Securities and Futures Commission (SFC) Circulars and Guidelines
On 22 February 2024, the SFC issued a circular ("Circular") inviting licensed corporations engaged in asset and wealth management activities to participate in the Asset and Wealth Management Activities Survey 2023 (AWMAS). The AWMAS is an annual exercise for the SFC to collect information about asset and wealth management activities in Hong Kong. The completed surveys should be submitted to the SFC by 19 April 2024.
On 28 February 2024, the SFC's Enforcement Division issued a guide entitled "Disciplinary Proceedings at a Glance (for regulated persons under Part 5B of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance)" (AMLO) ("Guide") to outline the disciplinary process under the new licensing regime for virtual asset trading platforms (VATP). The Guide provides the reasons for the SFC's disciplinary actions, persons subject to them, criteria for determining whether to take action, potential disciplinary measures and the disciplinary process. The disciplinary process under the VATP regime under the AMLO is based largely on the disciplinary process applicable to persons licensed by, or registered with, the SFC under the Securities and Futures Ordinance.
SFC Enforcement News
On 5 February 2024, the SFC announced it had reprimanded and fined PICC Asset Management (Hong Kong) Company Limited (PICC) HK$2.8 million over failures to discharge its duties as the manager of a Cayman-incorporated fund ("Fund") between May 2018 and May 2000 ("Relevant Period"). The Fund's investment management objective during the Relevant Period was to achieve capital preservation combined with steady capital appreciation over the long term through primarily investing in a diversified portfolio of equity securities.
The SFC found that PICC failed to:
- properly manage the Fund to ensure that the Fund's investments were in line with its stated investment objective and investment restrictions (in particular with highly concentrated positions);
- implement adequate and effective internal controls to properly manage the risks of the Fund (in particular the liquidity and concentration risks); and
- adequately supervise the investment manager who managed the Fund on behalf of PICC (in particular PICC placed significant reliance on the investment manager).
The SFC was of the view that PICC was in breach of the Code of Conduct for Persons Licensed by or Registered with the SFC and the Fund Manager Code of Conduct.
Hong Kong Monetary Authority (HKMA) Circulars / Press Releases / Consultations
On 6 February 2024, the HKMA issued a Press Release that the Hong Kong Deposit Protection Board (DPB) had published the Consultation Conclusions on Enhancements to the Deposit Protection Scheme (DPS) in Hong Kong ("Consultation Conclusions"). In its Consultation Paper issued on 13 July 2023, the DPB had set out a number of policy recommendations, including an increase in the protection limit from the current HK$500,000 to HK$800,000 per customer per bank (with a corresponding switch-back to the build-up level payable by DPS members to cater for the higher protection limit) and streamlining the negative disclosure requirements on non-protected deposits for private banking customers.
The DPB considers that raising the protection limit to HK$800,000 is sufficient at this stage to suitably enhance protection to depositors, as this level represents a 60% increase in the protection limit.
The DPB plans to implement the proposed DPS enhancements in two phases. Phase 1 will focus on implementing the enhanced protection limit and other measures which are expected to take a shorter period of preparation work. The target implementation date of Phase 1 is the fourth quarter of 2024. Phase 2 will cover other enhancement measures and the target implementation date is early 2025.
On 7 February 2024, the HKMA issued Consultation Paper CP 24.01 "Cryptoasset Exposures" seeking views on the HKMA's proposals to implement new regulations on the prudential treatment of cryptoasset exposures of authorized institutions (AIs). The consultation period runs until 6 May 2024. The Consultation Paper aims at implementing the new standard "Prudential treatment of cryptoasset exposures" issued by the Basel Committee for Banking Supervision (BCBS) in December 2022, which sets out the prudential treatment of banks' exposures to cryptoassets, including tokenised traditional assets, stablecoins and unbacked cryptoassets.
For the purpose of the prudential treatment of cryptoasset exposures, cryptoassets will be defined as private digital assets that depend on cryptography and distributed ledger technologies (DLT) or similar technologies. Digital assets are a digital representation of value, which can be used for payment or investment purposes or to access a good or service. Dematerialised securities (i.e., securities that have been moved from physical certificates to electronic book-keeping) that are issued through DLT or similar technologies are considered to be within the scope of the prudential treatment, whereas those dematerialised securities that use electronic versions of traditional registers and databases which are centrally administered are not within scope. Central bank digital currencies (CBDCs) are also not within scope.
