment benefit comprehensive income (see note 3(o)). plan for the benefit of employees of either the Group or an entity related to the Group. (l) Cash and cash equivalents Cash and cash equivalents comprise cash at bank (vi) The entity is controlled or jointly controlled and in hand, demand deposits with banks and by a person identified in (a). other financial institutions, and short-term highly (vii) A person identified in (a)(i) has significant liquid investments that are readily convertible into influence over the entity or is a member known amounts of cash and which are subject to an of the key management personnel of the insignificant risk of changes in value, having been entity (or of a parent of the entity). within three months of maturity at acquisition.
(viii) The entity, or any member of a group of (m) Creditors and accrued charges which it is a part, provides key management personnel services to the Group. We state creditors and accrued charges initially at fair values and thereafter at amortised cost unless the effect of discounting would be material, in which case they are stated at cost.
110 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 111 SFC Annual Report 2016-17 Report Annual SFC Changes in accounting policies Provisions and contingent liabilities Provisions and contingent unless the probability of outflow of economic benefits of outflow unless the probability is remote. of amendments has issued a number The HKICPA for the current first effective to HKFRSs that are None of these accounting period of the Group. on how the developments have had a material effect and financial position for the current results Group’s or presented. or prior periods have been prepared or has not applied any new standard The Group for the current effective that is not yet interpretation accounting period. Hong Section 3(3) of the SFO exempts the SFC from Kong taxes. We recognise a provision in the statement of financial in the statement a provision recognise We a legal or constructive has when the Group position timing or amount as a result obligation of uncertain will that the Group it is probable of a past event, and to settle the an outflow of economic benefits require reliably. obligation and the amount can be estimated economic that an outflow of it is not probable Where or the amount cannot be benefits will be required, a as we disclose the obligation reliably, estimated outflow of unless the probability contingent liability, also disclose We of economic benefits is remote. obligations, whose existence will only be possible of non-occurrence or confirmed by the occurrence events as contingent liabilities future one or more (q) 4. Taxation (p) (cont’d) Investment in subsidiaries impairment loss. evidence that the new circumstances and events will circumstances that the new evidence an reverse We future. persist for the foreseeable impairment loss only to the extent that the asset’s carrying amount does not exceed the carrying amount determined, net of depreciation have that we should any and amortisation, if we had not recognised at initial recognition of these assets), where the effect the effect these assets), where of at initial recognition of discounting is material. of an asset an impairment loss in respect reverse We and in a subsequent period if the circumstances objectively linked to the write down events that are is persuasive there cease to exist and or write-off For held-to-maturity investments carried at amortised For held-to-maturity investments carried as the cost, the impairment loss is measured amount and carrying the asset’s between difference cash flows, future value of estimated the present effective original discounted at the financial asset’s rate computed interest rate (ie, the effective interest selling price and value in use. We recognise in the recognise selling price and value in use. We other comprehensive or loss and statement of profit carrying between the asset’s income the difference amount as an impairment amount and the recoverable asset loss whenever the carrying amount of an amount. exceeds its recoverable We review the carrying amounts of the Group’s assets the Group’s carrying amounts of the review We period to determine at the end of each reporting evidence of impairment. is any objective whether there the asset’s If any such evidence exists, we estimate net higher of its is the amount, which recoverable We state investment in a subsidiary at cost less investment in a subsidiary at cost less state We in the statement of financial any impairment losses position. Significant accounting policies Significant accounting (o) Impairment (n) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 3. Notes to the consolidated financial statements Notes to the Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Notes to the consolidated financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
5. Investment income
2017 2016 $’000 $’000 Interest income from bank deposits 62,501 60,529 Interest income from financial assets designated at fair value through profit or loss 11,124 – Interest income from held-to-maturity debt securities 4,293 16,439 Realised gain on disposal of equity securities 483 – Loss on redemption/disposal of debt securities (230) – Gain/(loss) on revaluation of equity funds 132,484 (58,218) Loss on revaluation of debt securities (6,857) – Amortisation of premium on held-to-maturity debt securities (1,175) (5,186) Amortisation of discount on held-to-maturity debt securities – 227 202,623 13,791
6. Other income
2017 2016 $’000 $’000 Investigation costs awarded 258 1,240 Sale of SFC publications 250 215 Gain on disposal of fixed assets – 14 Others 17 537 525 2,006
7. Staff costs and directors’ emoluments
2017 2016 $’000 $’000 Salaries and allowances 1,093,961 999,685 Retirement benefits 71,253 62,405 Medical and life insurance 30,718 28,315 Staff functions 1,787 1,594 Recruitment 2,669 5,220 Registration and membership fees 1,548 1,356 1,201,936 1,098,575
The total number of staff as at 31 March 2017 was 891 (866 for the SFC, 22 for the Investor Education Centre and three for the Investor Compensation Company Limited) (as at 31 March 2016: the total number of staff was 866 comprising 841 for the SFC, 22 for the Investor Education Centre and three for the Investor Compensation Company Limited).
112 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 113 – – – 96 38 253 157 253 253 253 216 253 2016 Total 9,731 6,265 6,417 6,264 6,001 3,282 2,784 1,012 $’000 37,960 40,744 – – – 63 253 190 253 253 253 253 253 2017 Total 6,368 6,378 1,435 9,731 5,500 3,808 6,378 1,012 2,783 $’000 39,598 42,381 SFC Annual Report 2016-17 Report Annual SFC 1 – – – – – – – – – – – – – 97 450 472 680 375 280 472 2,826 2,826 $’000 scheme Retirement contributions – – – – – – – – – – – – – 185 728 pay 1,418 1,181 7,964 2,246 1,025 1,181 7,964 $’000 Discretionary – – – – – – – – – – – – – 4,500 4,725 1,153 6,805 4,100 2,800 4,725 $’000 28,808 28,808 in kind Salaries, allowances and benefits (cont’d) – – – – – – – – – – – 63 fee 253 190 253 253 253 253 253 1,012 2,783 2,783 $’000 Directors’ ) ) 2 2 ) 2 ) 2 ) 2 service with the SFC. The amount vested as at 31 March 2017 was $1,595,000 (as at 31 March 2016: $1,402,000). 2017 was $1,595,000 (as at 31 March service with the SFC. The amount vested as at 31 March in note 3(f) on page 108. The future payment of contributions is subject to completion of a vesting period, which is based on total years of vesting period, is subject to completion of a of contributions payment in note 3(f) on page 108. The future Retired having completed appointment period. having completed appointment Retired This represents net contribution expenses accrued during the year ended 31 March 2017 in accordance with the accounting policy set out with the 2017 in accordance net contribution expenses accrued during the year ended 31 March This represents (retired 31 December 2016 (retired (appointed 1 January 2017)
Chief Executive Officer Directors’ emoluments included in the above comprised: emoluments included in the above Directors’ Au Siu Cheung, Albert, BBS (appointed 26 May 2015) Kwok-hon, JP Cheng Leonard Professor SBS, JP Cheng Wai-sun, Edward Lester Garson Huang, JP (appointed 15 November 2015) Mark Steward (retired 25 September 2015 (retired Mark Steward Non-executive Chairman SBS, JP Carlson Tong, Non-executive Directors Christina Choi (appointed 1 August 2016) Brian Ho Julia Leung, SBS Keith Lui 19 June 2016 James Shipton (retired Ashley Alder, JP Ashley Alder, Executive Directors Thomas Atkinson (appointed 3 May 2016) 2 Dr William Ming-fung Wong emoluments directors’ Total 1 Teresa Ko, JP Teresa 14 November 2015 Lee, JP (retired Lawrence Mary Ma Xuezheng 25 May 2015 JP (retired Kai Man, BBS, Wong Tin-yau,Dr Kelvin Wong JP Staff costs and directors’ emoluments costs and directors’ Staff For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 7. Notes to the consolidated financial statements Notes to the Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Notes to the consolidated financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
7. Staff costs and directors’ emoluments (cont’d) The aggregate of the emoluments of the five highest paid individuals in 2016-17, representing the emoluments of the Chief Executive Officer and four Executive Directors, was $34,355,000 (2015-16: $34,678,000) with the breakdown as follows:
2017 2016 $’000 $’000 Salaries, allowances and benefits in kind 24,855 25,048 Discretionary pay 7,051 7,126 Retirement scheme contributions 2,449 2,504 34,355 34,678
Their emoluments are within the following bands:
2017 2016 No. of No. of individuals individuals $5,500,001 to $6,000,000 1 0 $6,000,001 to $6,500,000 3 4 $6,500,001 to $7,000,000 0 0 $7,000,001 to $7,500,000 0 0 $7,500,001 to $8,000,000 0 0 $8,000,001 to $8,500,000 0 0 $8,500,001 to $9,000,000 0 0 $9,000,001 to $9,500,000 0 0 $9,500,001 to $10,000,000 1 1
Employee benefits We provide retirement benefits to our staff through a defined contribution scheme under the Occupational Retirement Schemes Ordinance (ORSO Scheme) and a Mandatory Provident Fund Scheme (MPF Scheme). Prior to the inception of the MPF Scheme, all general grade staff were included in the Group’s ORSO Scheme. Following the introduction of the MPF Scheme in December 2000, new general grade staff have since been covered under the MPF Scheme while executive staff have been allowed to opt for either the Group’s ORSO Scheme or the MPF Scheme.
114 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 115 – 737 388 2016 5,076 6,685 7,340 7,921 $’000 8,600 12,547 70,403 43,861 25,133 188,691 7 762 389 2017 1,590 6,728 7,706 7,000 8,779 $’000 12,322 82,999 49,558 33,754 211,594 SFC Annual Report 2016-17 Report Annual SFC
(cont’d) (cont’d) MPF Scheme ORSO Scheme General office and insurance General office costs to the Investor Education Centre Investor and other education programme meeting expenses and others Overseas travelling, regulatory Exchange loss Loss on disposal of fixed assets Information and systems services remuneration Auditor’s Funding for the Financial Reporting Council and Investment Institute and Funding for the Hong Kong Securities other training initiatives Foundation Funding for the International Financial Reporting Standards Learning and development services Legal and professional We have participated in a master trust MPF Scheme since December 2000 and made contributions to the MPF Scheme trust MPF Scheme since December 2000 and made contributions to the MPF have participated in a master We of the MPF Schemes Ordinance. with the statutory requirements in accordance For executive staff, we make monthly contributions between 5% to 10% of the fixed pay. We use forfeited We pay. monthly contributions between 5% to 10% of the fixed we make For executive staff, of the prior to qualifying for 100% disbursement who leave the Group executive staff of contributions in respect year was $2,182,000 so forfeited during the contributions. The amount future the Group’s contributions to offset period was $416,000 (2016: at the end of the reporting so forfeited available (2016: $2,796,000) and the amount $24,000). the MPF Schemes Ordinance. Section 5 of under This scheme has obtained an exemption with the benefit fully vested upon completion of 10 years’ service. We reinvest forfeited contributions for general forfeited contributions reinvest of 10 years’ service. We with the benefit fully vested upon completion into the total pool of prior to qualifying for 100% disbursement of the contributions who leave the Group grade staff The amount so the end of the scheme year. members in the scheme at by the existing contributions that will be shared nil (2016: nil). during the year was reinvested Employee benefits Employee benefits scale subject to a vesting equal to 12% of the fixed pay, we make monthly contributions For general grade staff, Executive staff General grade staff Other expenses Staff costs and directors’ emoluments costs and directors’ Staff 8. (b) (ii) (a) (i) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 7. Notes to the consolidated financial statements Notes to the Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Notes to the consolidated financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
9. Held-to-maturity debt securities The Group and the SFC
2017 2016 $’000 $’000 Maturing after one year in the second to sixth years – unlisted – 30,009 – listed outside Hong Kong – – – 30,009 Maturing within one year – unlisted 30,003 383,865 – listed outside Hong Kong – 77,916 30,003 461,781
30,003 491,790 Amortised cost at 31 March – unlisted 30,003 413,874 – listed outside Hong Kong – 77,916 30,003 491,790 Market value at 31 March – unlisted 30,006 414,943 – listed outside Hong Kong – 77,813 30,006 492,756
The average yield to maturity of the debt securities was 1.6% as at 31 March 2017 (2016: 0.7%).
10. Financial assets designated at fair value through profit or loss
2017 2016 $’000 $’000 (a) Debt securities (i) Listing status Listed – outside Hong Kong 409,624 – Listed – in Hong Kong 18,444 – Unlisted 288,335 – 716,403 – (ii) Maturity profile Within one year 201,264 – After one year but within two years 157,288 – After two years but within five years 347,274 – After five years 10,577 – 716,403 – (iii) The weighted average effective interest rate of debt securities on 31 March 2017 was 1.8%. (b) Pooled funds – unlisted 941,911 654,585
The pooled funds comprise mainly listed equity securities.
116 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 117 Total $’000 (2,053) (2,319) (3,821) (3,828) 73,247 50,456 63,455 34,830 46,749 36,964 314,318 362,721 403,457 435,968 362,721 405,649 435,968 469,104 – – – – – – – 251 450 251 1,710 2,160 2,411 2,411 2,160 2,411 2,411 2,411 $’000 Motor vehicles SFC Annual Report 2016-17 Report Annual SFC and $’000 (1,406) (1,409) (3,384) (3,390) 16,565 86,898 11,073 96,565 18,030 99,601 14,938 96,565 11,136 12,607 113,130 104,317 113,130 122,347 Personal software computers (574) (574) (348) (348) $’000 25,429 15,135 31,806 19,483 13,698 20,075 151,846 166,407 172,927 191,836 166,407 179,757 191,836 211,563 systems Computer application (61) (70) (78) (79) 247 554 2,354 9,830 6,208 1,506 7,653 1,598 7,653 1,309 8,884 $’000 Office 10,007 10,007 10,482 equipment (12) (11) (11) 162 (266) 3,728 $’000 28,648 22,292 89,936 67,656 12,021 89,936 20,355 118,688 118,584 110,280 118,584 122,301 leasehold Furniture, fixtures and fixtures improvements At 31 March 2016 At 31 March Written back on disposals Written 2016 At 31 March At 1 April 2015 Charge for the year At 31 March 2016 At 31 March At 1 April 2015 At 31 March 2017 At 31 March 2017 At 31 March Charge for the year back on disposals Written At 31 March 2017 At 31 March At 1 April 2016 At 1 April 2016 The Group
Net book value
Additions Disposals Accumulated depreciation Cost Net book value
Accumulated depreciation Additions Disposals Cost (a) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 11. Fixed assets Notes to the consolidated financial statements Notes to the Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Notes to the consolidated financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
11. Fixed assets (cont’d) (b) The SFC
Furniture, Personal fixtures and Computer computers leasehold Office application and Motor improvements equipment systems software vehicles Total $’000 $’000 $’000 $’000 $’000 $’000 Cost At 1 April 2016 118,569 9,938 191,836 111,770 2,411 434,524 Additions 3,728 554 20,075 12,594 – 36,951 Disposals (11) (79) (348) (3,390) – (3,828) At 31 March 2017 122,286 10,413 211,563 120,974 2,411 467,647 Accumulated depreciation At 1 April 2016 89,920 7,592 166,407 95,744 2,160 361,823 Charge for the year 20,355 1,307 13,698 10,867 251 46,478 Written back on disposals (11) (78) (348) (3,384) – (3,821) At 31 March 2017 110,264 8,821 179,757 103,227 2,411 404,480
Net book value At 31 March 2017 12,022 1,592 31,806 17,747 – 63,167 Cost At 1 April 2015 118,673 9,766 172,927 98,976 2,411 402,753 Additions 162 242 19,483 14,203 – 34,090 Disposals (266) (70) (574) (1,409) – (2,319) At 31 March 2016 118,569 9,938 191,836 111,770 2,411 434,524 Accumulated depreciation At 1 April 2015 67,640 6,149 151,846 86,388 1,710 313,733 Charge for the year 22,292 1,504 15,135 10,762 450 50,143 Written back on disposals (12) (61) (574) (1,406) – (2,053) At 31 March 2016 89,920 7,592 166,407 95,744 2,160 361,823
Net book value At 31 March 2016 28,649 2,346 25,429 16,026 251 72,701
118 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 119 2016 $’000 25,649 6,066,032 6,091,681 1,522,116 (4,569,565) 2017 $’000 75,462 676,727 SFC Annual Report 2016-17 Report Annual SFC 5,107,808 5,183,270 (4,506,543) (2016: $111,108,000). Receivables are (2016: $111,108,000). Receivables are Financial instruments: Recognition and Non-current liabilities represent provision for premises for premises provision liabilities represent Non-current to its the premises cost to restore reinstatement original condition when the lease has expired. include Debtors, deposits and prepayments as loans and classified $141,623,000 receivables with the determination in accordance receivables of HKAS 39, measurement usually due within 30 days. an ageing analysis of debtors do not provide We debtor balance was no material overdue as there as included in “debtors, deposits and prepayments” 2017 and 2016. at 31 March funds to pay for the SFC’s The Government provided These and capital expenditure. initial non-recurrent to the Government. not repayable funds are Debtors, deposits and prepayments Initial funding by Government Non-current liabilities 14. Non-current 15. 16. As at 31 March 2017, the investments in subsidiaries, As at 31 March stated at cost less any impairment losses, which are amounted to $0.2 (2016: $0.2). The balance is too small to appear on the statement of financial position in thousands of dollars. which is expressed administration and management of the Investor administration and management of the Fund established under the SFO. Compensation the financial improve The objective of the IEC is to knowledge and capability of the general public and to financial decisions. assist them in making informed share capital of $0.2. On 20 November 2012, the capital of $0.2. On 20 share (IEC) as a SFC launched the Investor Education Centre having a share company limited by guarantee and not wholly owned subsidiaries capital. Both companies are incorporated in Hong Kong. are of the SFC and The objective of the ICC is to facilitate the Cash and cash equivalents in the consolidated cash flow statement Cash and cash equivalents in the consolidated Company The SFC formed Investor Compensation an issued Limited (ICC) on 11 September 2002 with Cash at bank and in hand Cash at bank and in Fixed deposits with banks position in the consolidated statement of financial Amounts shown months of beyond three Less: Amounts with an original maturity The effective interest rate on bank deposits as at 31 March 2017 ranged from 0.15% to 3.6% (2016: 0.35% to 5%). 0.15% to 3.6% ranged from 2017 deposits as at 31 March rate on bank interest The effective 2016. March 2017 and 31 31 March within one year as at both These balances mature of financial position the consolidated statement Reconciliation with Investments in subsidiaries Bank deposits and cash at bank Bank deposits 13. For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 12. Notes to the consolidated financial statements Notes to the Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Notes to the consolidated financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
17. Capital commitments Capital commitments outstanding as at 31 March 2017 not provided for in the financial statements were as follows:
2017 2016 $’000 $’000 Authorised and contracted for 19,969 21,446 Authorised but not contracted for 27,734 12,309
18. Commitment to pay rents for offices At 31 March 2017 the minimum amount we are committed to pay in rent for our offices up to 31 August 2020 are as follows:
The Group and the SFC 2017 2016 $’000 $’000 Payable next year 205,077 208,294 Payable in one to five years 477,534 87,619 Payable in more than five years – – 682,611 295,913
During the year ended 31 March 2017, $208,744,000 net of lease incentives, was recognised as an expense in the statement of profit or loss and other comprehensive income in respect of operating leases (2016: $202,097,000).
