licensing information booklet...advising business. for investment advisers’ partnerships, all...

Licensing Information Booklet

Hong Kong August 2001

This booklet provides general information on licensing of dealers, advisers, securities margin financiers, leveraged foreign exchange traders

and their representatives by the Securities and Futures Commission (“SFC”).

While it is believed that this booklet provides an accurate general overview of the licensing requirements currently administered by the SFC, it has not been possible to cover all situations, and some technical details have been omitted for the sake of clarity. For more precise guidance, readers should consult the SFC Licensing Department; their own professional advisers; or refer to the Securities & Futures Commission Ordinance, the Securities Ordinance, the Commodities Trading Ordinance and the Leveraged Foreign Exchange Trading Ordinance.

General licensing information is also available at the Commission’s web site at http://www.hksfc.org.hk.

Enquiries can be directed to the following:

1. Mailing address: Securities and Futures Commission Licensing Department 12th Floor, Edinburgh Tower The Landmark 15 Queen’s Road Central Hong Kong

Fax: (852) 2501-0375

2. E-MAIL address : [email protected]

3. SFC Infoline (24hours) (Licensing and general information)

Tel : (852) 2840-9393

TABLE OF CONTENTS Page

INTRODUCTION 1

WHO NEEDS TO BE LICENSED 1

TYPES OF LICENCE AND EXEMPTION 2

REQUIREMENTS OF LICENSING 7

PROCEDURES FOR APPLICATION 23

GRANTING OF LICENCE 27

ONGOING OBLIGATIONS 27

REVOCATION AND SUSPENSION OF LICENCE AND OTHER DISCIPLINARY ACTION

30

OTHER APPROVALS AND NOTIFICATIONS 30

PUBLIC REGISTER 35

GOVERNMENT GAZETTE 35

APPENDICES

Appendix A Definitions 36

Appendix B Exemption from Licensing 48

Appendix C Exemptions from Deposit Payment 52

Appendix D Recognized Futures Exchanges 53

Appendix E Supporting Documents 54

Appendix F Application Fees (See attachment)

Appendix G Annual Fees (See attachment)

Introduction The Securities and Futures Commission (“SFC”) administers the laws relating to the protection of investors and regulation of any activities relating to securities and commodities trading/advising, securities margin financing and non-bank retail leveraged foreign exchange market in Hong Kong. Such laws require intermediaries in these areas to be licensed.1 It is a serious offence to act as an intermediary in Hong Kong without the appropriate licence or exemption. The licensing requirements are administered by the SFC’s Licensing Department. Who Needs to be Licensed Broadly speaking, any business entity which carries on or holds itself as carrying on a business in Hong Kong of dealing in securities, trading in commodity futures contracts, giving advice on investment in securities or futures contracts, providing margin financing for the trading of securities listed on a stock exchange, or leveraged foreign exchange trading is required to be registered as a dealer, an adviser, a securities margin financier or a leveraged foreign exchange trader, as the case may be. In addition, some people with supervisory responsibilities in respect of dealing or advising business are required to be registered as dealers or advisers and anyone who performs dealing or advising functions on behalf of a dealer or an adviser is required to be registered as a representative. On the other hand, an individual, whether in the capacity of a director, an employee of or a person acting for or by arrangement with a leveraged foreign exchange trader or a securities margin financier is required to be licensed as a representative of that trader or that securities margin financier.

1 “Licensed”, “licensed person” and “licensing” have the same meaning as “registered”, “registered

person” and “registration” respectively.

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The licensing requirements relating to securities dealers and investment advisers are established by Part VI of the Securities Ordinance (“SO”). The licensing requirements relating to futures dealers and advisers are established by Part IV of the Commodities Trading Ordinance (“CTO”). The licensing requirements relating to securities margin financiers are established by Part XA of the SO. The licensing requirements relating to leveraged foreign exchange trading are established in the Leveraged Foreign Exchange Trading Ordinance (“LFETO”). Please refer to Appendix A for definitions of the various terms. Certain activities, such as the provision of financial accommodation by a registered or exempt dealer under the SO to facilitate acquisitions or holdings of securities by the dealer for the dealer’s clients are exempt activities, and such persons are not required to be registered as securities margin financiers. A person which is a corporation belonging to the qualifying class specified in the Leveraged Foreign Exchange Trading (Exemption) Rules; a unit trust or mutual fund corporation authorized by the SFC; or in the course of business for the purpose of managing a unit trust or mutual fund corporation authorized by the SFC is also exempted from the licensing requirement under the LFETO. Please refer to Appendix B for details of exemption provisions. Types of Licence and Exemption I. Securities Ordinance Securities Dealer A person is required to be registered as a dealer if he carries on a business in Hong Kong of dealing in securities or holds himself out as carrying on such a business. Please refer to Appendix A for the definitions of “securities” and “dealing in securities”. Most securities dealers are stockbrokers. Directors of corporations that are registered as securities dealers are themselves required to be registered as securities dealers if they are actively involved in the dealing business. For dealing partnerships, all general partners are required to be registered as securities dealers. Licensing as a securities dealer is not required of people who trade in securities on their own account through registered dealers.

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Investment Adviser A person is required to be registered as an investment adviser if he carries on a business in Hong Kong of giving investment advice with respect to securities or holds himself out as carrying on such a business. Please refer to Appendix A for the definition of “investment adviser”. Most investment advisers are either fund managers, merchant banks, or unit trust advisers. Directors of corporations that are registered as investment advisers are themselves required to be registered as investment advisers if they are actively involved in the advising business. For investment advisers’ partnerships, all general partners are required to be registered as investment advisers. Licensing as an investment adviser is not required of registered dealers or exempt dealers who give investment advice incidental to their dealing business; of solicitors and professional accountants who give investment advice wholly incidental to the practice of their professions; or of licensed banks, trustee companies or financial journalists. Securities Margin Financier A corporation is required to be registered as a securities margin financier if it carries on a business in Hong Kong of providing margin financing to clients for the trading of securities listed on a stock exchange. Please refer to Appendix A for the definition of “securities margin financier”. A registered securities dealer or an exempt dealer is not required to be registered as a securities margin financier to carry on margin financing activities. Nevertheless, in so doing, the registered dealer has to comply with certain similar requirements applicable to a registered margin financier. These include, amongst other things, the provision of statement of accounts in a specified format; the provision of specified statement of accounts to clients upon their request and certain restrictions on dispositions of securities collateral; and in the case of a registered dealer, also the compliance with the new requirements under the revised Financial Resources Rules (“FRR”).

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Securities Dealer’s Representative A person is required to be registered as a securities dealer’s representative if he is employed by or acts for or by arrangement with a securities dealer (except an exempt dealer) and performs for that securities dealer any of the functions of a securities dealer. Most securities dealer’s representatives are floor traders, account executives or runners for stockbrokers. Investment Representative A person is required to be registered as an investment representative if he is employed by or acts for or by arrangement with an investment adviser (except an exempt investment adviser) and performs for that investment adviser any of the functions of an investment adviser. Most investment representatives are employees or agents of fund managers, merchant banks, or unit trust advisers. Securities Margin Financier’s Representative A person, whether in the capacity of a director, an employee of or a person acting for or by arrangement with a securities margin financier, is required to be registered as a securities margin financier’s representative. Exempt Dealer A corporation may be eligible to be declared an exempt dealer if:

1. its main business is something other than dealing in securities or its main business is securities dealing at a “wholesale” level (in general terms, wholesale dealing is issuing prospectuses, offering underwriting arrangements to issuers, offering government securities, or dealing with professional investors who act as principals); and

2. the greater part of its dealing other than at a wholesale level is done through a member of a recognized stock exchange or other authorized channels.

Please refer to section 60 of the SO.

4

Exempt Investment Adviser A corporation may be eligible to be declared an exempt investment adviser if:

1. it gives investment advice mainly to professional investors; or 2. it gives investment advice only to persons residing outside Hong Kong.