There will be two broad groups of regulatory classifications of the in-scope cryptoassets. Group 1 cryptoassets will consist of qualifying tokenised assets (Group 1a) and stablecoins (Group 1b) subject to the conditions stated in the proposal and will generally be subject to the risk-based capital requirements of the existing Basel capital framework. Cryptoassets which fail to meet all Group 1 classification conditions will form Group 2 cryptoassets and will be subject to a more conservative capital treatment.
The HKMA aims to finalise the revised rules by Q2 2025 and put the new standards into effect no earlier than 1 July 2025.
On 20 February 2024, the HKMA issued a circular ("Circular") providing authorized institutions (AIs) with guidance on the supervisory standards in the sale and distribution of tokenised products. The Circular covers "tokenised products" which are referred to as the digital representation of real-world assets (RWA) which are not regulated under the SFO (e.g., tokenised structured investment products which are not regulated under the SFO, tokenised spot precious metal using distributed ledger or similar technology). In respect of placing of tokenised deposits by customers, AIs should comply with the same standards set out in the Circular. The Circular does not apply to stablecoins.
As a general principle, the prevailing supervisory requirements and consumer / investor protection measures for the sale and distribution of a product will also apply to its tokenised form. The Circular further sets out the following requirements for tokenised products:
- product due diligence (including understanding the terms, features and risks and conducting due diligence on the issuers and their third-party vendors / service providers);
- product and risk disclosure (including material information on the tokenisation arrangements and the key terms, features and risks of the tokenised product);
- risk management and allocation of sufficient human resources with expertise in tokenised products; and
- custodial services (for tokenised products, the AI must meet the HKMA's expected standards on digital asset custody as issued by the HKMA from time to time).
The HKMA reminds AIs to comply with the Circular as well as all other applicable legal and regulatory requirements before engaging in tokenised product related activities and discuss with the HKMA in advance.
On 20 February 2024, the HKMA issued a circular ("Circular") providing authorized institutions (AIs) with guidance ("Guidance") on the HKMA's expected standards for the provision of digital asset custodial services. AIs are required to apply these standards regardless of whether custodied digital assets are received in the course of conducting virtual asset (VA)-related activities as an intermediary, distributing tokenised products, or providing standalone custodial services. The Circular applies to AIs conducting digital asset custodial activities, as well as subsidiaries of Hong Kong incorporated AIs engaging in such activities.
The Guidance applies to digital assets (i.e., assets that depend primarily on cryptography and distributed ledger or similar technology), such as virtual assets as defined in section 53ZRA of the AMLO, tokenised securities and other tokenised assets. The term "digital assets" should also be read to cover the means of access to a digital asset, which generally refers to private keys, seeds or their backups. Limited purpose digital tokens, as defined in section 53ZR of the AMLO, are excluded from the scope of the Guidance. The Guidance does not apply to custody of an AI's and its group companies' proprietary assets which are not held on behalf of clients.
The Guidance covers: (i) governance and risk management; (ii) segregation of client digital assets; (iii) safeguarding of client digital assets; (iv) delegation and outsourcing; (v) disclosure; (vi) record-keeping and reconciliation of client digital assets; (vii) anti-money laundering and counter-financing of terrorism; and (viii) ongoing monitoring.
AIs which themselves, or (in the case of locally incorporated AIs) whose subsidiaries intend to provide digital asset custodial services should discuss their plans with the HKMA in advance and demonstrate to the HKMA's satisfaction that they meet the expected standards. AIs which, or (in the case of locally incorporated AIs) whose subsidiaries are already engaging in digital asset custodial activities, should review and revise their systems and controls as necessary and also notify the HKMA and confirm that they meet the expected standards within 6 months from the date of the Circular.
On 22 February 2024, the HKMA issued a circular inviting authorized institutions (which are also registered institutions) engaged in asset and wealth management activities to participate in the SFC's Asset and Wealth Management Activities Survey 2023 (AWMAS). The AWMAS is an annual exercise for the SFC to collect information about asset and wealth management activities in Hong Kong. The completed surveys should be submitted to the SFC by 19 April 2024.