120 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 121 SFC Annual Report 2016-17 Report Annual SFC Interest rate risk Credit risk revaluation of mark to market debt securities and the revaluation $12,110,000 accumulated surplus by approximately (2016: nil). after deducting any impairment allowance. bearing assets mainly comprise interest The Group’s securities and bank rate bearing debt fixed interest the risk that is subject to The Group balances. will fluctuate re-investments cash flows from future rates (re-pricing because of changes in market interest risk of its fixed manages re-pricing risk). The Group levels of rate debt securities by imposing different limits to the investments. concentration and maturity of rates and maturity profile interest The effective disclosed in bearing assets are interest the Group’s notes to the financial statements. As the respective 2017, it is estimated that a general at 31 March of 100 basis points, with all other increase/decrease the variables held constant, would increase/decrease income and accumulated surplus by interest Group’s $52,501,000 (2016: $62,824,000). As approximately duration of the Group’s 2017 the average at 31 March 2016: investment portfolio was 1.64 years (31 March 2017, it is estimated that 0.66 years). At 31 March of 100 basis points in a general increase/decrease variables held constant, rates, with all other interest gains on the Group’s would decrease/increase The Financial Secretary has approved our investment has approved The Financial Secretary limits, allows to other control policy which, subject to invest in high-quality dated securities, the Group in unit trusts and rated A or above. Investment as collective investment mutual funds authorised of to 15% schemes under Section 104 of the SFO up is also the total value of funds under management each to permitted. The policy also limits the exposure holdings the for except country, each and organisation complied the Group During the year, of US Treasuries. to manage with the above investment policy in order not exposed to was risk, and as a result, its credit to credit risk. The maximum exposure significant credit by the carrying amount of each risk is represented position financial asset in the statement of financial (b) (a) Remuneration of key management Remuneration of key management Reimbursement from the ICF for all the Reimbursement from the ICF for report thereon to the Group on a regular basis. on a regular to the Group thereon report to these risks and the financial exposure The Group’s risk management policies and practices used by the described below. to manage these risks are Group managers to manage the Group’s investments and managers to manage the Group’s investments comply portfolio’s that the to ensure by the Financial with the investment policy approved risk, limits on credit which sets control Secretary rate risk, liquidity risk and foreign market risk, interest exchange risk. The external investment managers debt securities and units in equity funds. The underlying investments of the equity funds mainly comprised equity securities. its arise from The main financial risks of the Group investments in debt securities and units in equity appoints external investment funds. The Group disclosed in note 7 are the only remuneration for key remuneration the only disclosed in note 7 are management personnel of the Group. values mainly comprise of the Group Financial instruments 31 March 2017, the amount due to the ICF from the due to the ICF from 2017, the amount 31 March 2016: $73,000). ICC was $75,000 (as at 31 March personnel emoluments as consider that the directors’ We ICC’s expenses, in accordance with Section ICC’s 242(1) of the SFO the from $5,574,000 was recovered During the year, As at expenses (2016: $5,398,000). ICF for the ICC’s Dealers’ Deposits Fund (CDD) and Securities Ordinance Ordinance Dealers’ Deposits Fund (CDD) and Securities (Chapter 333) – Securities Margin Financiers’ Security Fund (SMF). In addition to the transactions in these financial and balances disclosed elsewhere related statements, we have the following significant party transactions. We have related party relationships with the Unified party relationships related have We Fund (UECF), the Investor Exchange Compensation Fund (ICF), Securities Ordinance Compensation Deposits Fund (SDD), (Chapter 333) – Dealers’ 250) – (Chapter Ordinance Commodities Trading Financial risk management and fair Related party transactions Related party 20. (b) (a) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 19. Notes to the consolidated financial statements Notes to the Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Notes to the consolidated financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
20. Financial risk management and fair The sensitivity analysis above indicates the values (cont’d) instantaneous change in the Group’s accumulated surplus that would arise assuming that the changes in (b) Interest rate risk (cont’d) the benchmark indices had occurred at the end of the reporting period and had been applied to re-measure The sensitivity analysis above is estimated as an those financial instruments held by the Group which annualised impact on interest income assuming the expose the Group to equity price risk at the end of the change in interest rates had occurred at the end of reporting period. It is also assumed that the fair values the reporting period. The analysis is performed on the of the Group’s investment in equity funds would same basis for 2016. change in accordance with the historical correlation with the relevant benchmark indices since the (c) Exchange rate risk portfolio is diversified in terms of industry distribution The Group’s investment guidelines for our investment and that all other variables remain constant. portfolio only allow investments in assets denominated in Hong Kong dollars, US dollars and renminbi. (e) Fair value measurement Exposure in renminbi should not exceed 5% of the investment portfolio. As the majority of the financial (i) Financial assets measured at fair value assets are denominated in either US dollars or Hong The following table presents the fair value of the Kong dollars which are closely pegged, the Group was Group’s financial instruments measured at the end of not exposed to significant foreign exchange risk at the the reporting period on a recurring basis, categorised end of the reporting period. into the three-level fair value hierarchy as defined in HKFRS 13, Fair value measurement. The level (d) Market risk into which a fair value measurement is classified is determined with reference to the observability The investment activities of the Group expose it to and significance of the inputs used in the valuation various types of market risks which are associated technique as follows: with the markets in which it invests, to the extent of the amount invested in debt securities and equity Level 1 valuations: Fair value measured using funds. Such risk will be reflected in the price and the only Level 1 inputs ie, unadjusted quoted prices carrying value of the financial assets concerned. in active markets for identical assets or liabilities at the measurement date. The Group invests in units of equity funds, which mainly comprised listed equity securities, the Level 2 valuations: Fair value measured using performance of which is measured against the results only Level 2 inputs ie, observable inputs which of benchmark indices, MSCI AC Asia Free ex Japan fail to meet Level 1, and not using significant and MSCI World (Net Dividends), including their unobservable inputs. Unobservable inputs are returns and volatilities. Based on the weighted average inputs for which market data are not available. movement of these benchmark indices (9.8%) in the corresponding period, it is estimated that a general Level 3 valuations: Fair value measured using increase/decrease of such benchmark indices of 9.8% significant unobservable inputs. (2016:15.4%) would increase/decrease the Group’s investment income and the accumulated surplus by approximately $102,912,000 (2016: $110,432,000).
122 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 123 Total Total $’000 $’000 654,585 941,911 428,068 288,335 1,658,314 – – – – – $’000 $’000 Level 3 Level 3 SFC Annual Report 2016-17 Report Annual SFC – – 2016 2017 $’000 $’000 Level 2 Level 2 428,068 288,335 716,403 – – $’000 $’000 Level 1 Level 1 654,585 941,911 941,911 (cont’d) (cont’d) Fair value measurement Fair value measurement During the year there were no significant transfers between financial instruments in Level 1 and 2, or transfers into or no significant transfers between were During the year there as at the end of the fair value hierarchy between levels of transfers policy is to recognise out of Level 3. The Group’s period in which they occur. reporting The fair value of the investment in the unlisted pooled funds is determined based on the Group’s share in the net share pooled funds is determined based on the Group’s The fair value of the investment in the unlisted underlying assets of the pooled funds assets of the pooled funds as determined by the custodian. The majority of the listed securities. are in the fair or decrease fair value estimates. Any increase Changes in the market conditions could materially affect years. in future or loss profit values of financial instruments would affect Unlisted Assets Pooled funds Unlisted Pooled funds Listed Unlisted Assets Debt securities Financial assets measured at fair value (cont’d) Financial assets measured Financial risk management and fair values and fair values Financial risk management (e) (i) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 20. Notes to the consolidated financial statements Notes to the Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Securities and Futures Commission
Notes to the consolidated financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
20. Financial risk management and fair values (cont’d) (e) Fair value measurement (cont’d) (ii) Fair value of financial assets carried at other than fair value The carrying amounts of the Group’s financial instruments carried at cost or amortised cost are not materially different from their fair values as at 31 March 2017 and 2016 except for the following financial instruments, for which their carrying amounts and fair value and the level of fair value hierarchy are disclosed below:
Carrying Fair amount at value at 31 March 31 March 2017 2017 2017 Level 1 Level 2 Level 3 $’000 $’000 $’000 $’000 $’000 Held-to-maturity debt securities 30,003 30,006 30,006 – –
Carrying Fair amount at value at 31 March 31 March 2016 2016 2016 Level 1 Level 2 Level 3 $’000 $’000 $’000 $’000 $’000 Held-to-maturity debt securities 491,790 492,756 492,756 – –
The following summarises the major methods and assumptions used in estimating the fair values of these financial instruments.
The fair value of listed held-to-maturity debt securities is based on quoted market prices at the end of the reporting period using current bid prices without any deduction for transaction costs. Fair value for unlisted debt investments are based on third-party quotes.
21. Sponsored unconsolidated structured entities The SFC considers the ICF, UECF, SDD, CDD and SMF as unconsolidated structured entities sponsored by the SFC where no interests are held by the SFC.
Pursuant to Section 236 of the SFO, the SFC has established and maintained the ICF to compensate investors who suffer a loss due to the default of an intermediary in relation to trading of products on Hong Kong Exchanges and Clearing Limited. The SFC is primarily responsible for the administration and management of the ICF in accordance with Section 238 of the SFO, but has transferred some functions to the ICC under Section 80 of the SFO. According to Section 237(2)(b) of the SFO, the SFC may, with the consent in writing of the Financial Secretary, pay into the ICF from its reserves such amount of money as it considers appropriate. As at 31 March 2017, the ICF’s maximum liability in respect of claims received was $3,034,000 (2016: $4,031,000) and the net asset value was $2.3 billion (2016: $2.2 billion).
124 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 125 1 January 2018 1 January 2019 Effective for Effective accounting periods beginning on or after SFC Annual Report 2016-17 Report Annual SFC Leases Financial classified as operating leases. The application of the to lead to an new accounting model is expected in both assets and liabilities and to impact on increase in the statement the timing of the expense recognition the lease. or loss over the period of of profit detailed analysis of what the impact a more However, to determine the is required of the new standards exact extent of this impact. HKFRS 9, instruments HKFRS 16, of making an assessment is in the process The Group and new of what the impact of these amendments in the period of initial is expected to be standards has identified some application. So far the Group which may have a aspects of the new standards consolidated financial significant impact on the statements. for classification new requirements HKFRS 9 introduces of financial assets, calculation of and measurement assets and hedge accounting. impairment of financial assessment, the Group Based on the preliminary measured expects that its financial assets currently or profit at amortised cost and fair value through classification their respective loss will continue with the adoption of HKFRS 9. upon and measurements in The new impairment model in HKFRS 9 may result losses on the Group’s of credit an earlier recognition financial assets. accounting as the Group’s HKFRS 16 primarily affects currently which are a lessee of leases for properties standards and interpretations issued and interpretations standards year for the but not yet effective 2017 ended 31 March of these financial statements, Up to the date of issue of amendments and has issued a number the HKICPA for the not yet effective which are new standards been 2017 and which have not year ended 31 March include adopted in these financial statements. These to the Group. the following which may be relevant Possible impact of amendments, new Possible impact 23. (cont’d) will be used to support this reserve. be used to support will appropriation to it. There were no externally imposed were to it. There appropriation to which the SFC is subject to. requirements capital the SFC has earmarked $3 billion During the year, for its accumulated surplus to set up a reserve from The premises. acquisition of office the possible future investment holdings and available cash balances SFC’s The SFC manages its funding requirements from its from its funding requirements The SFC manages the from income and accumulated surplus. Apart initial funding by the Government as disclosed in note an appropriation 16, the SFC is eligible to receive Since the Government in each financial year. from 1994, the SFC the financial year ended 31 March the Government not to make an has requested entities that it was not contractually required to entities that it was not contractually required party relationships (2016: nil). The related provide these disclosed in note 19 of entities are with these financial statements. outstanding claims against the SDD, CDD and SMF as outstanding claims against the SDD, CDD any defaults occurring 2017. Claims for at 31 March be made against the ICF. 2003 should after 31 March financial the SFC has not provided During the year, structured or other support to these unconsolidated funds provide compensation to investors who suffer to investors who suffer compensation funds provide the default of an intermediary occurring a loss due to effect. SFO came into 1 April 2003 when the before maximum liability 2017, the UECF’s As at 31 March was $10,607,000 of claims received in respect was (2016: $10,253,000) and the net asset value no were $72,891,000 (2016: $71,411,000). There entities administration for the The SFC is also responsible SDD, CDD and SMF the UECF, and management of Securities in the repealed provisions under respective These Ordinance. and Commodities Trading Ordinance Funding and reserve management Funding and reserve Sponsored unconsolidated structured structured unconsolidated Sponsored 22. For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 21. Notes to the consolidated financial statements Notes to the Securities and Futures Commission and Futures Securities SFC Annual Report 2016-17
Investor Compensation Fund
Report of the Investor Compensation Fund Committee
The members of the Investor Compensation Fund Interests in contracts Committee (the Committee) present their annual report No contract of significance to which the Fund was a party, together with the audited financial statements for the year and in which a Committee member of the Fund had a ended 31 March 2017. material interest, subsisted at the end of the financial year or at any time during the financial year. Establishment of the Investor Compensation Fund Part XII of the Securities and Futures Ordinance (Chapter 571) established the Investor Compensation Fund (the Fund) on 1 April 2003. By order of the Committee
Keith Lui Financial statements Chairman The financial performance of the Fund for the financial year ended 31 March 2017 and the financial position of the Fund as at that date are set out in the financial statements 23 May 2017 on pages 129 to 144.