Please refer to section 61 of the SO. The SFC will not exercise its discretion to grant exemption to a corporation which seeks exemption from licensing based simply on the convenience of not having to meet normal licensing requirements or the inconvenience of or difficulties in having to respect some of the requirements under the law. II. Commodities Trading Ordinance Commodity Dealer A person is required to be registered as a commodity dealer if he, whether as principal or agent, carries on a business in Hong Kong of trading in commodity futures contracts or holds himself out as carrying on such a business. Please refer to Appendix A for the definitions of “commodity”, “futures contracts” and “trading in commodity futures contracts”. Most commodity dealers are futures brokers. Principals of corporations and partnerships that are registered as commodity dealers are themselves required to be registered as commodity dealers if they are actively involved in the dealing business. Licensing as a commodity dealer is not required of people who trade in futures contracts on their own account through registered commodity dealers. Commodity Trading Adviser A person is required to be registered as a commodity trading adviser if he carries on a business in Hong Kong of giving investment advice with respect to trading in commodity futures contracts or if he holds himself out as carrying on such a business. Please refer to Appendix A for the definition of “commodity trading adviser”. Most commodity trading advisers are fund managers.

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Principals of corporations and partnerships that are registered as commodity trading advisers are themselves required to be registered as commodity trading advisers if they are actively involved in the advising business. Licensing as a commodity trading adviser is not required of financial journalists. Commodity Dealer’s Representative A person is required to be registered as a commodity dealer’s representative if he is employed by or acts for or by arrangement with a commodity dealer and performs for that commodity dealer any of the functions of a commodity dealer. Most commodity dealer’s representatives are floor traders, account executives or runners for futures brokers.

Commodity Trading Adviser’s Representative A person is required to be registered as a commodity trading adviser’s representative if he is employed by or acts for or by arrangement with a commodity trading adviser and performs for that commodity trading adviser any of the functions of a commodity trading adviser. Most commodity trading adviser’s representatives are employees or agents of fund managers. III. Leveraged Foreign Exchange Trading Ordinance Leveraged Foreign Exchange Trader A business entity which carries on a business in Hong Kong of leveraged foreign exchange trading, or holds itself out as carrying on such a business, is required to be licensed as a leveraged foreign exchange trader. Please refer to Appendix A for the definitions of “foreign exchange trading” and “leveraged foreign exchange trading”. Please refer to Appendix B for the exclusion provisions. Leveraged Foreign Exchange Trader’s Representative A person, whether in the capacity of a director, an employee, or otherwise engaging in leveraged foreign exchange trading on behalf of a trader is required to be licensed as a representative of that trader. Exemption from Licensing under the LFETO An authorized institution within the meaning of section 2(1) of the Banking Ordinance is exempt from the licensing requirement.

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A person which is a corporation belonging to the qualifying class specified in the Leveraged Foreign Exchange Trading (Exemption) Rules (Please refer to Appendix B for details), a unit trust or mutual fund corporation authorized by the SFC, or in the course of business for the purpose of managing a unit trust or mutual fund corporation authorized by the SFC is also exempted from the licensing requirement. Requirements of Licensing The SFC shall refuse to grant a licence to anyone unless it is satisfied that the person is fit and proper to be licensed. In considering fitness and properness, the SFC must have regard to the applicant’s:

• current and past financial status;

• education or other qualifications or experience having regard to the functions to be performed;

• ability to perform functions efficiently, honestly and fairly; and

• reputation, character, financial integrity and reliability.

Furthermore, in considering the fitness and properness of a corporate applicant, the SFC must look at those matters in respect of its substantial shareholders, directors, shadow directors, officers and any person who is to be employed or associated with the applicant. The SFC may also look at any other corporation in the same group or any director, shadow director or officer of such corporation. For partnerships, it must look at them in respect of each partner. The SFC may also look at any other business carried on by the applicant. The SFC has released a detailed statement of matters that it will consider in assessing fitness and properness called “Fit and Proper Criteria”. This document is available for purchase at the SFC’s office at 12/F, Edinburgh Tower, The Landmark, 15 Queen’s Road Central, Hong Kong. It is also available in the SFC’s website at www.hksfc.org.hk. There are also some specific statutory requirements for applicants that are to carry on business.

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Corporations Corporations applying to be registered must meet, among other things, the following requirements:

Dealer Adviser (a)

Be a Hong Kong incorporated company or an overseas company registered with the Companies Registry of Hong Kong, with a valid business registration in Hong Kong

Same as dealer

(b)

Meet the competence requirement as set out in the “Guidance Note on Competence”*

Same as dealer

(c)

Have at least one director actively participating in or directly responsible for the supervision of the dealing business

Have at least one director actively participating in or directly responsible for the supervision of the advising business

(d)

Each active director registered as a dealer

Each active director registered as an adviser

(e)

Each employee to be engaged in dealing activities registered as a dealer’s representative

Each employee to be engaged in advising activities registered as an investment representative or a commodity trading adviser’s representative, as appropriate

(f)

Capital requirements

1. For dealers (excluding futures non-clearing dealers, introducing brokers and traders) the paid up share capital must not be less than HK$5 million; or

2. In the case of securities dealers engaging in securities margin financing, the paid up share capital must not be less than HK$10 million

Not applicable

* “Guidance Note on Competence” and “FAQ on Competence” can be obtained from the SFC office

or can be downloaded from the SFC’s website at www.hksfc.org.hk.

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(g)

Liquid capital/net tangible assets requirements Securities Dealer and Commodity Dealer (excluding futures non-clearing dealer, introducing broker or trader)

1. Liquid capital of HK$3,000,000; or 2. 5% of the aggregate of

i. the corporation's total liabilities;

ii. the initial margin requirement in respect of open positions in futures or options contracts held by the corporation on behalf of clients; and

iii. the amount of margin required to be deposited in respect of open positions in futures and options contracts held by the corporation on behalf of clients to the extent that those futures or options contracts have not been subject to the initial margin requirement described in subparagraph (ii);

whichever is higher; Commodity Dealer which is a futures non-clearing dealer

1. Liquid capital of HK$500,000; or 2. 5% of the aggregate of

i. the corporation's total liabilities;

ii. the initial margin requirement in respect of open positions in futures or options contracts held by the corporation on behalf of clients; and

iii. the amount of margin required to be deposited in respect of open positions in futures and options contracts held by the

Net tangible assets of not less than HK$500,000

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corporation on behalf of clients to the extent that those futures or options contracts have not been subject to the initial margin requirement described in subparagraph (ii);

whichever is higher; Securities Dealer and Commodity Dealer which is classified as an Introducing broker under the FRR

1. Liquid capital of HK$500,000; or 2. 5% of the aggregate of total

liabilities; whichever is higher (Please refer to Appendix A for definition of introducing broker)

(h)

Commodity dealer Be a holder of a trading right of the Hong Kong Futures Exchange Limited or a member of a recognized futures exchange (Please refer to Appendix D for a list of recognized futures exchanges), or wholly owned by such a member

Not applicable

(i)

Deposit requirements Securities dealer

• Pay HK$50,000 deposit for each dealing director

Commodity dealer • Pay HK$100,000 deposit

(Deposit may not be required in some cases. Please refer to Appendix C for exemption from deposit payment)

Not applicable

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Securities Margin Financier (a) Be a company (Please refer to Appendix A for definition) (b) Having sole business in securities margin financing (c)

Meet the competence requirement as set out in the “Guidance Note on Competence” *

(d)

Having at least one director who has applied to or is approved by the SFC under section 121I of the SO to be responsible for the supervision of its business as a securities margin financier

(e)

Each person in the employment of, or acting for or by arrangement with, a financier performing functions relating to the business of securities margin financing to be registered as a financier’s representative

(f)

Having adequate internal control systems to ensure compliance with all relevant rules and regulations, including the code of conduct

(g)

Maintaining minimum capital requirements – issued and paid-up capital of HK$10 million, and liquid capital of HK$3 million or 5% of total liabilities, whichever is higher - at all times

(h)

Deposit requirements To lodge and maintain with the SFC a security of HK$2,000,000



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Leveraged Foreign Exchange Trader (a) Be a limited company incorporated in Hong Kong (b) Having sole business in leveraged foreign exchange trading (c)


(d)

Having nominated at least one director, who is acceptable to the SFC, to act as a responsible director to supervise its business

(e)

Each employee intending to engage in trading activities to be registered as a representative

(f)

Having agreed that any dispute with clients will be settled by arbitration if the client so elects

(g) Having a centralized telephone recording system (h)

Capital requirements • Trader

issued and paid up capital of HK$30 million; and liquid capital of HK$25 million or 1/60 of aggregate gross position for all foreign currencies, whichever is higher;

• Classified as an introducing agent issued and paid up capital of HK$5 million; and liquid capital of HK$3 million (Please refer to Appendix A for definition of Introducing Agent)



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Sole Proprietorships People applying to be registered as sole proprietors must meet, among other things, the following requirements: Dealer Adviser (a)