Members of the Committee The members of the Committee during the year ended 31 March 2017 and up to the date of this report were:
Mr Keith Lui (Chairman) Ms Teresa Ko Yuk-yin, JP Mr Lee Kwok Keung Mr Thomas Allan Atkinson (appointed on 28 September 2016)
126 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 127 SFC Annual Report 2016-17 Report Annual SFC knowledge obtained in the audit or otherwise appears to knowledge obtained be materially misstated. we conclude If, based on the work we have performed, of this other is a material misstatement that there have that fact. We to report required information, we are in this regard. nothing to report of the Responsibilities of the directors SFC for the financial statements for the preparation responsible of the SFC are The directors of the financial statements that give a true and fair view in such for and HKICPA the by issued HKFRSs with accordance of the SFC determine is as the directors internal control of financial statements necessary to enable the preparation material misstatement, whether due to from free that are fraud or error. of the financial statements, the directors In preparing to ability for assessing the Fund’s responsible the SFC are continue as a going concern, disclosing, as applicable, to going concern and using the going matters related of the SFC concern basis of accounting unless the directors either intend to liquidate the Fund or to cease operations, alternative but to do so. or have no realistic Information other than the financial Information other thereon report auditor’s statements and Commission of the Securities and Futures The directors information. The other for the other responsible (SFC) are all the information included in the information comprises the financial statements and our than other annual report, thereon. report auditor’s does not cover Our opinion on the financial statements any form of the other information and we do not express assurance conclusion thereon. financial statements, the In connection with our audit of information and, the other is to read our responsibility information is in doing so, consider whether the other statements or our materially inconsistent with the financial Code of Ethics (the Code) and we have section of our report. We are independent of are We of our report. section Auditor’s responsibilities for the audit of the financial Auditor’s with the Code. We believe that the audit evidence we have with the Code. We a basis for to provide and appropriate obtained is sufficient our opinion. the Fund in accordance with the HKICPA’s the HKICPA’s with the Fund in accordance for Professional Accountants in accordance fulfilled our other ethical responsibilities responsibilities under those standards are further described are standards under those responsibilities in the statements Basis for opinion with Hong Kong our audit in accordance conducted We Our issued by the HKICPA. on Auditing (HKSAs) Standards Financial Reporting Standards (HKFRSs) issued by the Hong Financial Reporting Standards (HKICPA). Kong Institute of Certified Public Accountants view of the financial position of the Fund as at 31 March as at 31 March view of the financial position of the Fund its cash flows 2017 and of its financial performance and with Hong Kong for the year then ended in accordance and notes to the financial statements, including a summary and notes to the financial statements, including of significant accounting policies. give a true and fair In our opinion, the financial statements as at 31 March 2017, the statement of profit or loss and the statement of profit 2017, as at 31 March the statement of changes in income, other comprehensive ended then year the for statement flow cash the and equity Compensation Fund (the Fund) established under Part XII ofCompensation Fund set out on pages 129 Ordinance the Securities and Futures of financial position comprise the statement to 144, which Opinion audited the financial statements of Investor have We Independent auditor’s report to the Securities and Futures Commission auditor’s report to the Securities Independent Investor Compensation Fund Compensation Investor SFC Annual Report 2016-17
Investor Compensation Fund
Independent auditor’s report to the Securities and Futures Commission (continued)
Auditor’s responsibilities for the audit of Conclude on the appropriateness of the directors of the financial statements the SFC’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether Our objectives are to obtain reasonable assurance about a material uncertainty exists related to events or whether the financial statements as a whole are free from conditions that may cast significant doubt on the material misstatement, whether due to fraud or error, and Fund’s ability to continue as a going concern. If we to issue an auditor’s report that includes our opinion. This conclude that a material uncertainty exists, we are report is made solely to you, as a body, and for no other required to draw attention in our auditor’s report to the purpose. We do not assume responsibility towards or related disclosures in the financial statements or, if such accept liability to any other person for the contents of this disclosures are inadequate, to modify our opinion. Our report. conclusions are based on the audit evidence obtained Reasonable assurance is a high level of assurance, but is up to the date of our auditor’s report. However, future not a guarantee that an audit conducted in accordance events or conditions may cause the Fund to cease to with HKSAs will always detect a material misstatement continue as a going concern. when it exists. Misstatements can arise from fraud or Evaluate the overall presentation, structure and content error and are considered material if, individually or in the of the financial statements, including the disclosures, aggregate, they could reasonably be expected to influence and whether the financial statements represent the the economic decisions of users taken on the basis of these underlying transactions and events in a manner that financial statements. achieves fair presentation. As part of an audit in accordance with HKSAs, we We communicate with the directors of the SFC regarding, exercise professional judgement and maintain professional among other matters, the planned scope and timing of scepticism throughout the audit. We also: the audit and significant audit findings, including any Identify and assess the risks of material misstatement of significant deficiencies in internal control that we identify the financial statements, whether due to fraud or error, during our audit. design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The KPMG risk of not detecting a material misstatement resulting Certified Public Accountants from fraud is higher than for one resulting from error, 8th Floor, Prince’s Building as fraud may involve collusion, forgery, intentional 10 Chater Road omissions, misrepresentations or the override of internal Central, Hong Kong control. 23 May 2017 Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors of the SFC.
128 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 129 7 662 124 934 2016 5,398 7,341 3,752 $’000 (3,942) 17,549 12,938 13,607 1 182 131 967 2017 5,574 3,110 3,871 $’000 10,725 69,527 77,141 80,252 SFC Annual Report 2016-17 Report Annual SFC 7 8 5 Note Investor Compensation Company Limited expenses Investor Compensation Company expenses Compensation remuneration Auditor’s Bank charges Professional fees Professional Exchange difference Net investment income Surplus/(loss) and total comprehensive income for the year Surplus/(loss) and total comprehensive
Expenses
Recoveries
The notes on pages 133 to 144 form part of these financial statements. The notes on pages 133 to Income For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 Statement of profit or loss and other comprehensive income profit or loss and other Statement of Investor Compensation Fund Compensation Investor SFC Annual Report 2016-17
Investor Compensation Fund
Statement of financial position At 31 March 2017 (Expressed in Hong Kong dollars)
Note 2017 2016 $’000 $’000 Current assets Financial assets designated at fair value through profit or loss Debt securities 9 1,893,248 1,866,404 Pooled fund 9 330,386 282,860 Interest receivable 13,651 13,367 Due from Investor Compensation Company Limited 75 73 Fixed deposits with banks 10 26,201 7,788 Cash at bank 10 18,770 43,175 2,282,331 2,213,667 Current liabilities Provision for compensation 8 476 1,412 Creditors and accrued charges 1,449 1,376 1,925 2,788 Net current assets 2,280,406 2,210,879
Net assets 2,280,406 2,210,879 Representing: Compensation fund Contributions from Unified Exchange Compensation Fund 11 994,718 994,718 Contributions from Commodity Exchange Compensation Fund 11 108,923 108,923 Accumulated surplus 1,176,765 1,107,238 2,280,406 2,210,879
Approved and authorised for issue by the Securities and Futures Commission on 23 May 2017 and signed on its behalf by
Carlson Tong Ashley Alder Chairman of the SFC Chief Executive Officer of the SFC
The notes on pages 133 to 144 form part of these financial statements.
130 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 131 Total $’000 (3,942) 69,527 2,214,821 2,210,879 2,280,406 SFC Annual Report 2016-17 Report Annual SFC $’000 (3,942) 69,527 surplus 1,111,180 1,107,238 1,176,765 Accumulated – – from from Fund $’000 108,923 108,923 108,923 Exchange Commodity Contributions Compensation – – Fund $’000 994,718 994,718 994,718 Exchange from Unified from Contributions Compensation for the year for the year The notes on pages 133 to 144 form part of these financial statements. The notes on pages 133 to Surplus and total comprehensive income Surplus and total comprehensive 2017 Balance at 31 March Loss and total comprehensive income Loss and total comprehensive 1 April 2016 2016 and Balance at 31 March Balance at 1 April 2015 For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 Statement of changes in equity Statement of Investor Compensation Fund Compensation Investor SFC Annual Report 2016-17
Investor Compensation Fund
Cash flow statement For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
2017 2016 $’000 $’000 Cash flows from operating activities Surplus/(loss) for the year 69,527 (3,942) Adjustments for: Net investment income (77,141) (12,938) Exchange difference (3,110) (662) (10,724) (17,542) (Increase)/decrease in amount due from Investor Compensation Company Limited (2) 84 Decrease in provision for compensation (936) (42,396) Increase/(decrease) in creditors and accrued charges 73 (36) Net cash used in operating activities (11,589) (59,890) Cash flows from investing activities Debt securities purchased (536,658) (505,239) Debt securities sold or redeemed 494,332 514,675 Equity securities sold 1,455 1,450 Interest received 46,468 45,922 Net cash generated from investing activities 5,597 56,808
Net decrease in cash and cash equivalents (5,992) (3,082) Cash and cash equivalents at beginning of the year 50,963 54,045 Cash and cash equivalents at end of the year 44,971 50,963
Analysis of the balance of cash and cash equivalents
2017 2016 $’000 $’000 Fixed deposits with banks 26,201 7,788 Cash at bank 18,770 43,175 44,971 50,963
The notes on pages 133 to 144 form part of these financial statements.
132 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 133 SFC Annual Report 2016-17 Report Annual SFC Statement of compliance prior accounting periods reflected in these financial prior accounting periods reflected statements. or The Fund has not applied any new standard for the current effective that is not yet interpretation accounting period (see note 15). levies chargeable on securities traded on SEHK and levies chargeable on securities traded on HKFE (see also note 6), contracts traded on futures earnedand returns on the investment of the Fund (see also note 5). in These financial statements have been prepared Hong Kong Financial with all applicable accordance (HKFRSs), which collective Reporting Standards Hong Kong term includes all applicable individual Hong Kong Accounting Financial Reporting Standards, issued by the (HKASs) and Interpretations Standards Hong Kong Institute of Certified Public Accountants and accounting principles generally (HKICPA) accepted in Hong Kong. A summary of the significant accounting policies adopted by the Fund is set out below. has issued certain new and revised The HKICPA or available for early first effective HKFRSs that are accounting period of adoption for the current information on any provides 3(m) the Fund. Note initial from changes in accounting policies resulting application of these developments to the extent that and to the Fund for the current relevant they are The Fund mainly consists of the amounts paid from of the amounts paid from The Fund mainly consists funds, the Unified Exchange the two compensation Fund (UECF) and the Commodity Compensation Fund (CECF) (wound up on Exchange Compensation will also pay into the Fund any26 May 2006). The SFC Dealers’ Deposits balance in the Securities remaining Fund and Fund, the Commodities Dealers’ Deposits Fund after the Securities Margin Financiers’ Security and any money due to the dealers’ deposits repaying with Section 76 in accordance dealers the registered is not likely (11) of Schedule 10 of the SFO though it the coming that these payments will be made within year. the Fund include the of money for Other sources Significant accounting policies Money constituting the Fund Money constituting 3. (a) 2. exceed the Fund’s net assets, the SFC would apportion exceed the Fund’s in compensation payments to claimants as provided (Investor Compensation- the Securities and Futures Claims) Rules. The SFC would pay unpaid claim become available in the Fund. amounts when funds amount of compensation at $150,000 per claimant amount of compensation at $150,000 per at securities traded to for a single default in relation (SEHK) The Stock Exchange of Hong Kong Limited contracts traded at Hong Kong Futures or futures Exchange Limited (HKFE). If amounts owed to claimants against the Fund of defaults of intermediaries occurring on or after 1 of defaults of intermediaries occurring on claimant, the April 2003. Upon making payment to a right against the to the claimant’s SFC is subrogated defaulter. Chief Pursuant to Section 244 of the SFO, the set the maximum by order Executive in Council has and management of the Fund in accordance with and management of the Fund in accordance some Section 238 of the SFO, but has transferred Company functions to the Investor Compensation The ICC Limited (ICC) under Section 80 of the SFO. and determination for receipt, is thus responsible in respect payment of valid claims against the Fund to trading of products on Hong Kong Exchanges and on Hong to trading of products must Clearing Limited. The defaulting intermediary Securities and with the be licensed by or registered dealing in securities, Commission (SFC) for Futures margin financing. contracts or securities futures for the administration The SFC is primarily responsible activity (SFO) provides Ordinance The Securities and Futures of the Investor Compensation for the establishment a investors who suffer Fund (the Fund) to compensate of an intermediary in relation loss due to the default Purpose, limitation and principal Purpose, limitation For the year ended 31 March 2017 (Expressed in Hong Kong dollars) For the year ended 31 1. Notes to the financial statements Notes to the Investor Compensation Fund Compensation Investor SFC Annual Report 2016-17
Investor Compensation Fund
Notes to the financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
3. Significant accounting policies (cont’d) (e) Financial instruments (b) Basis of preparation (i) Initial recognition We have prepared these financial statements using We classify the financial instruments into different the historical cost basis as the measurement basis, categories at inception, depending on the purpose for except that we state financial instruments classified as which the assets were acquired or the liabilities were designated at fair value through profit or loss at their incurred. The categories are: fair value through profit fair value (see note 3(e)). or loss, loans and receivables and other financial liabilities. We prepare the financial statements in conformity with HKFRSs which require management to make We initially measure financial instruments at fair judgements, estimates and assumptions that affect the value, which normally will be equal to the transaction application of policies and reported amounts of assets, price, plus, in case of a financial asset or financial liabilities, income and expenses. We make estimates liability not held at fair value through profit or loss, and associated assumptions based on historical transaction costs that are directly attributable to the experience and various other factors that are believed acquisition or issue of the financial asset or financial to be reasonable under the circumstances, the results liability. We charge transaction costs on financial of which form the basis of making the judgements assets and financial liabilities at fair value through about carrying values of assets and liabilities that are profit or loss immediately. not readily apparent from other sources. Actual results We account for financial assets and financial may differ from these estimates. liabilities on the date the Fund becomes a party to We review estimates and underlying assumptions the contractual provisions of the instrument. We use on an ongoing basis. We recognise revisions to settlement date accounting to record regular purchase accounting estimates in the period in which the or sale of financial assets. From this date, we record in estimate is revised if the revision affects only that our books any gains and losses arising from changes period, or in the period of the revision and future in fair value of the financial assets or financial periods if the revision affects both current and future liabilities at fair value through profit or loss. periods. The Fund’s financial instruments mainly consist of debt and equity securities designated at fair value through (c) Recognition of income profit or loss. We state financial assets and liabilities We recognise income in the statement of profit or under this category at fair value and recognise loss and other comprehensive income provided it is changes in the fair value in the statement of profit or probable that the economic benefits will flow to the loss and other comprehensive income in the period Fund and we can measure reliably the revenue and in which they arise. Upon disposal or repurchase, the costs. We record interest income as it accrues using difference between the net sale proceeds or the net the effective interest method. payment and the carrying value is included in the statement of profit or loss and other comprehensive (d) Translation of foreign currencies income. We translate foreign currency transactions during the year into Hong Kong dollars at the foreign exchange rates ruling at the transaction dates. We translate monetary assets and liabilities denominated in foreign currencies that are stated at fair value into Hong Kong dollars at the foreign exchange rates ruling at the end of the reporting period. We record exchange gains and losses on translation in the statement of profit or loss and other comprehensive income.
134 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 135 SFC Annual Report 2016-17 Report Annual SFC bankruptcy or other financial reorganisation; that have an economic or legal environment on the borrower; adverse effect and assets because of financial difficulties; value of an investment in an equity instrument below its cost. borrower; payments; or principal delinquency in interest significant changes in the technological, market, significant changes in the technological, of an active market for financial disappearance in the fair decline a significant or prolonged significant financial difficulty of the issuer or significant financial difficulty a default or of contract, such as a breach enter will borrower the that probable becoming it
Cash and cash equivalents If any such evidence exists, the carrying amount of to financial assets held at amortised cost is reduced amount by means of a the estimated recoverable or loss and other charge to the statement of profit income. comprehensive Cash and cash equivalents comprise cash at bank and in hand and demand deposits with banks and other financial institutions. The carrying amount of the Fund’s assets are reviewed reviewed assets are of the Fund’s The carrying amount is whether there period to determine at each reporting impairment. Objective evidence objective evidence of observable includes impaired are that financial assets attention of the Fund about data that comes to the loss events which have of the following one or more assets that cash flows of the the future an impact on can be estimated reliably: (g) (f) Impairment (cont’d) (cont’d) Financial instruments Financial instruments financial position where there is a legally enforceable is a legally enforceable there financial position where is an amounts and there the recognised right to offset the asset intention to settle on a net basis, or realise simultaneously. and settle the liability obligation specified in the contract is discharged, obligation specified in the cancelled or expired. the financial assets and financial liabilities offset We the net amount in the statement of and report rights to receive the cash flows from the financial the cash flows from rights to receive the financial asset together with or where asset expire, of ownership substantially all the risks and rewards have been transferred. when the a financial liability derecognise We value is determined based on the Fund’s share in the share value is determined based on the Fund’s by the net assets of the pooled funds as determined custodian. when the contractual a financial asset derecognise We non-exchange-traded financial instruments at the non-exchange-traded financial instruments period without any deduction end of the reporting costs. Financial assets are selling for estimated future while financial liabilities bid prices, priced at current Unlisted equity asking prices. priced at current are in pooled funds. The fair shares investments are We determine the fair value of financial instruments the fair value of financial instruments determine We market prices on a recognised based on their quoted for a broker/dealer stock exchange or a price from Fair value measurement principles Fair value measurement Significant accounting policies Significant accounting (iv) Offsetting (iii) Derecognition (e) (ii) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) For the year ended 31 3. Notes to the financial statements Notes to the Investor Compensation Fund Compensation Investor SFC Annual Report 2016-17
Investor Compensation Fund
Notes to the financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
3. Significant accounting policies (cont’d) (j) Creditors and accrued charges We state creditors and accrued charges initially at (h) Other receivables fair value and thereafter at amortised cost unless the We state other receivables initially at fair value and effect of discounting would be immaterial, in which thereafter at amortised cost less impairment losses case we state them at cost. (see note 3(f)), unless the effect of discounting would be immaterial, in which case we state them at cost (k) Provisions and contingent liabilities less impairment losses. We recognise a provision in the statement of financial position when the Fund has a legal or constructive (i) Provision for compensation obligation of uncertain timing or amount as a result We make provision for liabilities arising from claims of a past event, and it is probable that the Fund will resulting from defaults for which it is probable require an outflow of economic benefits to settle the that the Fund will require an outflow of economic obligation and the amount can be estimated reliably. benefits to settle the obligation and the amount can be estimated reliably, independent of whether a Where it is not probable that an outflow of economic notice calling for claims pursuant to Section 3 of the benefits will be required, or the amount cannot be Securities and Futures (Investor Compensation-Claims) estimated reliably, we disclose the obligation as a Rules has been published. The provision covers all such contingent liability, unless the probability of outflow claims received up to the date on which the financial of economic benefits is remote. We also disclose statements are approved by the SFC. If the effect possible obligations, whose existence will only be is material, we determine provisions by discounting confirmed by the occurrence or non-occurrence of the expected future cash flows that reflects current one or more future events as contingent liabilities market assessments of the time value of money and, unless the probability of outflow of economic benefits where appropriate, the risks specific to the liability. is remote.
The maximum liability of the Fund to claims for each default case is set at $150,000 per claimant.
As the Fund is continually updating information in respect of claims received, it is possible that the recent claim experience is not indicative of future payments that will be required for claims received as at the end of the reporting period. Any increase or decrease in the provision would affect profit and loss in future years.
136 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 137 SFC Annual Report 2016-17 Report Annual SFC by a person identified in (a). by a person identified or is a member influence over the entity personnel of the of the key management of the entity). entity (or of a parent management key provides part, is a it which personnel services to the Fund. The entity is controlled or jointly controlled or jointly controlled The entity is controlled (a)(i) has significant A person identified in of or any member of a group The entity, (vi) (vii) (viii) Changes in accounting policies The HKICPA has issued a number of amendments has issued a number The HKICPA for the current first effective to HKFRSs that are these accounting period of the Fund. None of on how the developments have had a material effect or for the current and financial position results Fund’s or presented. prior periods have been prepared or The Fund has not applied any new standard for the current effective that is not yet interpretation accounting period. on investments earned by the and profits The interest under Tax not subject to Hong Kong Profits Fund are Section 14 of the Inland Revenue Ordinance. Close members of the family of a person are those those of a person are Close members of the family influence, family members who may be expected to that person in their dealings with or be influenced by, the entity. (m) 4. Taxation (cont’d) plan for the benefit of employees of either to the group. or an entity related the group third party. third and the other entity is an associate of the entity. third the others). or joint of the other entity (or an associate of which of a member of a group venture the other entity is a member). same group (which means that each parent, each parent, (which means that same group to subsidiary and fellow subsidiary is related personnel of the Fund. The entity is a post-employment benefit Both entities are joint ventures of the same joint ventures Both entities are entity of a third One entity is a joint venture One entity is an associate or joint venture or joint venture One entity is an associate The entity and the Fund are members of the of members are Fund the and entity The has control or joint control over the Fund; or joint control has control or has significant influence over the Fund; is a member of the key management (v) (iii) (iv) (ii) following conditions applies: (i) family, is related to the Fund if that person: is related family, (i) (ii) (iii) An entity is related to the Fund if any of the to the Fund An entity is related A person, or a close member of that person’s member of that person’s A person, or a close Related parties (b) For the purpose of these financial statements, a party For the purpose of these if: to the Fund to be related is considered (a) Significant accounting policies Significant accounting (l) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) For the year ended 31 3. Notes to the financial statements Notes to the Investor Compensation Fund Compensation Investor SFC Annual Report 2016-17
Investor Compensation Fund
Notes to the financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
5. Net investment income
2017 2016 $’000 $’000 Interest income from bank deposits 84 58 Interest income on financial assets designated at fair value through profit or loss 41,923 42,269 Realised gain/(loss) on disposal of equity securities 4 (38) Realised loss on redemption/disposal of debt securities (1,615) (2,862) Gain/(loss) on revaluation of equity securities 48,362 (20,655) Loss on revaluation of debt securities (11,617) (5,834) Net investment income 77,141 12,938
6. Levy from SEHK and HKFE 7. ICC expenses From 1 April 2003, the Fund received a levy The SFC formed the ICC in September 2002 to chargeable on leviable SEHK transactions and leviable perform functions on behalf of the Fund in relation HKFE contracts pursuant to Part 2 and Part 3 of the to the compensation to investors and other functions Securities and Futures (Investor Compensation – Levy) under Part III and Part XII of the SFO. The Fund Rules. is responsible for funding the establishment and operation of the ICC. For the year ended 31 March After the Securities and Futures (Investor 2017, the ICC incurred costs of $5,574,000 for its Compensation – Levy) (Amendment) Rules 2005 came operations (2016: $5,398,000) which were reimbursed into effect on 28 October 2005, a levy suspension and by the Fund. re-instatement mechanism was established whereby the investor compensation levies can be suspended when the net asset value of the Fund exceeds $1.4 billion, and subsequently reinstated when the net asset value of the Fund falls below $1 billion. Pursuant to the Securities and Futures (Investor Compensation – Levy) (Amendment) Rules 2005 and the Gazette on 11 November 2005, no person is required to pay any levy to the Fund in respect of a sale and purchase transaction of securities and futures contract with effect from 19 December 2005.
138 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 139 476 476 (294) 2016 1,412 $’000 $’000 (3,801) (1,118) 43,808 11,142 41,834 (49,737) 282,860 842,327 487,379 536,698 268,269 892,544 663,757 1,866,404 1,866,404 SFC Annual Report 2016-17 Report Annual SFC 2017 $’000 39,946 330,386 977,432 490,715 425,101 856,310 361,785 635,207 1,893,248 1,893,248
on 31 March 2017 was 2.1% (2016: 1.8%). on 31 March Within one year After one year but within two years After two years but within five years After five years Listed – outside Hong Kong Listed – in Hong Kong Unlisted The weighted average effective interest rate of debt securities interest The weighted average effective Maturity profile Listing status (iii) (ii) (i) Pooled fund – Unlisted Debt securities (b) The pooled fund comprises mainly listed equity securities. (a) Balance as at 31 March 2017 Balance as at 31 March default of two in respect of claims received to a number for compensation relates 2017, the provision As at 31 March for set at $150,000 per claimant. The provision to claims for these cases are cases. The maximum liability of the Fund 2017, all provisions 2016: $1,412,000). As at 31 March 2017 was $476,000 (31 March compensation at 31 March one year. expected to be paid within were Less: compensation paid during the year ended 31 March 2016 ended 31 March Less: compensation paid during the year and 1 April 2016 2016 Balance as at 31 March 2017 year ended 31 March Add: compensation expenses during the 2017 year ended 31 March Less: compensation write-backs during the 2017 ended 31 March Less: compensation paid during the year Balance as at 1 April 2015 Balance as at 1 April 2016 expenses during the year ended 31 March Add: compensation 2016 year ended 31 March Less: compensation write-backs during the Financial assets designated at fair value through profit or loss profit fair value through Financial assets designated at Provision for compensation Provision 9. For the year ended 31 March 2017 (Expressed in Hong Kong dollars) For the year ended 31 8. Notes to the financial statements Notes to the Investor Compensation Fund Compensation Investor SFC Annual Report 2016-17
Investor Compensation Fund
Notes to the financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
10. Deposits with banks and cash at bank 13. Financial risk management and fair The effective interest rate on deposits with banks and values cash at bank at 31 March 2017 ranged from 0.50% The financial assets of the Fund mainly comprise debt to 1.26% (2016: 0.25% to 0.70%). The balances of securities and units in a pooled fund. The underlying deposits at both 31 March 2017 and 31 March 2016 investments of the pooled fund mainly comprise mature within one year. equity securities.
11. Contributions from UECF and CECF The main financial risks of the Fund arise from its investments in debt securities and units in the pooled Under Sections 74(2) and 75(2) of Schedule 10 of fund. The SFC appoints external investment managers the SFO, the SFC may pay into the Fund such sum of to manage the Fund’s investments and to ensure that money from the UECF and the CECF as it considers the portfolio’s investments comply with the Fund’s appropriate after 1 April 2003. Up to 31 March 2017, investment policy approved by the SFC which sets the SFC had $994,718,000 (2016: $994,718,000) and control limits on credit risk, market risk, interest $108,923,000 (2016: $108,923,000) paid into the rate risk, liquidity risk and foreign currency risk. The Fund from the UECF and the CECF respectively. external investment managers report thereon to the The Fund defines “capital” as including contributions SFC on a regular basis. from the UECF and the CECF and the accumulated The Fund’s exposure to these risks and the financial surplus. risk management policies and practices used by the Fund to manage these risks are described below. 12. Material related party transactions We have related party relationships with the SFC, ICC (a) Credit risk and the UECF. There were no significant related party The Fund’s Investment Policy and Administrative transactions other than those disclosed in the financial Guidelines (the Policy) only allows the Fund to invest statements of the Fund for the years ended 31 March in pooled funds, fixed rate dated securities rated A 2016 and 2017 (refer to notes 7 and 11). or above or in bank deposits. The Policy further limits the Fund’s exposure to each issuer and each country, except for holdings of US Treasuries, any issuances by the Hong Kong Government and the Government of the People’s Republic of China and approved pooled funds. The Fund’s investment managers are responsible for managing the portfolio and ensuring the portfolio’s investments meet the Policy and restrictions and reports thereon on a monthly basis. During the year, the Fund complied with the above Policy. The maximum exposure to credit risk is the carrying value of the assets in the statement of financial position.
140 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 141 SFC Annual Report 2016-17 Report Annual SFC Foreign currency risk Foreign currency Market risk The Fund invests in units of a pooled fund, which The Fund invests in units of a pooled fund, the mainly comprises listed equity securities, against the performance of which is measured It is benchmark index MSCI AC Pacific ex Japan. of 14.3% that a general increase/decrease estimated in the benchmark index would increase/decrease surplus and the accumulated surplus the Fund’s (2016: a general $47,245,000 by approximately of 16.8% in the benchmark index increase/decrease the and surplus the Fund’s would increase/decrease $42,995,000). accumulated surplus by approximately The sensitivity analysis above indicates the accumulated instantaneous change in the Fund’s surplus that would arise assuming that the changes in the at the end of the benchmark index had occurred period and had been applied to re-measure reporting those financial instruments held by the Fund which expose the Fund to equity price risk at the end of assumed that the fair period. It is also the reporting investment in pooled fund would values of the Fund’s with the historical correlation change in accordance since the portfolio benchmark index with the relevant is diversified in terms of industry distribution and that constant. The analysis is all other variables remain performed on the same basis for 2016. The Fund’s investment policy allows the Fund to have investment The Fund’s exposure. exchange foreign US dollars and renminbi to US 2017, the Fund has exposure As at 31 March pegged with US dollars are dollars, as Hong Kong not exposed to significant dollars, the Fund was exchange risk. foreign to it The investment activities of the Fund expose associated various types of market risks which are extent of with the markets in which it invests, to the securities. the amount invested in debt and equity in the price and the carrying Such risk will be reflected financial assets concerned.value of the (d) (e) (cont’d) Interest rate risk Liquidity risk period and had been applied to re-measure those period and had been applied to re-measure financial instruments held by the Fund which expose rate risk at the end of the Fund to fair value interest period. The analysis is performed on the the reporting 2016. same basis for the year ended 31 March the accumulated surplus would not be affected (2016: the accumulated surplus would not be affected rates. Nil) by the changes in interest The sensitivity analysis above indicates the accumulated instantaneous change in the Fund’s surplus that would arise assuming that the change in at the end of the reporting rates had occurred interest Further, at 31 March 2017, it is estimated that a March at 31 Further, of 100 basis points in general increase/decrease variables held constant, rates, with all other interest income interest the Fund’s would increase/decrease and the accumulated surplus by approximately components of $5,031,000 (2016: $1,076,000). Other At 31 March 2017, it is estimated that a general 2017, it is estimated At 31 March of 100 basis points in interest increase/decrease rates, with all other variables held constant, would gains on revaluation the Fund’s decrease/increase of debt securities and the accumulated surplus by $29,659,000 (2016: $32,475,000). approximately of a debt security will fluctuate because of changes of a debt security will fluctuate because to manage the re- rates. In order in market interest maintaining pricing risk, the Fund adopts a policy of than five years within its debt duration at no more 2017 the duration securities portfolio. As at 31 March 2016: 1.74 years). March was 1.55 years (31 The Fund’s interest bearing assets mainly comprise bearing assets mainly comprise interest The Fund’s securities and bank rate bearing debt fixed interest exposed to bank deposits are deposits. The Fund’s risk. re-pricing short-term bank deposit interest cash flows The Fund is subject to the risk that future reserves of cash and readily realisable marketable realisable of cash and readily reserves in the securities to meet its liquidity requirements short and longer term. within one year or due All financial liabilities are payable on demand. values monitor its liquidity to regularly policy is The Fund’s that it maintains sufficient to ensure requirement Financial risk management and fair Financial risk management (c) (b) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) For the year ended 31 13. Notes to the financial statements Notes to the Investor Compensation Fund Compensation Investor SFC Annual Report 2016-17
Investor Compensation Fund
Notes to the financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
13. Financial risk management and fair All financial instruments are carried at amounts not values (cont’d) materially different from their fair values as at 31 March 2017 and 2016. (f) Fair values of financial instruments The following table presents the carrying value of The fair value of the debt securities is the quoted financial instruments measured at fair value at the end market price or based on quotes from bond market- of the reporting period across the three levels of the makers. fair value hierarchy defined in HKFRS 13, Fair value The fair value of the investment in the unlisted pooled measurement, with the fair value of each financial fund is determined based on the Fund’s share in the instrument categorised in its entirety based on the net assets of the pooled fund as determined by the lowest level of input that is significant to that fair custodian. The majority of the underlying assets of the value measurement. The levels are defined as follows: pooled fund are listed securities.
Level 1 (highest level): fair values measured using Changes in the market conditions could materially quoted prices (unadjusted) in active markets for affect fair value estimates. Any increase or decrease identical financial instruments in the fair values of financial instruments would affect Level 2: fair values measured using quoted prices profit or loss in future years. in active markets for similar financial instruments, or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data
Level 3 (lowest level): fair values measured using valuation techniques in which any significant input is not based on observable market data
142 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 143 Total Total $’000 $’000 425,101 330,386 536,698 282,860 1,468,147 2,223,634 1,329,706 2,149,264 – – – – – – – – $’000 $’000 SFC Annual Report 2016-17 Report Annual SFC Level 3 Level 3 – – 2016 2017 $’000 $’000 Level 2 Level 2 238,804 363,408 602,212 148,777 177,035 325,812 $’000 $’000 61,693 Level 1 Level 1 330,386 359,663 282,860 (cont’d) 1,229,343 1,621,422 1,180,929 1,823,452 (cont’d) Fair values of financial instruments Fair values of financial Unlisted Assets Debt securities Listed Unlisted Pooled fund significant transfers between financial instruments in Level 1 and Level 2. Unlisted of the reporting the end unavailable at in active markets for certain debt securities were prices Since the quoted classified under Level 2 financial instruments, period, debt securities with carrying amount of $602 million were no were Other than that, there classified as Level 1 financial instruments in prior year. of which $227 million were Assets Debt securities Listed Unlisted Pooled fund Financial risk management and fair values and fair values Financial risk management (f) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) For the year ended 31 13. Notes to the financial statements Notes to the Investor Compensation Fund Compensation Investor SFC Annual Report 2016-17
Investor Compensation Fund
Notes to the financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
14. Contingent liabilities As at the date of this report, in addition to the provision made as described in note 8, there are 18 claims received for which currently there is insufficient information to determine the likely level of payment. The maximum liability in respect of these claims is $2,558,000 (2016: $2,619,000). This is determined based on the lower of the maximum compensation limit of $150,000 per claimant or the amount claimed.
15. Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended 31 March 2017 Up to the date of issue of these financial statements, the HKICPA has issued a number of amendments and new standards which are not yet effective for the year ended 31 March 2017 and which have not been adopted in these financial statements. These include the following which may be relevant to the Fund.
Effective for accounting periods beginning on or after HKFRS 9, Financial instruments 1 January 2018
The Fund is in the process of making an assessment of what the impact of this amendments is expected to be in the period of initial application. So far it has concluded that the adoption of HKFRS 9 may have an impact on the Fund’s results and financial position arising from changes in the Fund’s classification and measurement of financial instruments.
HKFRS 9 introduces new requirements for classification and measurement of financial assets, calculation of impairment of financial assets and hedge accounting. Based on the preliminary assessment, the Fund expects that its financial assets currently measured at fair value through profit or loss will continue with their respective classification and measurements upon the adoption of HKFRS 9. The new impairment model in HKFRS 9 may result in an earlier recognition of credit losses on the Fund’s financial assets. However, a more detailed analysis is required to determine the extent of this impact.
144 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 145 SFC Annual Report 2016-17 Report Annual SFC Interests in contracts Interests to which the Fund was a party No contract of significance member of the Fund had a and in which a Committee year at the end of the financial subsisted material interest, the financial year. or at any time during of the Committee By order Keith Lui Chairman 15 May 2017 (Chairman) (appointed on 28 September 2016)
Ms Teresa Ko Yuk-yin, JP Ko Yuk-yin, Ms Teresa Mr Lee Kwok Keung Mr Thomas Allan Atkinson Mr Keith Lui Ms Mak Po Shuen Members of the Committee Committee during the year ended 31 The members of the were: date of this report 2017 and up to the March Fund as at that date are set out in the financial statements Fund as at that date are on pages 148 to 158. Financial statements the financial yearThe financial performance of the Fund for the financial position of the 2017 and ended 31 March effective in respect of the operation of the Fund to the in respect effective of Schedule 10 of the SFO. extent described in Section 74 eventually transfer the remaining balance of the Fund to eventually transfer the remaining the ICF. remains Securities Ordinance Part X of the repealed 2017, the Fund transferred $994,718,000 to the ICF. After After $994,718,000 to the ICF. 2017, the Fund transferred and its other settlement of all claims against the Fund Commission (SFC) will liabilities, the Securities and Futures 1 April 2003, a new single Investor Compensation Fund 2003, a 1 April the Fund and the (ICF) was formed to ultimately replace Fund. Up to 31 March Commodity Exchange Compensation established the Unified Exchange Compensation Fund (the established the Unified Exchange Compensation Ordinance and Futures Securities when the However, Fund). from into effect (SFO) and its subsidiary legislation came Establishment of the Unified Exchange Establishment Compensation Fund (Chapter 333) Securities Ordinance Part X of the repealed together with the audited financial statements for the year together with the audited 2017. ended 31 March The members of the Securities Compensation Fund Securities Compensation The members of the report their annual present Committee (the Committee) Report of the Securities Compensation Fund Committee Securities Compensation Report of the Unified Exchange Compensation Fund Compensation Exchange Unified SFC Annual Report 2016-17
Unified Exchange Compensation Fund
Independent auditor’s report to the Securities and Futures Commission
Opinion Information other than the financial We have audited the financial statements of Unified statements and auditor’s report thereon Exchange Compensation Fund (the Fund) established The directors of the Securities and Futures Commission under Section 99 of the repealed Hong Kong Securities (SFC) are responsible for the other information. The other Ordinance set out on pages 148 to 158, which comprise information comprises all the information included in the the statement of financial position as at 31 March 2017, annual report, other than the financial statements and our the statement of profit or loss and other comprehensive auditor’s report thereon. income, the statement of changes in equity and the cash flow statement for the year then ended and notes to the Our opinion on the financial statements does not cover financial statements, including a summary of significant the other information and we do not express any form of accounting policies. assurance conclusion thereon.