Satisfy the requirements for an individual (See page 19)

Satisfy the requirements for an individual (See page 19)

(b)

Possess a valid business registration in Hong Kong

Same as dealer

(c)


Same as dealer

(d)



(e)


1. For dealers (excluding futures non-clearing dealers, introducing brokers and traders) the capital account must not be less than HK$5 million; or

2. In the case of securities dealers engaging in securities margin financing, the capital account must not be less than HK$10 million

Not applicable

(f)


1. Liquid capital of HK$3,000,000; or

2. 5% of the aggregate of




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i. his total liabilities; ii. the initial margin

requirement in respect of open positions in futures or options contracts held by him on behalf of clients; and

iii. the amount of margin required to be deposited in respect of open positions in futures and options contracts held by him on behalf of clients to the extent that those futures or options contracts have not been subject to the initial margin requirement described in subparagraph (ii)


1. Liquid capital of HK$500,000; or

2. 5% of the aggregate of i. his total liabilities; ii. the initial margin

requirement in respect of open positions in futures or options contracts held by him on behalf of clients; and

iii. the amount of margin required to be deposited in respect of open positions in futures and options contracts held by him on behalf of clients to the extent that those futures or options

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contracts have not been subject to the initial margin requirement described in subparagraph (ii)



2. 5% of the aggregate of total liabilities;

whichever is higher

(g)

Commodity dealer Be a holder of a trading right of the Hong Kong Futures Exchange Limited or a member of a recognized futures exchange (Please refer to Appendix D for a list of recognized futures exchanges)

Not applicable

(h)


• Pay HK$50,000 deposit Commodity dealer

• Pay HK$100,000 deposit (Deposit may not be required in some cases Please refer to Appendix C for exemption from deposit payment)

Not applicable

15

Partnerships Partnerships applying to be registered must meet, among other things, the following requirements: Dealer Adviser (a)

Possess a valid business registration in Hong Kong

Same as dealer

(b)

All general partners meet the competence requirement as set out in the “Guidance Note on Competence”*

Same as dealer

(c)

All general partners registered as dealers

All general partners registered as advisers

(d)



(e)


1. For dealers (excluding futures non-clearing dealers, introducing brokers and traders) the aggregate partners’ capital accounts must not be less than HK$5 million; or

2. In the case of securities dealers engaging in securities margin financing, the aggregate partners’ capital accounts must not be less than HK$10 million

Not applicable

(f)


1. Liquid capital of HK$3,000,000; or

2. 5% of the aggregate of




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i. the firm's total liabilities; ii. the initial margin

requirement in respect of open positions in futures or options contracts held by the firm on behalf of clients; and

iii. the amount of margin required to be deposited in respect of open positions in futures and options contracts held by the firm on behalf of clients to the extent that those futures or options contracts have not been subject to the initial margin requirement described in subparagraph (ii)



2. 5% of the aggregate of i. the firm total liabilities; ii. the initial margin

requirement in respect of open positions in futures or options contracts held by the firm on behalf of clients; and

iii. the amount of margin required to be deposited in respect of open positions in futures and options contracts held by the firm on behalf of clients to the extent that those futures or options

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contracts have not been subject to the initial margin requirement described in subparagraph (ii)



2. 5% of the aggregate of total liabilities;

whichever is higher;

(g)

Commodity dealer Be a holder of a trading right of the Hong Kong Futures Exchange Limited or a member of a recognized futures exchange (Please refer to Appendix D for a list of recognized futures exchanges)

Not applicable

(h)


• Pay HK$50,000 deposit in respect of each general partner

Commodity dealer • Pay HK$100,000 deposit

(Deposit may not be required in some cases. Please refer to Appendix C for exemption from deposit payment)

Not applicable

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Individuals, Active Directors, General Partners and Representatives Individuals applying to be registered as dealers, advisers and representatives must meet, among other things, the following minimum age and competence requirements:

I Dealer and Adviser (a) Age Attained 21 years of age

Option 1 Option 2

Academic qualification

Relevant degree Or

Recognised industry qualification

Pass in Chin/ Eng + Maths

in HKCEE or equivalent

Local regulatory framework paper Pass Pass

Relevant industry experience

At least 3 years over past 6 years


(b) Competence*

Management skill & experience At least 2 years At least 2 years

II Dealer’s Representative and Adviser’s Representative (a) Age attained 18 years of age

Option 1 Option 2




---

Recognised industry qualification

Pass (individual with relevant

degree needs not complete the industry based

examination)

Pass


(b) Competence*


---




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Securities Margin Financier’s Representative

I Representative NOT applying as an approved director under section 121I of the SO(a) Age attained 18 years of age

Option 1 Option 2




---

Recognised industry qualification2


degree needs not complete the industry based examination)

Pass


(b) Competence*

Relevant industry experience3

---


II Representative applying as an approved director under section 121I of the SO (a) Fulfilled the requirements set out in (I) above; and

Option 1 Option 2 Academic qualification

Relevant degree or Recognised industry

qualification2

Pass in Chin/ Eng + Maths in HKCEE or

equivalent Local regulatory framework paper Pass Pass

Relevant industry experience3



(b) Competence*

Management skill & experience 2 years 2 years

(c) Has the ability to discharge the functions of a director. * “Guidance Note on Competence” and “FAQ on Competence” can be obtained from the SFC office

or can be downloaded from the SFC’s website at www.hksfc.org.hk. 2 Where there is no recognised industry qualification, depending on the level of responsibility and the

type of licence sought, to demonstrate competence, applicants should generally satisfy the SFC that they: (a) have a good understanding of the regulatory framework including the laws and regulations and

associated codes governing their intended industry sectors; (b) are aware of the ethical standards expected of a licensed person; and (c) are knowledgeable of the financial products that they deal in or advise upon and the markets in

which they provide services. 3 Relevant industry experience includes margin financing, treasury and credit control at securities

houses or financial institutions.

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Leveraged Foreign Exchange Trader’s Representative Dependent upon the kind of services to be provided, an individual applying for a licence must meet, among other things, the following requirements (Please also refer to “Guidance Note on Competence” and “FAQ on Competence” which can be obtained from the SFC office or can be downloaded from the SFC’s website at www.hksfc.org.hk.):

I Representative who does NOT handle discretionary account activities (a) Age attained 18 years of age

Option 1 Option 2



In HKCEE or equivalent

---



degree needs not complete the industry based

examination)

Pass


(b) Competence*


---






which they provide services.

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II Representative who handles discretionary account activities (a) Age attained 18 years of age

Option 1 Option 2


Relevant degree Or





(b) Competence*




III Representative who acts as a responsible director (a) Age attained 18 years of age

Option 1 Option 2


Relevant degree Or








(b) Competence*

Management skill & experience At least 2 years At least 2 years





which they provide services.

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Procedures for Application Forms to Complete People wishing to apply for a licence should complete the appropriate application forms. There are different forms to be used for different types of licence. The following is a list of the various application forms: DEALER/ADVISER

Types of Applicant Forms Required

Corporation

Form 1 (Part A & D) Computation in relation to the FRR Form 2, Consent Form on Personal Information Collection and Authorization Form for each non-active director and substantial shareholder who is a natural person

Sole Proprietorship

Form 1 (Part A & B) Computation in relation to the FRR Form 2, Consent Form on Personal Information Collection and Authorization Form

Partnership

Form 1 (Part A & C) Computation in relation to the FRR Form 2, Consent Form on Personal Information Collection and Authorization Form for each limited partner who is a natural person, if any

Active Director Form 1 (Part A & B) Form 2, Consent Form on Personal Information Collection and Authorization Form

General Partner Form 1 (Part A & B) Form 2, Consent Form on Personal Information Collection and Authorization Form

Representative Form 3, Consent Form on Personal Information Collection and Authorization Form

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SECURITIES MARGIN FINANCIER


Corporation

Form 1S Computation in relation to the FRR Supplementary Information on Business Operation (for Securities Margin Financier) Form 2S, Authorization Form and Consent Form on Personal Information Collection for each director and substantial shareholder who is a natural person Questionnaire on Personal Information, Authorization Form and Consent Form on Personal Information Collection for each executive director of the applicant’s immediate and ultimate holding companies, who is a natural person

Securities Margin Financier’s Representative (whether or not he is a director) not applying to be an approved director under section 121I of SO

Form 3R Consent Form on Personal Information Collection and Authorization Form

Securities Margin Financier’s Representative who is a director applying to be an approved director under section 121I of SO

Form 3S, Form 3R and Form 2S, if not already submitted Consent Form on Personal Information Collection and Authorization Form

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LEVERAGED FOREIGN EXCHANGE TRADER


Corporation

Form 1 Computation in relation to the Leveraged Foreign Exchange Trader (Financial Resources) Rules Form 2, Consent Form on Personal Information Collection and Authorization Form for each director, shadow director, substantial shareholder, and executive director of the immediate and ultimate holding company who is a natural person

Representative Form 3, Consent Form on Personal Information Collection and Authorization Form

Submission of applications Each application should be accompanied by copies of all relevant supporting documents. Please refer to Appendix E for a list of supporting documents. The required supporting documents for each type of licence are also listed on the application form. Please refer to Appendix F for the fees payable for applications. Completed forms together with application fees and copies of supporting documents can be either hand-delivered or posted to the Licensing Department of the SFC. While an applicant may choose to withdraw the application prior to the approval or refusal of the application by the SFC, the application fees, once paid, are non-refundable. Normal processing time for licensing is approximately ten weeks for representatives and fifteen weeks for principals. However, certain applications may take longer, depending on individual circumstances. Applicants may be invited to attend an interview with staff of the SFC Licensing Department. If necessary, SFC staff may also conduct visits to the business premises of the applicants.

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Application Forms Application forms can be obtained from the SFC office at 12th Floor, Edinburgh Tower, The Landmark, 15 Queen’s Road Central, Hong Kong. They will also be available on the SFC website in the near future. Tips for Applicants • Remember to date and sign the application form. • Check that ALL questions are answered or marked N/A. Never leave any questions

blank. • Ensure that application fee, checklist and all relevant supporting documents are

submitted with the application.

For Individual Applicants Only • Substantiate educational qualification and industry qualification etc. by

providing relevant educational certificates and examination result slips. • Substantiate experience by providing references which describe relevant

experience in relation to the functions to be performed. If possible, please provide a curriculum vitae.

• For expatriates, provide copies of employment visa or application form

submitted to Immigration Department for obtaining employment visa. • Applications not accompanied by the relevant checklist, appropriate fees, all the

required forms and documents listed in the checklist, will be returned.

• If all the supporting documents required are submitted with the application, you may expect to hear the result of your application within 10 weeks.

For Corporate Applicants Only • Substantiate financial status by providing evidence such as bank statements and

audited accounts to demonstrate FRR compliance.

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• Provide business plan detailing business activities, services, internal control, risk

management and operation system, organization structure and details of key personnel.

• If all the supporting documents required are accompanied with the application,

you may expect to hear the result of your application within 15 weeks. Granting of Licence Once all the requirements are met and the SFC is satisfied that the applicant is fit and proper, a certificate of registration /licence will be granted to the successful applicant. Under some circumstances, the SFC will impose conditions on the licence. The SFC shall refuse an application if the applicant fails to meet the statutory requirements or if the SFC is not satisfied that the applicant is a fit and proper person to be licensed. An application will not be refused without the applicant being offered an opportunity to be heard. When an application is refused, the applicant may appeal to the Securities and Futures Appeals Panel. When an individual ceases to act as a representative/director of the person specified on his certificate of registration/licence, his licence is considered invalid. He must notify the SFC of the change and return his old certificate/licence for cancellation. The individual is required to lodge a new application for licence should he act for another intermediary. Ongoing Obligations All licensed intermediaries must observe the following requirements:

• Report any changes in the information provided in the initial application to the SFC in writing within 7 days. Most of these changes should be reported by either using Form 4 (for dealer, adviser, forex trader and representatives) or Form 4S (for Securities Margin Financier and their representatives).

• Pay annual fees and file annual returns on time (Please refer to Appendix G for current annual fees).

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• For dealers, advisers, financiers, financiers’ representatives (who are approved under section 121I of the SO only) and traders, display the certificate of registration/licence in a prominent place at the principal place of business.

• Remain fit and proper (Please refer to “Fit and Proper Criteria”*). • Comply with the Continuous Professional Training Requirement

(a) Firms are obliged to evaluate the training needs of their staff and set up a continuous professional training programme best suited them;

(b) All individual registrants are required to fulfill 5 continuous professional training hours per calendar year; and

(c) Both firms and individual registrants are required to declare their compliance with the continuous professional training requirements in their annual returns.

• Observe at all times all the provisions of the Ordinances, associated subsidiary legislation, Codes of Conduct, Guidelines, Rules and Regulations administered by the SFC, the Exchange and the Clearing House wherever applicable. They include the followings: (a) relevant Ordinances and subsidiary legislation

• Securities Ordinance; • Commodities Trading Ordinance; • Securities and Futures Commission Ordinance; • Leveraged Foreign Exchange Trading Ordinance; • Protection of Investors Ordinance; • Other subsidiary legislations of the above Ordinances; and • Financial Resources Rules.

(b) relevant Codes of Conduct and Guidelines • Fit and Proper Criteria; • Code of Conduct for Persons Registered with the SFC; • Management, Supervision and Internal Control Guidelines for Persons

Registered with or Licensed by the SFC; • Revised Guidance Note on Money Laundering;

* “Fit and Proper Criteria” is available for purchase at the SFC office at 12th Floor, Edinburgh

Tower, The Landmark, 15 Queen’s Road Central, Hong Kong. It is also available in the SFC’s website at www.hksfc.org.hk.

28

• Core Operational and Financial Risk Management Control for Over-the-Counter Derivatives Activities of Registered Persons (for registered persons engaged in over-the-counter derivatives activities only);

• Fund Manager Code of Conduct (for fund managers only); • Guidance Note On Internet Regulation (for those conducting activities

over the Internet only); • Guidance Note on Incidental Investment Advice Provided by Solicitors

and Accountants; • Guidance Note on Competence; and • Guidance Note on Continuous Professional Training.

Please visit the sections “Codes and Guidelines” and “Press Release” on the SFC’s website for an update of the latest code and policy guidelines issued by the SFC and the latest information that are of interest to intermediaries.

Additional requirements to be observed by business entities:

• Report any changes in personnel to the SFC in writing within 7 days. • Inform the SFC of the date of commencement of business as soon as practicable,

and of the date of the financial year end within 1 month after the issuance of the certificate of registration/ licence.

• For dealers, securities margin financiers and leveraged foreign exchange traders, file monthly FRR returns within the prescribed timeframe and annual audited accounts within 4 months of the financial year end. For advisers, file annual audited accounts at the time of filing annual returns.

• For leveraged foreign exchange traders, publish audited accounts, names of directors or shadow directors and names of subsidiaries in the newspapers within 4 months of the financial year end.

• Give the SFC not less than 30 days’ notice in writing of any intended change in the location of premises at which any records or documents relating to the business are kept; and state whether these premises are used partly or wholly for residential purpose.

• Obtain prior approval from the SFC when there is change in substantial shareholder (please refer to the next page for details).

• For securities margin financier, have at least one director approved by the SFC under section 121I of the SO at all times.

29

Revocation and Suspension of Licence and Other Disciplinary Action Misconduct, not being fit and proper or failure to comply with relevant laws and rules may lead to revocation or suspension of licence, or a reprimand. Disciplinary action will not be taken without the person concerned being offered an opportunity to be heard. Any decision to suspend or revoke a licence may be appealed to the Securities and Futures Appeals Panel. Other Approvals and Notifications Substantial Shareholders Who are “substantial shareholders”? “Substantial shareholder”, of a company, means a person who, either alone or with an associate

a. has an interest in shares in the company – i. the nominal value of which is equal to more than 10% of the issued share

capital of the company; ii. which entitles the person, either alone or with an associate, and either

directly or indirectly to exercise or control the exercise of more than 10% of the voting power at any general meeting of the company; or

b. holds shares in another corporation or corporations which holdings allow him either alone or with an associate and either directly or indirectly to exercise or control the exercise of 35% or more of the voting power of the other corporation, or of a further corporation, which is itself entitled either alone or with an associate and either directly or indirectly, to exercise or control the exercise of more than 10% of the voting power of the company.

Definition of “substantial shareholder” under the LFETO is more or less the same as that of the SO. In determining whether a person falls within the definition of “substantial shareholder”, the definition of “associate” under section 2(1) of the Securities and Futures Commission Ordinance (“SFCO”) and the LFETO, amongst others, should be taken into account. A person who is entitled, directly or indirectly, to exercise or control the exercise of the voting power of the immediate holding companies or above of a corporate licence/limited company is a substantial shareholder if such control is 35% or more.