In our opinion, the financial statements give a true and fair In connection with our audit of the financial statements, view of the financial position of the Fund as at 31 March our responsibility is to read the other information and, 2017 and of its financial performance and its cash flows in doing so, consider whether the other information is for the year then ended in accordance with Hong Kong materially inconsistent with the financial statements or our Financial Reporting Standards (HKFRSs) issued by the Hong knowledge obtained in the audit or otherwise appears to Kong Institute of Certified Public Accountants (HKICPA). be materially misstated.
If, based on the work we have performed, we conclude Basis for opinion that there is a material misstatement of this other We conducted our audit in accordance with Hong Kong information, we are required to report that fact. We have Standards on Auditing (HKSAs) issued by the HKICPA. Our nothing to report in this regard. responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial Responsibilities of the directors of the statements section of our report. We are independent of SFC for the financial statements the Fund in accordance with the HKICPA’s Code of Ethics for Professional Accountants (the Code) and we have The directors of the SFC are responsible for the preparation fulfilled our other ethical responsibilities in accordance of the financial statements that give a true and fair view in with the Code. We believe that the audit evidence we have accordance with HKFRSs issued by the HKICPA and for such obtained is sufficient and appropriate to provide a basis for internal control as the directors of the SFC determine is our opinion. necessary to enable the preparation of financial statements that are free from material misstatement, whether due to Emphasis of matter fraud or error. We draw attention to the fact that the Fund is in the In preparing the financial statements, the directors of process of terminating its business and operations and is the SFC are responsible for assessing the Fund’s ability to no longer considered to be a going concern. Details about continue as a going concern and disclosing matters related the basis of preparation of the financial statements are set to going concern. The directors consider that the Fund is out in the significant accounting policies note 3(b) to the no longer a going concern and have prepared the financial financial statements. Our opinion is not modified in respect statements on the basis as set out in note 3 thereto. of this matter.
146 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 147 SFC Annual Report 2016-17 Report Annual SFC used and the reasonableness of accounting estimates of accounting estimates used and the reasonableness of the directors made by the disclosures and related SFC. that the Fund is no longer a judgement the SFC’s going concern based on the audit evidence obtained. the financial statements, including the content of financial statements and whether the disclosures, transactions and events in a the underlying represent manner that achieves fair presentation. Evaluate the appropriateness of accounting policies Evaluate the appropriateness of of the directors Conclude on the appropriateness and structure Evaluate the overall presentation,
the audit and significant audit findings, including any the audit and significant audit that we identify significant deficiencies in internal control during our audit. KPMG Certified Public Accountants Building Prince’s 8th Floor, 10 Chater Road Central, Hong Kong 15 May 2017 We communicate with the directors of the SFC regarding, of the SFC regarding, communicate with the directors We and timing of among other matters, the planned scope misrepresentations or the override of internal or the override control. misrepresentations that to design audit procedures to the audit in order but not for the in the circumstances appropriate are an opinion on the effectiveness purpose of expressing internal control. of the Fund’s or error, design and perform audit procedures design and perform audit procedures or error, obtain audit evidence to those risks, and responsive a to provide and appropriate that is sufficient basis for our opinion. The risk of not detecting a fraud is higher from material misstatement resulting as fraud may error, from than for one resulting intentional omissions, involve collusion, forgery, of the financial statements, whether due to fraud of the financial statements, whether due Obtain an understanding of internal control relevant relevant Obtain an understanding of internalcontrol Identify and assess the risks of material misstatement Identify and assess the risks of material
exercise professional judgement and maintain professional judgement and maintain professional professional exercise also: We the audit. scepticism throughout financial statements. we HKSAs, with As part of an audit in accordance error and are considered material if, individually or in the considered and are error influence be expected to they could reasonably aggregate, the basis of these the economic decisions of users taken on Reasonable assurance is a high level of assurance, but is Reasonable assurance is a high level of assurance, in accordance not a guarantee that an audit conducted misstatement with HKSAs will always detect a material fraud or when it exists. Misstatements can arise from accept liability to any other person for the contents of this accept liability to any other person for the report. to issue an auditor’s report that includes our opinion. This that includes our opinion. report to issue an auditor’s for no other and as a body, is made solely to you, report or towards responsibility do not assume purpose. We Our objectives are to obtain reasonable assurance about to obtain reasonable Our objectives are from free statements as a whole are whether the financial and fraud or error, due to whether material misstatement, Auditor’s responsibilities for the audit of audit for the responsibilities Auditor’s the financial statements Independent auditor’s report to the Securities and Futures Commission (continued) and Futures Commission auditor’s report to the Securities Independent Unified Exchange Compensation Fund Exchange Compensation Unified SFC Annual Report 2016-17
Unified Exchange Compensation Fund
Statement of profit or loss and other comprehensive income For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
Note 2017 2016 $’000 $’000 Income Interest income 560 518 560 518 Expenses Recoveries re-distributed 5 1,152 – Auditor’s remuneration 55 52 Professional fees 19 18 Bank charge 3 – Sundry expenses 1 – 1,230 70
(Loss)/surplus and total comprehensive income for the year (670) 448
The notes on pages 152 to 158 form part of these financial statements.
148 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 149 1 59 278 800 2016 3,500 3,002 $’000 49,050 71,411 71,411 82,179 82,517 11,106 71,411 26,790 10,306 353,787 300,000 330,000 (994,718) 1,066,129 1 77 332 600 2017 3,500 3,002 $’000 51,200 26,120 72,891 72,891 83,744 84,154 10,663 11,263 72,891 353,787 300,000 330,000 SFC Annual Report 2016-17 Report Annual SFC (994,718) 1,067,609 7 9 6 7 10 11 11 12 13 Note Lee Kwok Keung Committee Member Interest receivable Interest Fixed deposits with banks Cash at bank and accrued charges Creditors Relinquished trading rights payable to SEHK Equity securities received under subrogation Equity securities received Keith Lui Chairman Commission on 15 May 2017 and signed on its behalf by Approved and authorised for issue by the Securities Compensation Fund Committee on behalf of the Securities and Futures behalf of the Securities and Futures and authorised for issue by the Securities Compensation Fund Committee on Approved Accumulated surplus Contributions to Investor Compensation Fund Additional contributions from the SFC Additional contributions from Special levy surplus Excess transaction levy from SEHK Excess transaction levy from Special contributions SEHK Additional contributions from Compensation fund SEHK Contributions from Representing: Net current assets Net current Net assets
Current liabilities Current
The notes on pages 152 to 158 form part of these financial statements. The notes on pages 152 to Current assets Current At 31 March 2017 (Expressed in Hong Kong dollars) in Hong 2017 (Expressed At 31 March Statement of financial position Statement of Unified Exchange Compensation Fund Exchange Compensation Unified SFC Annual Report 2016-17
Unified Exchange Compensation Fund
Statement of changes in equity For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
Additional Excess Special contributions Contributions transaction contributions from to Investor Contributions levy and special SEHK and Accumulated Compensation from SEHK from SEHK levy surplus the SFC surplus Fund Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 Balance at 1 April 2015 48,100 353,787 6,502 630,000 26,342 (994,718) 70,013 Net contributions from SEHK 950 – – – – – 950 Surplus and total comprehensive income for the year – – – – 448 – 448 Balance at 31 March 2016 49,050 353,787 6,502 630,000 26,790 (994,718) 71,411 Balance at 1 April 2016 49,050 353,787 6,502 630,000 26,790 (994,718) 71,411 Net contributions from SEHK 2,150 – – – – – 2,150 Loss and total comprehensive income for the year – – – – (670) – (670) Balance at 31 March 2017 51,200 353,787 6,502 630,000 26,120 (994,718) 72,891
The notes on pages 152 to 158 form part of these financial statements.
150 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 151 2 (70) 100 278 448 518 518 950 950 (518) 2016 2016 $’000 $’000 (1,300) (1,368) 82,357 82,457 82,179 82,457 332 542 357 542 (560) (200) (670) 2017 2017 1,619 2,150 2,150 $’000 $’000 (1,230) (1,073) 82,457 84,076 83,744 84,076 SFC Annual Report 2016-17 Report Annual SFC Net contributions from SEHK Net contributions from Decrease in relinquished trading rights payable to SEHK trading rights in relinquished Decrease received Interest Adjustment for: and accrued charges in creditors Increase (Loss)/surplus for the year (Loss)/surplus for the Cash at bank Fixed deposits with banks Analysis of the balance of cash and cash equivalents Analysis of the balance of Cash and cash equivalents at beginning of the year Cash and cash equivalents at beginning the year Cash and cash equivalents at end of Net cash generated from financing activities financing Net cash generated from in cash and cash equivalents Net increase Net cash generated from investing activities investing Net cash generated from Net cash used in operating activities activities investing Cash flows from
Interest income Interest Cash flows from financing activities financing Cash flows from
The notes on pages 152 to 158 form part of these financial statements. The notes on pages 152 to Cash flows from operating activities Cash flows from For the year ended 31 March 2017 (Expressed in Hong Kong dollars) 2017 (Expressed March For the year ended 31 Cash flow statement Unified Exchange Compensation Fund Exchange Compensation Unified SFC Annual Report 2016-17
Unified Exchange Compensation Fund
Notes to the financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
1. Purpose, limitation and principal Apart from the above change and Section 112 of activity the repealed Securities Ordinance, under Section 74 of Schedule 10 of the SFO, Part X of the repealed The Fund provides compensation to investors who Securities Ordinance remains effective in respect of suffer a loss due to the default of an exchange the operation of the Fund. participant of The Stock Exchange of Hong Kong Limited (SEHK). Part X of the repealed Securities Ordinance governs its operation. 2. Money constituting the Fund Before 1 April 2003, SEHK was required to keep SEHK receives and determines claims against the deposited with the SFC $50,000 for each SEHK Fund. The Securities and Futures Commission (SFC) trading right under the repealed Securities Ordinance. maintains and invests the money of the Fund and When the SFC makes compensation payments out of makes payments to claimants. Upon making payment the deposits, the SFC may require SEHK to replenish to a claimant, the SFC is subrogated to the claimant’s the net amount paid after the SFC has exhausted rights against the defaulter. its subrogated rights against the defaulter. The SFC pays to SEHK the investment return earned on any The repealed Securities Ordinance limits the total remaining deposits net of Fund expenses. During the compensation amount that may be paid per exchange year, the SFC did not make such payment as the total participant default to $8 million. If allowed claims of the compensation payments exceeded the deposits exceed the limit, payments are made proportionally received from SEHK (2016: Nil). to claimants. SEHK, with the approval of the SFC, can decide to exceed the limit if it considers, among SEHK and the SFC have made contributions of their other things, that the assets of the Fund so permit. own money to the Fund. The SFC determined it For eight defaults since 1998, SEHK proposed and the would retain investment returns earned on these SFC approved exceeding the limit via payment of up contributions in the Fund. to $150,000 per claimant or, if higher, the claimant’s proportional share of the $8 million limit. Other sources of money for the Fund include: recoveries; SEHK replenishments detailed in note 16; If amounts owed to claimants against the Fund special levy surplus detailed in note 12; and excess exceed the Fund’s net assets, the SFC would apportion transaction levy received before the SFO became compensation payments to claimants as provided effective from 1 April 2003 detailed in note 9. in the repealed Securities Ordinance. Unpaid claim amounts would be charged against future receipts by The Fund defines “capital” as including all elements the Fund and paid when funds are available. of the Fund less contributions to the ICF and less contributions from SEHK (deposits for transferred After the Securities and Futures Ordinance (SFO) trading rights) as disclosed on the face of the and its subsidiary legislation came into effect from statement of financial position. 1 April 2003, a new single Investor Compensation Fund (ICF) was formed to ultimately replace the Fund and the Commodity Exchange Compensation Fund. After settlement of all claims against the Fund and its other liabilities, the SFC will eventually transfer the remaining balance of the Fund into the ICF. Claims for any defaults occurring after 31 March 2003 should be made against the ICF. If the sum of money in the Fund is not sufficient to meet its liabilities, the SFC shall pay into the Fund from the ICF the appropriate sum of money according to Section 242 of the SFO.
152 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 153 SFC Annual Report 2016-17 Report Annual SFC Recognition of income amount of $8 million for each default to be charged SEHK. to the contribution from period, or in the period of the revision and future and future the period of the revision period, or in and future both current affects periods if the revision periods. income as it accrues using the interest record We method. interest effective to Section 118 pursuant recoveries recognise We as income to Securities Ordinance of the repealed to claimants re-distributed the Fund and recoveries and re- received recoveries record as expenses. We distributed when and only when we can be virtually and paid. will be received certain that the recoveries SEHK pursuant to from replenishments record We Securities Ordinance repealed the Section 107 of basis. For the as income of the Fund on a receipt purpose of calculating the amount to be replenished to the compensation payments up by SEHK, we deem We prepare the financial statements in conformity the financial prepare We to make management with HKFRSs which require the and assumptions that affect judgements, estimates assets,of amounts reported and policies of application make estimates expenses. We liabilities, income and based on historical and associated assumptions believed are experience and various other factors that the results circumstances, under the to be reasonable of which form the basis of making the judgements that are about carrying values of assets and liabilities Actual results other sources. from apparent not readily these estimates. from may differ and underlying assumptions estimates review We to revisions recognise on an ongoing basis. We the accounting estimates in the period in which only that affects if the revision estimate is revised Interest income Replenishments by SEHK (c) (i) (ii) Recoveries (iii)
Basis of preparation Statement of compliance these cannot be reliably estimated. We have also not estimated. We reliably these cannot be the financial statements for all expenses in provided the subsequent to the end of expected to be incurred period and up to the date operations will reporting estimated to be immaterial. are cease and these a non-going concern basis. We expect that the a non-going concern basis. We operations of the Fund will be maintained until all to liquidators in relation from claims and recoveries defaults that happened on or before the broker have not been fully settled. We 2003 have 31 March as claims and recoveries for potential future provided Under the SFO, the Fund will continue in operation until all claims against it and all its liabilities have been settled. As the Fund will eventually cease operation, these financial statements on we have prepared they are relevant to the Fund for the current and to the Fund for the current relevant they are in these financial prior accounting periods reflected statements. or The Fund has not applied any new standard for the current effective that is not yet interpretation accounting period (see note 17). The HKICPA has issued certain new and revised new and revised has issued certain The HKICPA or available for early first effective HKFRSs that are period of accounting adoption for the current information on any 3(i) provides the Fund. Note initial from changes in accounting policies resulting extent that application of these developments to the Financial Reporting Standards, Hong Kong Accounting Financial Reporting Standards, issued by the (HKASs) and Interpretations Standards Hong Kong Institute of Certified Public Accountants generally accepted and accounting principles (HKICPA) adopted in Hong Kong. Significant accounting policies set out below. by the Fund are These financial statements have been prepared in have been prepared These financial statements with all applicable Hong Kong Financial accordance which collective (HKFRSs), Reporting Standards Hong Kong term includes all applicable individual Significant accounting policies Significant accounting (b) (a) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) For the year ended 31 3. Notes to the financial statements Notes to the Unified Exchange Compensation Fund Exchange Compensation Unified SFC Annual Report 2016-17
Unified Exchange Compensation Fund
Notes to the financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
3. Significant accounting policies (cont’d) (e) Cash and cash equivalents (d) Impairment Cash and cash equivalents comprise cash at bank and in hand and demand deposits with banks and other The carrying amount of the Fund’s assets are reviewed financial institutions. at each reporting period to determine whether there is objective evidence of impairment. Objective evidence that financial assets are impaired includes observable (f) Creditors and accrued charges data that comes to the attention of the Fund about We state creditors and accrued charges initially at one or more of the following loss events which have fair value and thereafter at amortised cost unless the an impact on the future cash flows of the assets that effect of discounting would be immaterial, in which can be estimated reliably: case they are stated at cost.
significant financial difficulty of the issuer or (g) Provisions and contingent liabilities borrower; We recognise a provision in the statement of financial a breach of contract, such as a default or position when the Fund has a legal or constructive delinquency in interest or principal payments; obligation of uncertain timing or amount as a result of a past event, and it is probable that the Fund will it becoming probable that the borrower will enter require an outflow of economic benefits to settle the bankruptcy or other financial reorganisation; obligation and the amount can be estimated reliably. significant changes in the technological, market, Where it is not probable that an outflow of economic economic or legal environment that have an benefits will be required, or the amount cannot be adverse effect on the borrower; estimated reliably, we disclose the obligation as a disappearance of an active market for financial contingent liability, unless the probability of outflow assets because of financial difficulties; and of economic benefits is remote. We also disclose possible obligations, whose existence will only be a significant or prolonged decline in the fair confirmed by the occurrence or non-occurrence of value of an investment in an equity instrument one or more future events as contingent liabilities below its cost. unless the probability of outflow of economic benefits is remote. If any such evidence exists, the carrying amount of financial assets held at amortised cost is reduced to the estimated recoverable amount by means of a charge to the statement of profit or loss and other comprehensive income.