30

Why application to become substantial shareholder is required? Section 26A(1) of the SFCO sets out the restrictions on changes in substantial shareholdings: A person shall not become a substantial shareholder of a registered person that is a corporation unless

a. he has served on the Commission written notice that he proposes to become a substantial shareholder in the registered person;

b. he has applied to the Commission for its approval to his being a substantial shareholder in the registered person;

c. he has given the Commission the information it reasonably requires to consider the application; and

d. the Commission has approved in writing his being a substantial shareholder in the registered person.

Section 26A(2) of the SFCO also states that a person shall give written notice to the Commission and apply for approval within 14 days of his becoming aware of being a substantial shareholder of a registered person that is a corporation if a. at the time he became a substantial shareholder, he did not know, and could not

reasonably have known, the fact by which he became a substantial shareholder of the registered person; and

b. subsequently he becomes aware that he is a substantial shareholder of the registered person.

Section 14A of the LFETO has similar provisions as those of section 26A of the SFCO. How to apply for approval to become “Substantial Shareholder”? 1. Application must be in writing and originated from the substantial shareholder(s) or

persons acting on its behalf and not from the registrant. 2. All persons falling within the definition of “substantial shareholder” must apply for

prior approval. 3. No application fee* is required under SO and CTO. However, application fee of

HK$6,950* is required for a person applying to become a substantial shareholder of a licensed leveraged foreign exchange trader in accordance with the Leveraged Foreign Exchange Trading (Fees) Rules.

4. Additional Information required:

* Please note that all fees may be subject to changes. It is advisable to check the SFC’s website for

current application fees.

31

• A group chart depicting the proposed change in holding structure including

the percentage of shareholdings in the company concerned; • Total value and number of shares to be acquired by the applicant; • Intended acquisition date; • Source of financing of the applicant in acquisition; • For those substantial shareholders who are natural persons, the following

documents are required: i. Questionnaire on Personal Information ii. Notes on Personal Information Collection iii. Authorization Form iv. ID card/Passport Copy

• For those substantial shareholders who are corporations, the following documents are required: i. Certificate of incorporation and details of ultimate beneficiaries, if

appropriate ii. Principal business activities iii. All the executive directors and individual shareholders of the corporate

applicants are required to provide documents i to iv mentioned above. Approval of Substantial Shareholders Approval will be granted by the SFC only if it is satisfied that the applicants are fit and proper persons. An approval letter will be sent to the applicant, the registered person concerned and the relevant exchange(s), if applicable. Change of Financial Year End A securities dealer/financier/forex trader is obliged under section 87A/121AH of the SO and 26A(1) of the LFETO respectively to inform the SFC within one month after the grant of licence in writing the date on which his financial year ends. The financial year shall not be more than 12 months except with written permission of the SFC. Any changes in the financial year of a securities dealer/financier require prior approval of the SFC under section 87A(2)/121AH(2) of the SO, the application fee of which is HK$2,000*. Section 26A(2) of the LFETO also requires a trader to obtain approval for change of financial year and the application fee for such is HK$2,150*

* Please note that all fees may be subject to changes. It is advisable to check the SFC’s website for


32

Although there is no statutory requirement applicable to investment adviser, commodity dealer and commodity trading advisers, the SFC expects them to notify it in writing if there are any changes in their financial year. Request for Extension of Deadline for Submitting Audited Accounts Securities dealer, financier, commodity dealer and forex trader are required by section 88(1)/121AI(1) of the SO, section 50(1) of the CTO and section 29 of the LFETO respectively to submit annually a true and fair profit and loss accounts and balance sheet, together with an auditor’s report containing the information prescribed by the Securities/Commodities Trading/Leveraged Foreign Exchange Trading (Accounts and Audit) Rules to the SFC within 4 months after the end of the financial year. If there are special reasons for requiring extension of the time of submission of annual audited accounts, the licensed person shall apply in writing to the SFC. A securities dealer, financier or commodity dealer is required to pay a fee of HK$2,000* for such application, while the corresponding fee for a forex trader is HK$2,150*. There is no statutory provision to empower the SFC to extend the deadline of submission of audited accounts for investment advisers and commodity trading advisers. Change of Auditors Section 87B/49A/28(1) of the SO/CTO/LFETO provide that a dealer/trader should immediately give written notice to the SFC if he decides to remove the auditor before the expiry of his terms of office or when he becomes aware that the auditor resigns on his own accord. Section 121AS of the SO requires a securities margin financier within 1 business day to inform the SFC in writing if the auditor is removed, resigns or otherwise ceases to hold office as auditor. Although there is no similar statutory requirement applicable to advisers, the SFC also expects them to notify the SFC in writing if there is any change in auditor. Change of Business Address and/or Address of Keeping Books and Records Under sections 63(1)&121Q(1)/41(1)/14 of the SO/CTO/LFETO respectively and Rule 7 of the Securities (Miscellaneous) Rules, a licensed holder is obliged to inform the SFC in writing of changes of addresses at which the business is carried out. Section 22 of the Leveraged Foreign Exchange Trading (Books, Contract Notes and Conduct of Business) * Please note that all fees may be subject to changes. It is advisable to check the SFC’s website for


33

Rules (“LFET Conduct Rules”) provides that a licensed trader shall carry on a business of leveraged foreign exchange trading only at an address approved by the SFC for that purpose. The application for such approval must be submitted with an application fee of HK$6,950*. Section 27 of the SFCO and section 14 of the LFETO require a licensed person to notify the SFC in writing at least 30 days in advance of the intended change in the location of the premises at which any record or other document is to be kept in relation to the business of which he is licensed. Section 3(1)(d) of the LFET Conduct Rules provides that a licensed trader shall keep its accounting, trading and other records at the principal place of business in Hong Kong and only with the prior written approval of the Commission at any other place or places, whether in or outside Hong Kong. The application for such approval must be submitted with an application fee of HK$6,950*. Internet Activities The SFC expects all licensed firms, prior to commencing their Internet business activities, to: 1. inform the Licensing Department in writing of their intended Internet activities and

provide relevant information which includes the revised business plan, a description of the computer system, a description of account opening procedures and information on experience and qualification of responsible staff in charge of the Internet services;

2. prepare a demonstration to the SFC of the business operations via the Internet when

ready; and 3. notify the SFC in writing the effective date of launching Internet services and the

address of the website. With respect to the account opening procedures through the Internet, licensed firms should establish appropriate measures to ensure compliance with the applicable codes and guidance notes including paragraph 5.1 of the Code of Conduct for Persons Registered with the Commission, paragraph 6.2.6 of the Guidance Notes on Internet Regulation and paragraph 4.1 of the Revised Guidance Notes Regarding Money Laundering. Licensed firms are reminded to comply at all times with the relevant codes and guidance notes in conducting their businesses via the Internet. * Please note that all fees may be subject to changes. It is advisable to check the SFC’s website for


34

Public Register

The SFC maintains a register that sets out details of all licensed persons. The register is available for inspection by the public at the Licensing Counter of the SFC during the following hours: Weekdays 9:00 a.m. – 12:30 p.m. 2:00 p.m. – 5:30 p.m. Saturdays 9:00 a.m. – 12:30 p.m. Details of registrants are also available at the section “Public Register” on the SFC’s website. Government Gazette On the last Friday of every month, the SFC publishes in the Hong Kong SAR Government Gazette details of amendments made to the Public Register within the previous month. Once every year, the SFC publishes the names and addresses of all licensed and exempt persons in the Hong Kong SAR Government Gazette. The publication dates in respect of the various Ordinances are set out below:

Ordinance Last Friday of the month of Securities Ordinance (other than exempt person) September Commodities Trading Ordinance and Exempt Persons under the Securities Ordinance

January

Leveraged Foreign Exchange Trading Ordinance November

35

Appendix A

Definitions

1. Securities The term “securities” is defined in section 2(1) of the Securities Ordinance: “securities” means any shares, stocks, debentures, loan stocks, funds, bonds, or notes of, or issued by, any body, whether incorporated or unincorporated, or of any government or local government authority; and includes

a. rights, options, or interests (whether described as units or otherwise) in or in respect of any of the foregoing;

b. certificates of interest or participation in, or temporary or interim certificates for, receipts for, or warrants to subscribe to or purchase, any of the foregoing; or

c. any instruments commonly known as securities; but does not include –

i. any shares or debentures of any company which is a private company within the meaning of section 29 of the Companies Ordinance;

ii. any interest arising under a partnership agreement or proposed partnership agreement (other than an agreement creating a limited partnership), unless the agreement or proposed agreement relates to an undertaking, scheme, enterprise, or investment contract promoted by or on behalf of a person whose ordinary business is or includes the promotion of similar undertakings, schemes, enterprises, or investment contracts, whether or not that person is, or is to become, a party to the agreement or proposed agreement, or unless the agreement is or would be an agreement, or is or would be within a class of agreements, prescribed by Commission rules for the purposes of this paragraph;

iii. any negotiable receipt or other negotiable certificate or document evidencing the deposit of a sum of money, or any rights, or interest arising under any such receipt, certificate, or document;

iv. any bill of exchange within the meaning of section 3 of the Bills of Exchange Ordinance and any promissory note within the meaning of section 89 thereof;

v. any debenture that specifically provides that it is not negotiable or transferable.