154 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 155 SFC Annual Report 2016-17 Report Annual SFC which it is a part, provides key management management key part, provides is a it which the Fund. personnel services to The entity, or any member of a group of any member of a group or The entity, (viii) Changes in accounting policies The Fund has not applied any new standard or The Fund has not applied any new standard for the current effective that is not yet interpretation accounting period. Section 87 of the Hong Kong Inland Revenue Hong Kong Profits from exempts the Fund Ordinance Tax. by virtue of the SFC’s recoveries The Fund received of claimants who rights in respect subrogation the Fund. On compensation payments from received 17 May 2016, the Securities Compensation Fund the excess Committee of the SFC decided to return amount totalled to interest amount and relevant claimants of the C.A. the $1,152,000 to some of Pacific case. The excess amount for each claimant amount from the excess of total recovered represents the liquidators over the compensation amount paid to the claimant. Close members of the family of a person are those are of a person family Close members of the may be expected to influence, family members who their dealings with that person in or be influenced by, the entity. of amendments has issued a number The HKICPA for the current first effective to HKFRSs that are these accounting period of the Fund. None of on how the developments have had a material effect or for the current and financial position results Fund’s or presented. prior periods have been prepared Recoveries re-distributed 4. Taxation 5. (i) (cont’d) influence over the entity or is a member of the key management personnel of the of the entity). entity (or of a parent plan for the benefit of employees of either to the group. or an entity related the group by a person identified in (a). third party. third and the other entity is an associate of the entity. third the others). or joint of the other entity (or an associate of which of a member of a group venture the other entity is a member). same group (which means that each parent, each parent, (which means that same group to subsidiary and fellow subsidiary is related personnel of the Fund. A person identified in (a)(i) has significant The entity is a post-employment benefit or jointly controlled The entity is controlled Both entities are joint ventures of the same joint ventures Both entities are entity of a third One entity is a joint venture One entity is an associate or joint venture or joint venture One entity is an associate The entity and the Fund are members of the of members are Fund the and entity The has control or joint control over the Fund; or joint control has control or has significant influence over the Fund; is a member of the key management (vii) (v) (vi) (iii) (iv) (ii) following conditions applies: (i) family, is related to the Fund if that person: is related family, (i) (ii) (iii) An entity is related to the Fund if any of the to the Fund An entity is related A person, or a close member of that person’s member of that person’s A person, or a close Related parties (b) For the purpose of these financial statements, a party For the purpose of these if: to the Fund to be related is considered (a) Significant accounting policies Significant accounting (h) For the year ended 31 March 2017 (Expressed in Hong Kong dollars) For the year ended 31 3. Notes to the financial statements Notes to the Unified Exchange Compensation Fund Exchange Compensation Unified SFC Annual Report 2016-17
Unified Exchange Compensation Fund
Notes to the financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
6. Creditors and accrued charges 7. Contributions from SEHK/ Creditors and accrued charges comprised mainly Relinquished trading rights payable compensation payments re-established for those to SEHK cheque payments that were not cleared over six According to Section 104 of the repealed Securities months from the cheque issuing date and accrued Ordinance, SEHK contributes to the Fund in respect of auditor’s remuneration. each trading right at the rate of $50,000 per trading These liabilities are classified as financial liabilities right. In the absence of claims or other provisions measured at amortised cost in accordance with the as set out in Section 106 of the repealed Securities determination in HKAS 39, Financial instruments: Ordinance, the SFC must refund to SEHK the deposit Recognition and measurement unless the effect of within six months after the trading right was discounting would be immaterial, in which case they relinquished. During the year, deposits of $2,750,000 are stated at cost. They are due on demand or within in respect of 55 new trading rights were received one year and are unsecured. from SEHK and deposits of $800,000 in respect of 16 relinquished trading rights were refunded to SEHK. As at 31 March 2017, there were 12 trading rights in total of $600,000 that have been relinquished but not yet refunded.
The movement of contributions from SEHK during the year was as follows:
2017 2016 $’000 $’000 Balance brought forward 49,050 48,100 Add: new trading rights issued 2,750 1,400 Less: relinquished trading rights refunded (800) (1,750) Add: decrease in relinquished trading rights payable to SEHK 200 1,300 Balance carried forward 51,200 49,050
8. Contingent liabilities 10. Special contributions As at the date of this report, there is no outstanding In October 1993, a member of SEHK made a special claim against the Fund. contribution to the Fund in recognition of the SFC’s concerns about its misconduct in handling its client In relation to the default cases, any excess of trading activities. recovered amounts (refer to note 5), will be re- distributed to claimants. As the timing of any future 11. Additional contributions from SEHK re-distribution and amount of these potential excess amounts are uncertain at the date of this report, we and the SFC disclose this as a contingent liability. Following the relaxation of the compensation rules and compensation limit in 1998, the SFC and 9. Excess transaction levy from SEHK SEHK had injected $330 million and $300 million respectively to the Fund during the years 1998 to SEHK paid these amounts to the Fund from 1992 2001. to 1994 under an agreement with the SFC and the Financial Secretary concerning SEHK’s budget and its receipt of transaction levy.
156 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 157 SFC Annual Report 2016-17 Report Annual SFC transactions and balances are denominated in Hong transactions and balances are Kong dollars. attributable to risk is primarily credit The Fund’s is that bank policy amounts at bank. Management’s banks rated P-1 licensed with only placed balances are no are There or S&P respectively. or A-1 by Moody’s amounts past due or impaired. monitor its liquidity policy is to regularly The Fund’s that it maintains sufficient ensure to requirements in liquidity requirements of cash to meet its reserves the short and longer term. The Fund’s interest bearing assets mainly comprise bearing assets interest The Fund’s in the or re-price mature deposits at banks which the Fund is subject of which short term, as a result rate risk due to to interest to a limited exposure market rates. At 31 fluctuations in the prevailing is estimated that a general increase/ 2017, it March rates, in the interest of 100 basis points decrease increase/ with all other variables held constant, would surplus and accumulated surplus the Fund’s decrease (2016: $822,000). Other $837,000 by approximately not be components of accumulated surplus would rates. in interest (2016: Nil) by the changes affected risks arises in and liquidity to credit The exposure Fund The operation. the normal course of the Fund’s exchange risk as all is not exposed to any foreign Financial risk management 15.
2016 and 2017. The Fund has related party relationships with the ICF with the ICF party relationships The Fund has related party related significant no were and the SFC. There the financialtransactions other than those disclosed in 31 March statements of the Fund for the years ended Compensation Fund. Under Section 74(2) of Schedule Compensation 2003 pay 10 of the SFO, the SFC may after 1 April which came into operation after into the ICF, as it the Fund 2003, such sum of money from 1 April theinto paid contributions Total appropriate. considers to $994,718,000 2017 amounted ICF up to 31 March (2016: $994,718,000). Compensation Fund came When the SFO and its subsidiary legislation 1 April 2003, a new single Investor from into effect Fund (ICF) was formed to ultimately Compensation Exchange the Fund and the Commodity replace In November 2000, the former Financial Services In November 2000, the to of the HKSAR Government transferred Bureau the of provisions the under the Fund $3,002,000 Ordinance. Exchanges (Special Levy) Material related party transactions Material related Contributions to Investor Contributions to Special levy surplus 14. 13. For the year ended 31 March 2017 (Expressed in Hong Kong dollars) For the year ended 31 12. Notes to the financial statements Notes to the Unified Exchange Compensation Fund Exchange Compensation Unified SFC Annual Report 2016-17
Unified Exchange Compensation Fund
Notes to the financial statements For the year ended 31 March 2017 (Expressed in Hong Kong dollars)
16. Replenishments from SEHK Under Section 107 of the repealed Securities Ordinance, the SFC may require SEHK to replenish the Fund with an amount that is equal to that paid in connection with the satisfaction of the claim (limited to $8,000,000 per each defaulted case) after the SFC has exhausted all relevant rights of action and other legal remedies against the defaulter.
Up to 31 March 2017, SEHK replenished $16,361,000 to the Fund. In compliance with Section 107 of the repealed Securities Ordinance, if no further recoveries were to be collected, the SFC may require SEHK to further replenish $70,816,000 to the Fund as follows:
2017 2016 $’000 $’000 Compensation paid up to the $8 million limit as set out in Section 109(3) of the repealed Securities Ordinance 100,738 100,738 Less: recoveries received for compensation paid up to $8 million (29,946) (29,946) Add: recoveries re-distributed to claimants 16,385 16,385 Less: replenishments from SEHK (16,361) (16,361) Net amount the SFC may request SEHK for replenishment 70,816 70,816
Under Section 74(3) of Schedule 10 of the SFO, the SFC having allowed sufficient funds to meet claims, may reimburse SEHK for the deposits paid by SEHK into the Fund for each trading right. The reimbursement of these SEHK deposits may be set off against further replenishments required from SEHK.
Replenishments from SEHK are not recognised in the statement of financial position given that the Fund is not aware of any need for requesting SEHK for replenishment in the near future.
17. Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended 31 March 2017 Up to the date of issue of these financial statements, the HKICPA has issued a number of amendments and new standards which are not yet effective for the year ended 31 March 2017 and which have not been adopted in these financial statements. These include the following which may be relevant to the Fund.
Effective for accounting periods beginning on or after HKFRS 9, Financial instruments 1 January 2018
The Fund is in the process of making an assessment of what the impact of this amendment is expected to be in the period of initial application. So far it has concluded that the adoption of HKFRS 9 is unlikely to have a significant impact on the Fund’s results of operations and financial position.
158 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 159 (9.3%) (100%) 1 (1.7%) 1 292 (0%) 69 (0%) (100%) 1 (33.2%) 1 110 (0%) 1 Total NAV NAV Total otal NAV otal NAV T 78,830 (6.2%) 10,880 (0.8%) 15,253 (1.2%) 41,719 (3.3%) (US$ million) 1,576 (0.1%) 118,172 860,620 (67.4%) 150,267 (11.8%) 15,651 (1.2%) 87,530 (6.9%) (US$ million) 21,315 117,242 (9.2%) 1,276,033 608,782 (47.7%) 423,758 1,276,033 Total SFC Annual Report 2016-17 Report Annual SFC As at 31.3.2016 65 (3%) 229 5 (0.2%) 9 (0.4%) 27 (1.3%) 90 (4.2%) 277 (13%) 2,133 656 (30.8%) As at 31.3.2016 2,133 (100%) 1,004 (47.1%) 3 (0.2%) 3 (0.2%) Number 46 (2.4%) 14 (0.7%) 140 (7.3%) 102 (5.4%) 161 (8.5%) 404 (21.2%) 1,904 (100%) 2 1,031 (54.1%) 4 217 (0%) Total NAV Total 41,815 (3%) 90,987 (6.6%) 17,056 (1.2%) 11,546 (0.8%) (US$ million) 131,605 (9.6%) 910,351 (66.2%) 172,383 (12.5%) 28 (0%) 1,375,960 (100%) 127 (0%) Total NAV NAV Total 1,288 (0.1%) 21,014 (1.5%) 19,865 (1.4%) 92,069 (6.7%) (US$ million) 137,454 (10%) Total 465,267 (33.8%) 638,848 (46.4%) 1,375,960 (100%) 5 (0.2%) 74 (3.4%) 11 (0.5%) 64 (2.9%) 49 (2.2%) due to revised figures reported by fund managers after the report’s issuance. the report’s by fund managers after reported figures due to revised due to revised figures reported by fund managers after the report’s issuance. the report’s by fund managers after reported figures due to revised 4 735 (33.4%) 256 (11.6%) 2,203 (100%) 1,009 (45.8%) 242 2,203 As at 31.3.2017 3 (0.2%) 2 (0.1%) 7 (0.4%) 8 1 0 2 Number 44 (2.2%) 24 22 45 70 172 162 (8.3%) 113 (5.8%) 182 (9.3%) As at 31.3.2017 430 (21.9%) funds Single 1,961 (100%) 1,018 (51.9%) Annual Report 2015-16 Annual Report 2015-16 2 2 2 36 38 527 956 226 Sub- 1,789 funds 2 1 2 4 14 53 28 242 138 funds 3 Umbrella Authorised unit trusts and mutual funds – by type Authorised unit Authorised unit trusts and mutual funds – by origin Authorised unit trusts and mutual
2
This figure differs from that disclosed in the from differs This figure Including leveraged and inverse products. This figure differs from that disclosed in the that disclosed from differs This figure due to rounding. does not add up to total The percentage The percentage does not add up to total due to rounding. The percentage Including futures and options funds, structured funds and funds that invest in financial derivative instruments. and options funds, structured Including futures Cayman Islands Others Total Mainland China Bermuda United Kingdom Luxembourg Ireland Hong Kong Umbrella structures Umbrella Total Hedge Other specialised Sub-total Fund of funds Index Guaranteed Diversified Money market Bond Equity
1 2
Table 1 Table Breakdown of SFC activity data SFC activity of Breakdown 4 2 Table 1 2 3 SFC Annual Report 2016-17
Breakdown of SFC activity data
Table 3 Takeovers activities
2016/17 2015/16 2014/15
Codes on Takeovers and Mergers and Share Buy-backs General and partial offers under Code on Takeovers and Mergers 73 50 55 Privatisations 13 7 7 Whitewash waiver applications 37 51 31 Other applications under Code on Takeovers and Mergers1 365 323 279 Off-market and general offer share buy-backs 4 1 3 Other applications under Code on Share Buy-backs1 2 3 9 Total 494 435 384 Executive Statements Sanctions imposed with parties’ agreement2 4 1 1 Takeovers and Mergers Panel Meetings for review of Codes on Takeovers and Mergers and Share Buy-backs 0 0 1 Hearings before the Panel (disciplinary and non-disciplinary) 2 2 4 Statements issued by the Panel3 2 4 2
1 Including stand-alone applications and those made during the course of a code-related transaction. 2 Pursuant to section 12.3 of the Introduction to the Codes on Takeovers and Mergers and Share Buy-backs. 3 Pursuant to section 16.1 of the Introduction to the Codes on Takeovers and Mergers and Share Buy-backs.
160 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 161 0 2 9 4 0 2 5 5 7 48 97 65 18 40 22 28 18 79 236 117 307 1,109 2014/15 9 3 2 0 1 5 6 56 14 12 16 41 34 45 33 10 69 388 223 571 146 1,684 2015/16 SFC Annual Report 2016-17 Report Annual SFC 8 0 1 6 1 8 8 18 82 14 91 11 13 58 36 62 13 85 441 201 598 1,755 2016/17 2 1 3 Breaches noted during on-site inspections Breaches noted information management, adequacy of audit trail for internal control purposes, among other weaknesses. information management, adequacy of audit trail for internal control Commonly related to risk management, record keeping, client agreements, safeguarding of client assets and management responsibilities. of client assets and safeguarding keeping, client agreements, record to risk management, Commonly related Exchange Limited. Comprised The Stock Exchange of Hong Kong Limited and Hong Kong Futures duties, of over the handling of client accounts, segregation and supervision, operational controls management review Comprised deficiencies in Internal control weaknesses Internal control Non-compliance with anti-money laundering guidelines Non-compliance with anti-money laundering Breach of Fund Manager Code of Conduct of Fund Breach of on-line trading of regulation Breach Breach of Code of Conduct for Persons Licensed by or Registered with the for Persons Licensed by or Registered of Code of Conduct Breach Commission Securities and Futures Schemes Authority Others Breach of other rules and regulations of the Exchanges of other rules and regulations Breach Fund of the Mandatory Provident of other rules and regulations Breach Breach of Corporate Finance Adviser Code of Conduct of Corporate Finance Breach Dealing malpractices Total Marketing malpractices securities Illegal short selling of Breach of requirements of contract notes/statements of account/receipts of requirements Breach to make filing/notification Failure of margin requirements Breach Failure to safekeep client money to Failure issues Unlicensed dealing and other registration of licensing conditions Breach Failure to safekeep client securities to Failure records books and maintain proper to Failure Failure to comply with Securities and Futures (Financial Resources) Rules (Financial Resources) comply with Securities and Futures to Failure
1 2 3 Table 4 Table Breakdown of SFC activity data of SFC Breakdown SFC Annual Report 2016-17
Breakdown of SFC activity data
Table 5 Successful prosecutions
Unauthorised activities
Date of Investigation Defendants conviction Fine ($) costs awarded ($)
Gold Root Global Investments Limited 27.10.2016 10,000 14,348 CHIANG Ching Fung 20.2.2017 12,000 15,348 Total 22,000 29,696
Provision of false/misleading representation to the SFC
Date of Investigation Defendant conviction Fine ($) costs awarded ($)
CHIU Sing Ho 28.4.2016 10,000 8,001
Disclosure of interests
Date of Investigation Defendants conviction Fine ($) costs awarded ($)
Springs China Opportunities Master Fund 14.4.2016 24,000 4,680 ZHAO Jun 14.4.2016 24,000 4,680 HO Pui Tin Terence 8.9.2016 36,000 10,257 Total 84,000 19,617
162 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 163 decision 2 SFC Annual Report 2016-17 Report Annual SFC months and fined $51,830 months and fined years Banned for three Suspended for one year Banned for 10 years Banned for one year and fined $150,000 Banned for two years Banned for six months Reprimanded and fined $50,000 Banned for nine months Reprimanded and fined $700,000 Banned for nine months Banned for six months Action/SFAT the SFC’s affirmed SFAT decision to reprimand and fine the company $11 million Reprimanded and fined $700,000 Banned for 12 months Lam – banned for 36 months and fined $111,000 – banned for 30 Yeung 3 1 in a licensed corporation of which he was officer the responsible client records Failed to maintain proper transactions without proper and effected authorisation Effected transactions for two of his clients transactions for two Effected his breached authorisation, without proper internal policies and failed control employer’s client records to keep proper Forged client signature to a short selling restrictions Misrepresented customer on insurance Forged client signatures application documents to controls Failed to put in place proper monitor and supervise employee dealings Failed to monitor risk and compliance issues than for which the data was collected steps to avoid Failed to take all reasonable on the basis and traded conflicts of interest pending a of non-public information about acquisition of a client share Convicted of forgery Convicted of fraud of Conduct of the Code breaches Various a fund to a to his sale of Failings related client Conduct preparation to the relating failures Various special comment report and publication of a published on 11 July on Mainland companies 2011 Failed to comply with the telephone and put in place requirements recording procedures internal control effective client data for purposes other Transferred 20.3.2017 23.12.2016 5.1.2017 6.1.2017 9.1.2017 27.1.2017 10.3.2017 10.8.2016 3.10.2016 12.10.2016 2.11.2016 21.11.2016 Date of action 5.4.2016 3.5.2016 6.5.2016 Other public disciplinary actions Other public disciplinary The Securities and Futures Appeals Tribunal. The Securities and Futures Commission. with the Securities and Futures or Registered The Code of Conduct for Persons Licensed by See Enforcement on pages 63-71 for details of the most significant disciplinary actions. on pages 63-71 for details See Enforcement LEUNG Ming Yin Philip LEUNG Ming Yin Limited HUANG Qiang CHOI Siu Ki Marcus North Sea Securities CHEUNG Kwan Po Bobo CHANG Chyi KU Ka Tat Benedict KU Ka Tat POON Kin Lung LO Tsz On Chris LO Tsz LAI Lawrence WONG Yick Lok WilliamYick WONG LAM Chun Yin and LAM Chun Yin Cheong YEUNG Chok YEUNG Chun Him YEUNG Chun Solid King Securities Limited Moody’s Investors Service Investors Service Moody’s Hong Kong Limited Company/Name
3 1 2 Table 6 Table Breakdown of SFC activity data of SFC Breakdown SFC Annual Report 2016-17
Breakdown of SFC activity data
Table 7 Other enforcement actions1
2016/17 2015/16 2014/15
S1792 inquiries commenced 27 24 21 S1813 inquiries commenced (number of letters sent) 301 (8,960) 286 (7,997) 293 (9,752) S1824 directions issued 407 507 553 Rule 8 directions5 issued 4 2 1 Show cause letters5 issued 3 0 1 Cases with search warrants executed 34 31 53 Compliance advice letters issued 548 453 302 Criminal, Civil and Market Misconduct Tribunal (MMT) proceedings6 (a) Insider dealing Individuals/corporations summonsed (summons laid) 0 (0) 1(3) 0 (0) Individuals/corporations involved in ongoing civil proceedings 16 13 12 Individuals/corporations involved in ongoing MMT proceedings 0 2 4 (b) Market manipulation Individuals/corporations summonsed (summons laid) 0 (0) 0 (0) 0 (0) Individuals/corporations involved in ongoing civil proceedings 0 0 0 Individuals/corporations involved in ongoing MMT proceedings 3 16 21 (c) Others Individuals/corporations summonsed (summons laid) 10 (46) 20 (107) 15 (71) Individuals/corporations involved in ongoing civil proceedings 110 87 81 Individuals/corporations involved in ongoing MMT proceedings 26 14 16 Disciplinary enquiry Notices of Proposed Disciplinary Action7 issued 49 35 36 Notices of Decision8 issued (including S2019 agreement) 56 42 46 SFAT hearings Applications to SFAT 2 4 5 Applications/hearings completed 4 4 4
1 Including primarily the work of the Enforcement Division. 2 Section 179 of the SFO gives the SFC the power to compel the production of records and documents from persons related to a listed company in relation to fraud or other misconduct. 3 Section 181 of the SFO gives the SFC the power to require information from intermediaries about trading transactions, including the identity information of the ultimate clients, the particulars and instructions relating to the transactions. 4 Section 182 of the SFO gives the SFC the power to investigate SFO offences, market misconduct, fraud, misfeasance and disciplinary misconduct. 5 A Rule 8 direction is issued by the SFC pursuant to Section 8 of the Securities and Futures (Stock Market Listing) Rules, directing The Stock Exchange of Hong Kong Limited (SEHK) to suspend trading in the shares of a listed company on grounds that the market is misinformed, disorderly or unfair. A show cause letter is sent by the SFC to inform a listed company that it is minded to exercise its power under the aforesaid Rules to direct SEHK to suspend trading in the shares of the company, in the absence of a satisfactory explanation. 6 Following the enactment of the Securities and Futures (Amendment) Ordinance in 2012, the SFC can bring cases directly to the MMT without first referring them to the Financial Secretary. 7 A notice issued by the SFC to regulated persons that it proposes to exercise its disciplinary powers, on grounds that they appear to be guilty of misconduct or not fit and proper. 8 A notice that sets out the SFC’s decision and its reasons to take disciplinary action against regulated persons. 9 Section 201 of the SFO gives the SFC the power to resolve disciplinary proceedings by agreement when the SFC considers it appropriate to do so in the interest of the investing public or in the public interest.
164 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 165 951 1 9,421 As at 94,473 21,179 94,071 15,390 11,223 26,613 119,060 144,626 251,879 181,593 341,124 111,549 197,043 219,491 211,338 470,507 124,671 109,281 ($ million) 1,080,545 1,157,599 1,339,192 1,080,545 57,970,022 ($ million) 31.12.2014 31.12.2014 12 months to 1,002 As at SFC Annual Report 2016-17 Report Annual SFC 61,198 28,656 12,203 26,404 16,799 43,203 111,265 146,989 304,316 106,044 146,903 120,499 241,948 429,002 145,307 139,869 170,125 205,673 466,208 ($ million) 1,089,976 1,259,868 1,501,816 1,089,976 84,787,467 ($ million) 31.12.2015 31.12.2015 12 months to 1,104 6,893 As at 86,731 33,194 18,739 14,026 98,344 14,131 21,024 143,941 333,316 267,132 446,465 171,633 125,471 110,756 224,196 481,339 131,109 116,978 1,078,521 1,289,563 1,556,695 1,078,521 ($ million) 63,495,134 ($ million) 31.12.2016 31.12.2016 12 months to 4 5 3 2 2 6 relevant reporting month under the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules. (Contract Notes, month under the Securities and Futures reporting relevant these clients on a given date on an loan due from market value of securities collateral deposited by margin clients over the total amount of margin industry-wide basis licensed for dealing in securities or securities margin financing. Figures reported by an overseas incorporated licensed corporation that carries out its carries that corporation licensed incorporated overseas an by reported Figures securities margin financing. securities or in dealing for licensed excluded. were principal business activities outside Hong Kong and operates in Hong Kong as a branch office As at 31.12.2016, the average collateral coverage was 4.0 times (as at 31.12.2015: 4.4 times). It represents the number of times the aggregate the number of times the aggregate represents As at 31.12.2016, the average collateral coverage was 4.0 times (as at 31.12.2015: 4.4 times). It and overseas. The total value of transactions includes trading in equities, bonds and other securities in Hong Kong management fee income and others. finance income, inter-company management fee income, corporate Comprised fund Active clients are clients for whom the licensed corporation is required to prepare and deliver monthly statements of account in respect of the and deliver monthly statements of account in respect to prepare licensed corporation is required clients for whom the Active clients are million (31.12.2015: $225,099 million). Cash in hand and at bank include trust monies held on behalf of clients which totalled $248,066 Data were extracted from the monthly financial returns submitted under the Securities and Futures (Financial Resources) Rules by corporations (Financial Resources) and Futures submitted under the Securities the monthly financial returns extracted from Data were Profit and loss Profit Total shareholders’ funds shareholders’ Total funds liabilities and shareholders’ Total Total borrowings from financial institutions from borrowings Total Short positions held for own account Other liabilities Total assets Total arising from Amounts payable to clients and other dealers dealing in securities Proprietary positions Proprietary Other assets Amounts receivable from margin clients from Amounts receivable clients and other dealers arising from from Amounts receivable dealing in securities Active clients Balance sheet bank Cash in hand and at Securities dealers and securities margin financiers Securities dealers and Active cash clients Active margin clients Total operating profit Total trading on proprietary Net profit for the period Net profit Other income operating income Total expense interest overheads and Total Net securities commission income income interest Gross Total value of transactions Total
6 4 5 2 3 1 Table 8 Statistical industry of the Hong Kong securities information and financial position Table Breakdown of SFC activity data of SFC Breakdown SFC Annual Report 2016-17
Committees, panels and tribunal
A number of committees and panels have been set up to advise the SFC on various matters and perform other functions as set out in their terms of reference. Their responsibilities and members are listed in this section. For information on the board committees and Executive Committee, see our discussion in Corporate Governance on pages 14-33.
SFC Committees Advisory Committee Advises the SFC on policy matters regarding the performance of its functions.
Chairman TONG Carlson, SBS, JP
Members ALDER Ashley Ian, JP LI Brian David Man Bun, JP Dr AU King-lun, MH LO Chi Wai (Peter LO) CHAN Jeffrey Lap-tak LUI Kei Kwong Keith CHRISTIANSON Sun Wei SHIPMAN Mark Graham DING Chen TSANG Frederick Sui Cheong DUHAMEL Vincent WINTER Richard David GRAHAM David YIN Ke HO Yin Tung Brian
Number of meetings: 4 Average attendance rate: 80%
Academic and Accreditation Advisory Committee Approves industry-based courses and examinations for the purpose of meeting the licensing competence requirements, endorses applications from professional bodies and tertiary institutions as recognised institutions for providing continuous professional training, advises the SFC on areas to study in the context of enhancing Hong Kong’s position as an international financial centre and provides input for the development of industry-related courses and training programmes.
There were no circumstances which called for a meeting of the Committee during the year.
Chairman LEUNG Fung Yee Julia, SBS (from 19.6.2016) SHIPTON James Roger Francis (to 18.6.2016)
Members Prof CHENG Wui Wing Joseph Prof LUI Ting Ming Francis CHOW Yuen Yee Dr MAK Sui Choi Billy DAVIS Nigel PAN San Kong Terry HAGLAND Trent (to 2.5.2016) RONALDS Nick (from 22.6.2016) KEE Nicholas Min Kwan YUEN Ho Duen Judith
Secretary TUNG Ka Shun Sam
Number of meetings: 0 Average attendance rate: N/A
166 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 167 SFC Annual Report 2016-17 Report Annual SFC Average attendance rate: 85.7% Average CHOI Fung Yee Christina (from 1.8.2016) Christina (from CHOI Fung Yee LIM Chai Geok LO) (Peter LO Chi Wai Tat LUI Yin Robert Sui Yuen LYNN John Martin MAGUIRE SBS, JP NIGHTINGALE Anthony John Liddell, CMG, SHIEH Wing Tai Paul, SC SHIEH Wing Tai Lun Horace, SC WONG Yuk attendance rate: N/A Average Number of meetings: N/A of meetings: Number JAT Sew Tong, SC, JP Sew Tong, JAT SC LI Gladys Veronica, Members SC CHAN King Sang Edward, TSE Lok Min of meetings: 1 Number KWOK Lam Kwong Larry, BBS, JP Lam Kwong Larry, KWOK LAU Chun Kong Secretary HO Yin Tung Brian Tung HO Yin (Marie-Anne KONG) Sew Youne FAH KONG YAO Dr KWOK Chi Piu Bill, JP Members CHAN Duen Grace JP Dr CH’IEN Kuo Fung Raymond, GBS, CBE, Chairman Julia, SBS (to 31.7.2016) LEUNG Fung Yee Members are nominated by the Nominations Committee on the basis that they are duly experienced and legally qualified duly experienced the Nominations Committee on the basis that they are nominated by Members are Codes on the under and Mergers Panel in disciplinary proceedings as Chairman of the Takeovers is to act persons. Their role a case-by-case basis. Appeal Committee on Buy-backs or of the Takeovers and Mergers and Share Takeovers Disciplinary Chair Committee During the year, the Committee met once to discuss policy issues in relation to REITs. once to discuss policy issues in relation the Committee met During the year, (REITs), the overall market development of REITs, the property or securities market or investment management in Hong in management or securities market or investment the property development of REITs, the overall market (REITs), and fund investment or of REITs, involved in the operation that are practices or guidelines professional Kong or elsewhere, management in general. Committee on Real Estate Investment Trusts Committee on Real Investment Trusts to the Code on Real Estate related issues that are policy matters or regulatory Advises the SFC on general Committees, panels and tribunal and tribunal panels Committees, SFC Annual Report 2016-17
Committees, panels and tribunal
Investor Compensation Fund Committee Administers the Investor Compensation Fund and regulates its procedures in accordance with Part XII of the Securities and Futures Ordinance (SFO).
During the year, the Committee met once to consider the financial statements of the Fund and dealt with other administrative matters.
Chairman LUI Kei Kwong Keith
Members ATKINSON Thomas Allan (from 28.9.2016) LEE Kwok Keung Roger KO Teresa Yuk Yin, JP
Number of meetings: 1 Average attendance rate: 100%
Nominations Committee Nominates members of the Takeovers and Mergers Panel, the Takeovers Appeal Committee and the Disciplinary Chair Committee.
During the year, the Committee met once to consider the appointment and reappointment of members to the Takeovers and Mergers Panel and the Takeovers Appeal Committee.
Ex-officio Members ALDER Ashley Ian, JP (Chairman) HO Yin Tung Brian CLARK Stephen Edward
Members TONG Carlson, SBS, JP Dr WONG Ming Fung William, SC
Alternate members to CLARK Stephen Edward CHAN Yuk Sing Freeman MAGUIRE John Martin KO Teresa Yuk Yin, JP WEBB David Michael LIU Chee Ming
Number of meetings: 1 Average attendance rate: 100%
168 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 169
SFC Annual Report 2016-17 Report Annual SFC SHIPMAN Mark Graham (Timothy Ming TSE) TSE Wai Costa (Con TZATZAKIS) TZATZAKIS (Fanny WONG) WONG Man Yee WONG Pui Ling Pauline Qiumei YANG (to 6.9.2016) Peng Kuang YONG Lennard attendance rate: 78.9% Average CHOI Fung Yee Christina (from 1.8.2016) Christina (from CHOI Fung Yee Dr MALDONADO-CODINA Guillermo Eduardo (Bill MALDONADO) 24.3.2017) Mark (to McSHANE Darren NORONHA Virginia NOYES Keith Samuel Shelly Marie (to 28.11.2016) PAINTER (to 6.9.2016) San Kong Terry PAN Sau Queenie Wai PANG PARK Yoo Kyung Yoo PARK PHADNIS Dhananjay Shrikrishna SHAH Asit Sudhir Man Raymond SO Wai Prof Arnoutvan Rijn YE Xiang attendance rate: 65.5% Average MA Sean 3 of meetings: Number HO John LAU Ka Shi, BBS LIU Hung Ho Ellis BENNETT Pru Roy Chung CHEN Yang CHIA Chin-Ping Chairman Brian Tung HO Yin Members Number of meetings: 1 of meetings: Number Secretary Loreen POON Wing Yee LIU Yun Bonn LIU Yun LUO Jiabin LU) Hong (Sandra LYU LAW Shing Mui Alice (from 29.3.2017) Shing Mui Alice (from LAW LECKIE Stuart Hamilton, OBE, JP LEE Chi Kee Trevor FUNG Ka Shing Bernard 30.9.2016) (from HARRISON Stuart Edward HUI) (Carol HUI Mei Ying Victor Dr HUNG Tin Yau Prof CHEUNG Yan Leung Stephen, BBS, JP CHEUNG Yan Prof (to 9.1.2017) CHOY Peng Wah DING Chen BACCI Arthur John (from 30.9.2016) BACCI Arthur John (from CHAN Duen Grace CHAN Siu Ping Chordio Chairman Julia, SBS (to 31.7.2016) LEUNG Fung Yee Members governance structure for listing regulation. governance structure Limited’s (HKEX) proposal on new board, The Stock Exchange of Hong Kong Limited’s (SEHK) policies on capital raisings, Exchange of Hong Kong Limited’s The Stock on new board, (HKEX) proposal Limited’s concerns, use of cornerstoneback-door listing and delistings, corporate conduct of regulators’ investors in initial public decision-making and enhancements to SEHK’s as well as the joint consultation of the SFC and HKEX on proposed offerings, Public Shareholders Group rights and interests. shareholders’ to Advises on issues relating times and discussed many policy subjects, such as Hong Kong Exchanges and Clearing met three the Group During the year, During the year, the Committee held a sub-group meeting to discuss the Code on Unit Trusts and Mutual Funds review. the Code on Unit Trusts meeting to discuss a sub-group the Committee held During the year, Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products, the SFC Code on MPF Products Products the SFC Code on MPF Investment Products, Assurance Schemes and Unlisted Structured Funds, Investment-Linked features. practices and novel product industry market environment, Funds, overall Retirement and the Code on Pooled Products Advisory Committee Products Advisory and Mutual to the SFC Handbook for Unit Trusts relating the Committee on a wide range of matters The SFC may consult Committees, panels and tribunal and tribunal panels Committees, SFC Annual Report 2016-17
Committees, panels and tribunal
Securities Compensation Fund Committee Administers the Unified Exchange Compensation Fund and regulates its procedures in accordance with Part X of the repealed Securities Ordinance which, under Section 74 of Schedule 10 to the SFO, continues to apply to and in relation to any claim for compensation from the Fund made before 1 April 2003.