36

Appendix A

(Cont’d)

2. Dealing in Securities The term “dealing in securities” is defined in section 2(1) of the Securities Ordinance: “dealing in securities”, in relation to any person (whether acting as principal or agent), subject to section 3(1), means making or offering to make an agreement with any other person, or inducing or attempting to induce any other person to enter into or offer to enter into any agreement

a. for or with a view to acquiring, disposing of, subscribing for or underwriting securities;

b. the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities.

It should be noted that, before considering whether someone is dealing in securities, regard must be made to section 3(1) and (1A) of the Securities Ordinance, which says: 3(1) For the purpose of determining whether or not a person has dealt in securities or has communicated an offer to acquire or dispose of securities, no account shall be taken of an act done on behalf of that person by, or of an offer made by that person to, a registered dealer, a dealer’s representative, an exempt dealer or an exempt dealer’s representative or of that person having (whether as principal or as agent) –

a. [Repealed 24 of 1991, s.3] b. issued a prospectus which complies with, or is exempt from compliance with,

Part II of the Companies Ordinance, or in the case of a company incorporated outside Hong Kong, complies with or is exempted from compliance with Part XII of that Ordinance;

c. issued any document relating to securities of a corporation incorporated in Hong Kong that is not a registered company, being a document which –

37

Appendix A

(Cont’d)

i. would if the corporation were a registered company be a prospectus to which section 38 of the Companies Ordinance applies, or would apply if not excluded by subsection (5)(b) of that section or by section 38A of that Ordinance; and

ii. contains all the matters which, by virtue of Part XII of that Ordinance, it would be required to contain if the corporation were a company incorporated outside Hong Kong and the document were a prospectus issued by that company;

d. issued a form of application for shares or debentures of a company, together with i. a prospectus which complies with, or is exempt from compliance with,

Part II of the Companies Ordinance or, in the case of a company incorporated outside Hong Kong, complies with or is exempt from compliance with Part XII of that Ordinance; or

ii. in the case of a corporation incorporated in Hong Kong which is not a registered company, a document which contains the matters specified in paragraph (c)(ii);

e. issued a prospectus which has been approved by the Commission in relation to a mutual fund corporation or unit trust authorized by the Commission under section 15;

f. issued a form of application for the shares of a mutual fund corporation or the units of a unit trust, being a mutual fund corporation or unit trust which has been authorized by the Commission under section 15, together with a prospectus approved by the Commission;

g. entered into a market contract; or of his having as principal, acquired, subscribed for, or underwritten securities, or effected transactions with a person whose business involves the acquisition and disposal, or the holding, of securities (whether as principal or as agent).

38

Appendix A

(Cont’d)

(1A) Without prejudice to the generality of the definition of “dealing in securities” in section 2(1), a person shall be regarded as dealing in securities if in return for a commission, rebate or other remuneration, he

a. receives from another person an offer to effect a dealing or to acquire or dispose of securities, and communicates it, either in his name or in the name of the person from whom the offer is received, to a registered dealer, a dealer’s representative, an exempt dealer or an exempt dealer’s representative;

b. effects an introduction between a registered dealer, a dealer’s representative, an exempt dealer or an exempt dealer’s representative and another person, in order that that other person may effect a dealing or make an offer to acquire or dispose of securities; or

c. on behalf of another person i. effects a dealing through a registered dealer, a dealer’s representative, an

exempt dealer or an exempt dealer’s representative; or ii. makes an offer to a registered dealer, a dealer’s representative, an exempt

dealer or an exempt dealer’s representative to acquire or dispose of securities,

and subsection (1) shall be construed and have effect accordingly. 3. Investment Adviser The term “investment adviser” is defined in section 2(1) of the Securities Ordinance: “investment adviser” means any person who

a. for remuneration carries on a business of advising other persons concerning securities;

39

Appendix A

(Cont’d)

b. for remuneration as part of a regular business issues analyses or reports

concerning securities; or c. for remuneration pursuant to a contract or arrangement with a client, undertakes

on behalf of the client the management of a portfolio of securities, including the arranging of purchases, sales, or exchanges of securities through a dealer or exempt dealer,

and, in the case of a corporation which is an investment adviser, includes any director of the corporation who actively participates in, or is in any way directly responsible for the supervision of, the corporation’s business as an investment adviser; but does not include –

i. a licensed bank; ii. a solicitor or professional accountant whose carrying on business as an

investment adviser is wholly incidental to the practice of his profession; iii. the proprietor or publisher of, or any contributor to, a bona fide newspaper,

magazine, journal, or other periodical publication that is generally available to the public, otherwise than on subscription, who, only in that bona fide newspaper, magazine, journal, or periodical publication, advises other persons concerning securities, or issues analyses or reports concerning securities, not being the proprietor or publisher of, or a contributor to, a newspaper, journal, magazine, or other periodical publication whose principal or only object is to advise others concerning securities or to issue analyses or reports concerning securities;

iv. a dealer or exempt dealer to the extent that his giving of investment advice is incidental to his carrying on business as a dealer or exempt dealer;

v. a trustee company registered under Part VIII of the Trustee Ordinance; vi. an exempt investment adviser; vii. a recognized clearing house.

4. Commodity The term “commodity” is defined in section 2(1) of the Commodities Trading Ordinance: “commodity” includes any item, whether or not capable of being delivered, which is listed or specified, as the case may be, in

40

Appendix A

(Cont’d)

a. the Schedule to the Commodity Exchanges (Prohibition) Ordinance; or b. Part I of Schedule 1; or c. Part II of Schedule 1.

Items specified under :

a. the Schedule to the Commodity Exchanges (Prohibition) Ordinance are barley, cocoa, coffee, copper, cotton, gold, lead, maise, oats, platinum, rice, rubber, silver, oil seeds and vegetable oils, sugar, timber, tin, wheat, wool, zinc, jute, frozen meat, poultry and fish, and soybeans.

b. Part I of Schedule 1 to the Commodities Trading Ordinance are cotton, sugar, soybeans, gold, Hang Seng Index futures contracts, Three Month Hong Kong Interbank Offered Rate futures contracts, Hang Seng Finance Sub-Index futures contracts, Hang Seng Utilities Sub-Index futures contracts, Hang Seng Properties Sub-Index futures contracts, Hang Seng Commerce and Industry Sub-Index futures contracts, Stock Indices, and cash-settled stock futures contracts for differences.

There is nothing in Part II of Schedule 1 to the Commodities Trading Ordinance. 5. Futures Contract The term “futures contract” is defined in section 2(1) of the Commodities Trading Ordinance: “futures contract” means either

a. a contract executed on a commodity exchange the effect of which is i. that one party agrees to deliver to the other party at an agreed future time

an agreed commodity or quantity of a commodity, at an agreed price; or ii. that the parties will make an adjustment between them at an agreed future

time according to whether an agreed commodity is worth more or less or, as the case may be, stands higher or lower at that time than a level agreed at the time of making of the contract, the difference being determined in accordance with the rules of the commodity market in which the contract is made; or

b. an option on a contract of the kind described in paragraph (a)(i) or (ii).

41

Appendix A

(Cont’d)

6. Trading in Commodity Futures Contracts The term “trading in commodity futures contracts” is defined in section 2(1) of the Commodities Trading Ordinance: “trading in commodity futures contracts”, in relation to any person (whether acting as principal or agent), means making or offering to make an agreement with any other person in Hong Kong, or inducing or attempting to induce any other person in Hong Kong to enter into or offer to enter into a futures contract. The following activities are not regarded as trading in commodity futures contracts under the Commodities Trading Ordinance:

a. trading on the Chinese Gold and Silver Exchange; b. trading on a market to which the Public Health and Municipal Services

Ordinance applies; c. trading on a market established under the Agricultural Products (Marketing)

Ordinance; or d. trading on a market established under the Marine Fish (Marketing) Ordinance.

7. Commodity Trading Adviser Under section 27(1) of the Commodities Trading Ordinance, the term “commodity trading adviser” refers to a person who shall not –

a. for remuneration carry on a business of advising any other person concerning the purchase or sale of futures contracts;

b. for remuneration as part of a regular business issue or circulate analyses or reports concerning the purchase or sale of futures contracts;

c. for remuneration pursuant to a contract or arrangement with a client, undertake on behalf of the client the management of a portfolio of commodities or futures contracts, including the arranging of purchase, sale, exchange or storage of commodities; or

d. holds himself out as carrying on the business referred to in paragraph (a); unless such person is registered as a commodity trading adviser under the Commodities Trading Ordinance.

42

Appendix A

(Cont’d)

8. Securities Margin Financing The term “securities margin financing” is defined in section 2(1) of the Securities Ordinance: “securities margin financing” means providing financial accommodation in order to facilitate the acquisition of securities listed on a stock exchange and, where applicable, the continued holding of those securities, whether or not those or other securities are pledged as security for the accommodation. 9. Securities Collateral The term “securities collateral” is defined in section 2(1) of the Securities Ordinance: “securities collateral”, in relation to a dealer or a securities margin financier, means securities deposited –

a. with the dealer or financier as security for the provision by the dealer or financier of financial accommodation; or

b. with any other person to facilitate the provision of financial accommodation by the dealer or financier under an arrangement that confers on the dealer or financier a collateral interest in the securities; or

c. for the purpose of section 81A only, with the dealer as security for a purpose other than the provision of financial accommodation.

10. Financial Accommodation The term “financial accommodation” is defined in section 2(1) of the Securities Ordinance:

43

Appendix A

(Cont’d)

“financial accommodation” means a loan or other arrangement under which a person is or is to be provided with credit, whether directly or through a third party, and in particular includes an overdraft, a discounted negotiable instrument, a guarantee, a forbearance from enforcing a debt that in substance is a loan, and also includes an agreement to secure the payment or repayment of any such accommodation. 11. Securities Margin Financier The term “securities margin financier” is defined in section 2(1) of the Securities Ordinance: “securities margin financier” means a person who carries on a business of securities margin financing, whether the person carries on any other business or not. 12. Securities Margin Financier’s Representative The term “securities margin financier’s representative” is defined in section 2(1) of the Securities Ordinance: “securities margin financier’s representative”, in relation to a securities margin financier, means –

a. a person in the employment of, or acting for or by arrangement with, a securities margin financier who for remuneration performs for the financier any function relating to the business of securities margin financing carried on by the financier, other than work normally performed by an accountant, clerk or cashier; or

b. a director of the financier who actively participates in, or is directly responsible for supervising, the financier’s business of securities margin financing.

44

Appendix A

(Cont’d)

13. Company The term “company” is defined in section 2(1) of the Securities Ordinance: “company” means a company as defined in section 2 of the Companies Ordinance, a company to which Part XI of that Ordinance applies, and any body corporate incorporated in Hong Kong having a share capital. 14. Foreign Exchange Trading The term “foreign exchange trading” is defined in section 2(1) of the Leveraged Foreign Exchange Trading Ordinance: “foreign exchange trading”, subject to subsection (2), means the act of entering or offering to enter into, or inducing or attempting to induce a person to enter into or offer to enter into, a contract or arrangement whereby any person undertakes –

a. to exchange currency with another person; or b. to deliver an amount of foreign currency to another person; or c. to credit the account of another person with a foreign currency.

15. Leveraged Foreign Exchange Trading The term “leveraged foreign exchange trading” is defined in section 2(1) of the Leveraged Foreign Exchange Trading Ordinance: “leveraged foreign exchange trading”, subject to subsection (2), means –

a. the act of entering into or offering to enter into, or inducing or attempting to induce a person to enter into or offer to enter into, a contract or arrangement whereby any person undertakes

i. to make an adjustment between himself and another person according to whether a currency is worth more or less, as the case may be, in relation to another currency; or

ii. to pay an amount of money or to deliver a quantity of any commodity determined or to be determined by reference to the change in value of a currency in relation to another currency; or

45

Appendix A

(Cont’d)

iii. to deliver to another person at an agreed future time an agreed amount of currency at an agreed price;

b. the provision of any advance, credit facility or loan directly or indirectly to facilitate foreign exchange trading, or to facilitate an act of the description mentioned in paragraph (a)(i), (ii) or (iii); or

c. the act of entering into or offering to enter into, or inducing or attempting to induce a person to enter into, an arrangement with another person, on a discretionary basis or otherwise, to enter into contracts to facilitate an act of description mentioned in paragraph (a)(i), (ii) or (iii) or (b).

16. Introducing Broker The term “introducing broker” is defined in section 2 of the Financial Resources Rules made under the Securities & Futures Commission Ordinance: “introducing broker” means a dealer who has satisfied the Commission that –

a. he, in respect of the business for which he is registered, conducts no business other than –

i. receiving from another person offers to effect dealings in securities or tradings in futures or options contracts and communicating the same in the name of such person to exchange participants, or members of a stock market specified in Schedule 5 or a futures or options market specified in Schedule 6; or

ii. introducing another person to exchange participants, or members of a stock market specified in Schedule 5 or a futures or options market specified in Schedule 6, in order that such person may –

(A) effect dealings in securities; (B) make offers to acquire or dispose of securities; (C) trade in futures or options contracts; or (D) make offers to trade in futures or options contracts;

b. he does not handle clients' assets; and c. in connection with the offers or person so introduced he incurs no legal liability

to any party save for his own negligence, wilful default or fraud.

46

Appendix A

(Cont’d)

17. Leveraged Foreign Exchange Introducing Agent

The term “leveraged foreign exchange introducing agent” is defined in section 2 of the Leveraged Foreign Exchange Trading (Financial Resources) Rules: “leveraged foreign exchange introducing agent” means a licensed leveraged foreign exchange trader which has satisfied the Commission that –

a. it does not hold or control clients' assets; and b. it conducts no business other than –

i. communicating offers to effect leveraged foreign exchange trading in the name of the persons from whom they are received to recognized counterparties; or

ii. effecting introductions of persons to recognized counterparties.

47

Appendix B

Exemption from Licensing

I. Securities Margin Financing Schedule 4 of the Securities Ordinance provides that the following kinds of activities are exempted from Part XA (Securities Margin Financing) – 1. The provision of financial accommodation by a registered or exempt dealer in order

to facilitate acquisitions or holdings of securities by the dealer for the dealer’s clients.

2. The provision of financial accommodation by a mutual fund corporation in order to

finance investment in any of the corporation’s mutual funds. 3. The provision of financial accommodation by an authorized financial institution for

the purpose of facilitating acquisitions or holdings of securities by the institution’s clients.

4. Securities margin financing that is or forms part of a stock borrowing, or a stock

return, as defined by section 19(16) of the Stamp Duty Ordinance (Cap. 117), or any transaction in securities similar to such a borrowing or return.

5. The provision of financial accommodation that forms part of an arrangement to

underwrite or sub-underwrite securities. 6. The provision of financial accommodation to facilitate an acquisition of securities in

accordance with the terms of a prospectus, regardless of whether the offer of securities is made in Hong Kong or elsewhere.

7. The provision of financial accommodation by a company to its directors or

employees to facilitate acquisitions or holdings of its own securities. 8. The provision of financial accommodation to a registered financier, a registered or

an exempt dealer or an authorized institution to facilitate acquisitions or holdings of securities.

9. The provision of financial accommodation by a member of a group of companies to

another member of the group to facilitate acquisitions or holdings of securities by that other member.

48

Appendix B

(Cont’d)

10. The provision of financial accommodation by an individual to a company in which

he holds 10% or more of its issued share capital to facilitate acquisitions or holdings of securities.