During the year, the Committee met once to consider the Fund’s financial statements and other administrative matters.
Chairman LUI Kei Kwong Keith
Members ATKINSON Thomas Allan (from 28.9.2016) LEE Kwok Keung Roger KO Teresa Yuk Yin, JP MAK Po Shuen
Number of meetings: 1 Average attendance rate: 100%
SFC Dual Filing Advisory Group Advises on treatment of cases and policy issues under the dual filing regime.
There were no circumstances which called for a meeting of the Group during the year.
Convener Executive Director, Corporate Finance, SFC
Members CHAN Ching Chu LUNG Hak Kau HANNING Matthew Paul (to 31.08.2016) SOUTAR James Alexander JOHNSON Nicholas Regan WECHSLER Joshua LIU Kennedy Tat Yin
Number of meetings: 0 Average attendance rate: N/A
SFC (HKEC Listing) Committee Exercises powers and functions equivalent to those of the Main Board and GEM Listing Committees of SEHK when actual or potential conflicts of interest arise between HKEX as the holding company of SEHK and the proper performance of SEHK’s listing functions. In such cases, the relevant SEHK functions may be undertaken by the SFC.
There were no circumstances which called for a meeting of the Committee during the year.
Chairman Members present in each Committee meeting will elect a Chairman among themselves at the beginning of that meeting.
Members ALDER Ashley Ian, JP PHENIX Paul Anthony ATKINSON Thomas Allan (from 3.5.2016) SHIPTON James Roger Francis (to 18.6.2016) BROWN Melissa TYE Philip Andrew CHOI Fung Yee Christina YEUNG Eirene LEE Carmelo Ka Sze, JP YOUNG Andrew John LEUNG Fung Yee Julia, SBS YU Ka Po Benita LUI Kei Kwong Keith
Number of meetings: 0 Average attendance rate: N/A 170 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 171 SFC Annual Report 2016-17 Report Annual SFC MA Xuezheng Mary TONG Carlson, SBS, JP Dr WONG Ming Fung William, SC Kelvin, JP Dr WONG Tin Yau attendance rate: N/A Average TSAI Wing-chung Philip Elizabeth Lily Chiang WANG YUEN Ka Fai attendance rate: N/A Average Number of meetings: 0 of meetings: Number KONG YAO FAH Sew Youne (Marie-Anne KONG) Sew Youne FAH KONG YAO Ho Chester Tun KWOK LIN James C LIU Yun Bonn LIU Yun Members DENNY Roger Michael NORMAN David Michael Deputy Chairman Chairman HUANG Lester, JP HUANG Lester, JP Yin, Yuk KO Teresa of meetings: 0 Number AU Siu Cheung Albert, BBS BBS, JP (to 31.12.2016) CHENG Kwok Hon Leonard, Prof 1.1.2017) SBS, JP (from Edward, Sun CHENG Wai Chairman that meeting. meeting will elect a Chairman among themselves at the beginning of in each Committee Members present Members Hears and determines disciplinary matters relating to share registrars in the first instance. registrars to share relating Hears and determines disciplinary matters year. the which called for a meeting of the Committee during circumstances no were There Share Registrars’ Disciplinary Committee There were no circumstances which called for a meeting of the Committee during the year. which called for a meeting of the no circumstances were There of interest arise between HKEX and the proper performance of listing functions by SEHK. In such cases, the relevant powers by SEHK. In such cases, the relevant performance of listing functions arise between HKEX and the proper of interest by the SFC. exercised and functions may be SFC (HKEC Listing) Appeals Committee SFC (HKEC Listing) conflicts Committee when actual or potential Listing Appeals equivalent to those of SEHK’s powers and functions Exercises Committees, panels and tribunal and tribunal panels Committees, SFC Annual Report 2016-17
Committees, panels and tribunal
Share Registrars’ Disciplinary Appeals Committee Hears and determines appeals from the Share Registrars’ Disciplinary Committee. Members of the Share Registrars’ Disciplinary Appeals Committee for the hearing of each appeal case brought before it consists of members of the Share Registrars’ Disciplinary Committee who did not preside or participate in the disciplinary hearing of that case.
There were no circumstances which called for a meeting of the Committee during the year.
Takeovers and Mergers Panel Hears disciplinary matters in the first instance and reviews rulings by the Takeovers Executive1 at the request of any party dissatisfied with such a ruling. Considers novel, important or difficult cases referred to it by the Takeovers Executive. Reviews, upon request by the SFC, the provisions of the Codes on Takeovers and Mergers and Share Buy-backs and the Rules of Procedure for hearings under the Codes and recommends appropriate amendments to the Codes and Rules of Procedure to the SFC.
During the year, the Panel met twice to consider non-disciplinary matters.
Chairman CLARK Stephen Edward
Deputy Chairmen CHAN Yuk Sing Freeman MAGUIRE John Martin KO Teresa Yuk Yin, JP WEBB David Michael LIU Chee Ming
Members BROWN Melissa LIU Yun Bonn CHAN Che Chung NORMAN David Michael CHARLTON Julia Frances NORRIS Nicholas Andrew DENNY Roger Michael PARK Yoo Kyung FU Yat Hung David PERRY Jonathan Garth (to 6.7.2016) IP Koon Wing Ernest SABINE Martin Nevil LAM Sung Lai Edward SCHWILLE Mark Andrew LEE Kam Hung Lawrence, JP SOUTAR James Alexander LEE Pui Ling Angelina, SBS, JP VAS CHAU Lai Kun Judy LIU Che Ning WINTER Richard David YU Ka Po Benita
Number of policy meetings: 0 Average attendance rate: N/A
Number of non-disciplinary hearings: 2 Average attendance rate: N/A2
Number of disciplinary hearings: 0 Average attendance rate: N/A
1 The Takeovers Executive refers to the Executive Director of the Corporate Finance Division of the SFC or his delegate. 2 The Chairman will appoint not less than four panel members to participate in hearings, and the attendance of other members is not required.
172 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 173 SFC Annual Report 2016-17 Report Annual SFC WINTER Richard David WINTER Richard YU Ka Po Benita attendance rate: N/A Average LIU Chee Ming Bonn LIU Yun John Martin MAGUIRE NORMAN David Michael NORRIS Nicholas Andrew Kyung Yoo PARK (to 6.7.2016) Jonathan Garth PERRY SABINE Martin Nevil SCHWILLE Mark Andrew James Alexander SOUTAR CHAU Lai Kun Judy VAS WEBB David Michael CHEUNG Tai Keung Jack CHEUNG Tai CHAN Kang Muk Woody CHAN Kang Muk LEE Pui Shan Rosita Members Chairman Kun Lawrence LAM Yuk Deputy Chairman Number of meetings: 0 Number LEE Kam Hung Lawrence, JP LEE Kam Hung Lawrence, LEE Pui Ling Angelina, SBS, JP Ning LIU Che IP Koon Wing Ernest JP Yin, Yuk KO Teresa LAM Sung Lai Edward CHARLTON Julia Frances CHARLTON CLARK Stephen Edward DENNY Roger Michael David Hung FU Yat BROWN Melissa CHAN Che Chung Sing Freeman CHAN Yuk Members The panel received no new cases during the year and none were carried over from the previous year. the previous carried over from no new cases during the year and none were The panel received (Arbitration) Rules (Arbitration) Rules. Exchange Trading) (Leveraged Foreign with the Securities and Futures Resolves disputes in accordance Independent Panels and Tribunal and Futures (Leveraged Foreign Exchange Trading) Arbitration Panel under Securities determining whether any sanction imposed by the Panel is unfair or excessive. imposed any sanction determining whether year. Committee during the which called for a meeting of the no circumstances were There Takeovers Appeal Committee Appeal Takeovers purpose of of an aggrieved party for the sole and Mergers Panel at the request rulings of the Takeovers Reviews disciplinary Committees, panels and tribunal and tribunal panels Committees, SFC Annual Report 2016-17
Committees, panels and tribunal
Process Review Panel for the Securities and Futures Commission Reviews and advises the SFC upon the adequacy of the SFC’s internal procedures and operational guidelines governing the action taken and decisions made by the SFC and its staff in the performance of its regulatory functions, including those related to the handling of complaints, licensing applications, inspection of intermediaries, product authorisation, exercise of investigation and disciplinary action, and corporate finance transactions.
Chairman Dr CHENG Mo Chi Moses, GBM, GBS, JP
Members CHAN Kam Wing Clement Dr LAM Kit-Lan Cynthia (to 31.10.2016) CHAN Lena (from 1.6.2016) LEE Pui Shan Rosita CHOW Yuen Yee (to 31.10.2016) LEE Wai Wang Robert DING Chen MAK Chi Ming Alfred (to 31.10.2016) Prof HO Yan Ki Richard, JP (to 31.10.2016) Dr MAK Sui Choi Billy (from 1.6.2016) Dr HU Zhanghong TSANG Sui Cheong Frederick (from 1.11.2016) KWOK Tun Ho Chester (from 1.11.2016) YUEN Shuk-kam Nicole
Ex-officio Members CHEUNG Kam-Wai Christina, JP TONG Carlson, SBS, JP
Securities and Futures Appeals Tribunal Reviews a range of specified decisions made under the SFO by the SFC, the Monetary Authority or a recognised investor compensation company, and hears and determines any question or issue arising out of or in connection with any review.
Chairmen The Hon Mr Justice HARTMANN Michael John, GBS, Non-Permanent Judge of the Court of Final Appeal KWOK Hing Wai Kenneth, SBS, SC, JP, former Recorder of the Court of First Instance of the High Court TALLENTIRE Garry, former Deputy Judge of the Court of First Instance of the High Court
Members CHAN Jeffrey Lap-tak KWOK Pui Fong Miranda MUH Yi-tong Anthony CHENG Chung-ching Raymond LAI Hin-wing Henry NG Joo Yeow Gerry CHEUNG Wing-han Ivy LAM Sze-cay Kevin TSANG Chi-wai Roy CHIN Vincent LEE Yiu-wing William TSANG Kam-yin Wendy DATWANI Mohan LIM Wai-tin Cynthia WONG Anna Wai-kwan DING Chen LIN James C YUNG Wen-yee Wendy EU Andrew Douglas (to 25.5.2016) LIU Swee Long Michael ZEE Helen HO Chiu-ping Dennis Prof LOW Chee-keong Dr HU Zhanghong Dr MAK Sui Choi Billy
174 Message from Strategic Corporate Our Highlights Operational Corporate Social Corporate Financial Supplementary Chairman and CEO Priorities SFC at a Glance Governance People of the Year Review Responsibility Developments Statements Information 175 SFC Annual Report 2016-17 Report Annual SFC regulation. Investment-linked assurance scheme (ILAS) A life insurance policy with investment elements that investment options, and both insurance protection provides funds. usually through technology to financial services, including digital payments, technology to financial services, including big data security, financing, cybersecurity and peer-to-peer ledger technology. data and data analytics, and distributed of Twenty Group An internationalgovernments forum for the and central major economies 19 of the world’s bank governors from Union. plus the European Enterprise Market (GEM) Growth An alternative stock market operated by The Stock fund-raising Exchange of Hong Kong Limited to provide mid-sized companies which may opportunities for small to listing requirements. not meet the Main Board Hong Kong Exchanges and Clearing Limited (HKEX) Operates the securities and derivatives markets and their clearing houses. related International of Securities Organization (IOSCO) Commissions worldwide An international body of securities regulators adherence which develops, implements and promotes for securities standards to internationally recognised Financial Dispute Resolution Scheme Financial Dispute by administered impartial process An independent and financial whereby Resolution Centre the Financial Dispute monetary to resolve required Kong are institutions in Hong and mediation through disputes with their customers arbitration. Agency of Japan Financial Services for responsible regulator The integrated financial exchange, and overseeing the banking, securities and insurance sectors in Japan. (FSB) Financial Stability Board global financial An international body which promotes and the for, recommendations stability through initiatives and implementation and monitoring of, policy international standards. Financial technology (Fintech) and communications The application of information
Exchange-traded fund (ETF) A passively managed index-tracking investment fund traded on a stock exchange. A company with rights to trade on or through The Stock through A company with rights to trade on or Exchange of Hong Kong Limited or Hong Kong Futures Exchange Limited. and trade repositories. Exchange participant (EP) of the financial system in the European Union by assessing of the financial system in the European supervisory risks to investors and markets, providing rating agencies supervising credit convergence and directly European Securities and Markets Authority European (ESMA) the stability An independent authority which safeguards The requirement that all corporate disclosure and listing all corporate disclosure that The requirement application materials be filed with both The Stock Exchange of Hong Kong Limited (SEHK) and the SFC. period. Dual filing regime Cold shoulder order accessing, directly from a person A sanction that prevents for a stated the Hong Kong securities market or indirectly, which regulates the Mainland’s securities and futures securities and futures the Mainland’s which regulates markets. China Securities Regulatory Commission China Securities Regulatory Commission (CSRC) under the State Council A ministry-level agency directly A Mainland over-the-counter market to trade debt market to trade A Mainland over-the-counter instruments. buyer, thereby ensuring the performance of open contracts. thereby buyer, China Interbank Bond Market (CIBM) Central counterparty markets by Facilitates trading in derivatives and equities seller to every acting as the buyer to every seller and the recognised exchange company or clearing house, through through exchange company or clearing house, recognised settle securities, which participants may trade, clear and (OTC) derivatives. contracts and over-the-counter futures Automated trading services (ATS) Automated trading by a facilities, outside of those provided Electronic orders anonymously outside traditional exchanges without outside traditional exchanges anonymously orders or Also known as dark pool transparency. any pre-trade alternative trading system. Alternative liquidity pool (ALP) of or matching allows crossing system which An electronic Glossary and abbreviations and Glossary SFC Annual Report 2016-17
Glossary and abbreviations
Leveraged and inverse products Securities and Futures Appeals Tribunal (SFAT) Products structured as ETFs for public offering in Hong A body established under the SFO to review specified Kong. Leveraged products aim to deliver a daily return decisions made by the SFC, the Monetary Authority or a equivalent to a multiple of the underlying index return recognised investor compensation company. while inverse products aim to deliver the opposite of the daily return of the underlying index that they track. Securities and Futures Ordinance (SFO) Together with subsidiary legislation, the law in Hong Kong Mainland and Hong Kong Closer Economic relating to financial products and the securities and futures Partnership Arrangement (CEPA) market and industry, as well as to their regulation and A free trade agreement concluded by the Mainland and to other connected matters including the protection of Hong Kong covering trade in goods and services as well as investors. investment facilitation. Provisions include tariff agreements, preferential treatment for service providers, mutual Swiss Financial Market Supervisory Authority recognition of professional qualifications, and enhanced (FINMA) cooperation in trade and investment facilities. The independent financial markets regulator in Switzerland. Mandatory provident fund (MPF) Taiwan Financial Supervisory Commission An employment-based retirement savings scheme that The authority responsible for the development, supervision, requires regular mandatory contributions by employees and examination and regulation of the financial sector in employers in Hong Kong. Taiwan. Market Misconduct Tribunal (MMT) The Stock Exchange of Hong Kong Limited An independent full-time body established under the (SEHK) Securities and Futures Ordinance which imposes civil sanctions against those it determines to be guilty of market Operates and maintains a stock market in Hong Kong and misconduct. is the front-line regulator of Stock Exchange participants in relation to trading matters. Open-ended fund companies (OFC) Undertakings for collective investment in Collective investment schemes which are structured in corporate form with limited liability and variable share transferable securities (UCITS) capital. A harmonised regulatory regime for the operation and sale of investment funds within the European Union. Over-the-counter (OTC) derivatives Financial instruments that are usually traded directly Unit trust between dealers and principals rather than via an exchange A collective investment scheme constituted in trust form. and whose values are derived from the values of underlying assets. US Commodity Futures Trading Commission (CFTC) Real estate investment trust (REIT) The independent agency that regulates futures and options A collective investment scheme constituted as a trust that markets in the US. invests primarily in real estate with the aim to provide returns to holders derived from rental income. US Financial Industry Regulatory Authority (FINRA) Regulatory technology (Regtech) An independent US agency regulating the broker-dealer Technologies that assist regulators and firms to enhance industry. processes for the collection, management and reporting of regulatory data, risk identification, risk weighting, surveillance and data analytics. US Securities and Exchange Commission (SEC) The primary regulator of the US securities markets. Rights issue An offer to existing holders of a listed company’s securities Whitewash waiver which enables them to subscribe to an additional number A waiver of a party’s obligation to make a mandatory offer of securities in proportion to their existing holdings. to other shareholders of a company arising from an issue of new securities of that company.
176 Contact Securities and Futures Commission Information 35/F, Cheung Kong Center 2 Queen’s Road Central Hong Kong Telephone : (852) 2231 1222 Facsimile : (852) 2521 7836 Website : www.sfc.hk
Auditor KPMG
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