II. Leveraged Foreign Exchange Trading Section 2(2) of the Leveraged Foreign Exchange Trading Ordinance provides that, for the purposes of subsection (1), “foreign exchange trading” and “leveraged foreign exchange trading” do not include any act performed for or in connection with a contract or arrangement or a proposed contract or arrangement –

a. wholly referable to the provision of property, other than currency, or services or employment at fair or market value;

b. where the contract or arrangement is entered into by a limited company – i. the principal business of which does not include dealing in currency in

any form; ii. for the purpose of hedging its exposure to currency exchange risks in

connection with its principal business; and iii. with another limited company;

c. that is an exchange transaction to which the Money Changers Ordinance (Cap. 34) applies;

d. arranged by an approved money broker within the meaning of section 2 of the Banking Ordinance (Cap. 155) and every party to which is a corporation within the meaning of section 2 of the Securities Ordinance (Cap. 333) or a limited partnership registered under the Limited Partnerships Ordinance (Cap. 37);

e. that is a transaction executed solely for the purpose of its insurance business by an insurer authorized under section 8 of the Insurance Companies Ordinance (Cap. 41) to carry on insurance business or deemed to be so authorized under section 61(1) or (2) of that Ordinance;

f. that is a contract executed on a recognized futures exchange by or through a commodities dealer registered under Part IV of the Commodities Trading Ordinance (Cap. 250) or is wholly ancillary or incidental to one or more than one such contract or a series of such contracts;

49

Appendix B

(Cont’d)

g. arranged by –

i. a body which, in the opinion of the Monetary Authority, is A. a central bank; or B. an institution which performs the functions of a central bank; or

ii. an organization which, with the approval of the Monetary Authority, is acting on behalf of a body of the description mentioned in subparagraph (i);

h. that is a transaction executed on a recognized stock exchange by or through a securities dealer registered under Part VI of the Securities Ordinance (Cap. 333) or is wholly ancillary or incidental to one or more than one such transaction or a series of such transactions;

i. that is a transaction in units or shares respectively of a unit trust or mutual fund authorized by the Commission under section 15 of the Securities Ordinance (Cap. 333);

j. that is wholly ancillary or incidental to one or more than one transaction in specified debt securities or a series of such transactions; or

k. by any person belonging to a class of persons, or carrying on a type of business, prescribed by rules made by the Commission under section 73 for the purposes of this paragraph.

Rule 2 of the Leveraged Foreign Exchange Trading (Exemption) Rules provides: For the purposes of the Ordinance, other than section 39, “foreign exchange trading” and “leveraged foreign exchange trading” do not include any act performed for or in connection with a contract or arrangement or a proposed contract or arrangement by –

a. any person which is a corporation belonging to the class specified in section 3; b. a unit trust or mutual fund corporation authorized by the Commission under

section 15 of the Securities Ordinance (Cap. 333); or c. any person in the course of business for the purpose of managing a unit trust or

mutual fund corporation authorized by the Commission under section 15 of the Securities Ordinance (Cap. 333).

50

Appendix B

(Cont’d)

Qualifying Class Rule 3 of the Leveraged Foreign Exchange Trading (Exemption) Rules provides:

1. A corporation belongs to the class referred to in section 2(a) only if a. i. it has a qualifying credit rating; or

ii. its shares are wholly-owned, directly or indirectly, by another corporation, or by a partnership, which has such a rating; and

b. i. its principal business is not in leveraged foreign exchange spot transactions; or

ii. the average principal amount of each transaction in its leveraged foreign exchange spot trading, calculated for each financial year of the corporation, is not less than $7.8 million.

2. For the purposes of subsection 1(b)(ii), the average principal amount shall be computed by dividing the aggregate of all principal amounts of leveraged foreign exchange spot transactions carried out by the relevant corporation during the relevant financial year by the total number of such transactions for that year.

Notices Rule 4 of the Leveraged Foreign Exchange Trading (Exemption) Rules provides:

1. Any corporation belonging to the class referred to in section 2(a) which, but for these Rules, would require to be licensed by the Commission under section 7(1)(a) of the Ordinance, shall annually, within 4 months of the end of its financial year, notify the Commission in writing –

a. that it belongs to the class specified in section 3; and b. of the grounds on which it belongs to that class, in sufficient detail to

enable the Commission to verify that the corporation does so belong. 2. If a corporation belonging to the class referred to in section 2(a) which has filed

a notice pursuant to subsection (1) ceases to have a qualifying credit rating, it shall within 7 days thereof notify the Commission in writing of the cessation.

51

Appendix C

Exemptions from Deposit Payment

A deposit is not required for licensing as a securities dealer in the case of:

a. A holder of a trading right of the Stock Exchange of Hong Kong Limited (“SEHK”);

b. a dealing director of a corporation which is a holder of a trading right of

the SEHK unless he is also a dealing director of another corporation which is a registered dealer and which is not a holder of a trading right of the SEHK;

c. a corporation which is not a holder of a trading right of the SEHK, each

of whose dealing director has deposited an amount of HK$50,000; or

d. any other dealer who belongs to a class of dealers exempted by Commission rules.

A deposit is not required for licensing as a commodity dealer in the case of:

a. an applicant that is a corporation, if any director or employee accredited to the corporation as a dealer has paid such deposit;

b. an applicant that is a firm, if any partner or employee accredited to the

firm as a dealer has paid such deposit;

c. an applicant who is a holder of a trading right of the Hong Kong Futures Exchange Limited (“HKFE”), if HKFE has made in respect of the holder of a trading right a deposit to the compensation fund; or

d. an applicant who is accredited to a holder of a trading right of HKFE as a

dealer, if HKFE has made in respect of that holder of a trading right a deposit to the compensation fund.

52

Appendix D

Recognized Futures Exchanges

The following is a list of recognized futures exchanges specified in the Second Schedule to the Commodities Trading Ordinance:

Australian Options Market Chicago Board of Trade Chicago Board Options Exchange Chicago Mercantile Exchange Commodity Exchange, Inc. Deutsche Terminborse European Options Exchange London International Financial Futures Exchange London Metal Exchange Marche a terme International de France Marche des Options Negociables de la Bourse de Paris New York Cotton Exchange, Inc New York Futures Exchange New York Mercantile Exchange New York Produce Exchange, Inc. New Zealand Futures and Options Exchange Osaka Securities Exchange Philadelphia Stock Exchange Singapore International Monetary Exchange Stockholm Options Market Swiss Option and Financial Futures Exchange Sydney Futures Exchange, Ltd. Tokyo Grain Exchange Tokyo International Financial Futures Exchange Tokyo Stock Exchange Tokyo Sugar Exchange Toronto Futures Exchange Winnipeg Commodities Exchange

53

Appendix E

Supporting Documents

Applicants are required to provide various documents in support of their applications. Such documents are specified in the notes to each form. They include the following: For a Corporate/Principal/ Director Application

a. certified true copy of valid business registration certificate (for business applicant only);

b. certified true copy of certificate of incorporation (for corporate applicant only); c. certified true copy of memorandum and articles of association (for corporate

applicant only); d. certified true copy of board resolution authorizing the application and verifying

particulars contained in the application (for corporation only), and certified true copy of board resolution authorizing the applicant’s capacity (for applicant who intends to be dealing/supervisory director of a corporation);

e. certified true copy of identity card/passport, authorization form and consent form on personal information collection of individual applicant, and directors and substantial shareholders of corporate applicants;

f. evidence of educational, professional, technical or other academic qualifications (for individual only);

g. computation of Liquid Assets, Ranking Liabilities & Liquid Capital (for securities dealer, securities margin financier and commodity dealer);

h. computation of Net Tangible Assets (for securities investment adviser and commodity trading adviser);

i. duly completed statement of compliance with the requirements of the Leveraged Foreign Exchange Trading (Financial Resources) Rules and the underlying supporting documents (for leveraged foreign exchange trader only);

j. confirmation of having sole business in securities margin financing from the director applying to be approved under section 121I of the Securities Ordinance (for securities margin financier only);

k. confirmation of having sole business in leveraged foreign exchange trading from the responsible director (for leveraged foreign exchange trader only);

l. copy of standard Clients’ Agreement (for leveraged foreign exchange trader only);

54

Appendix E

(Cont’d)

m. confirmation statement from the responsible director that the proposed standard

Clients’ Agreement complies with the requirements of the Leveraged Foreign Exchange Trading (Books, Contract Notes and Conduct of Business) Rules (for leveraged foreign exchange trader only);

n. confirmation statement from the legal advisers that the proposed standard Clients’ Agreement complies with the requirements of the Leveraged Foreign Exchange Trading (Books, Contract Notes and Conduct of Business) Rules (for leveraged foreign exchange trader only); and

o. in the case of the applicant intending to provide discretionary account services, a copy of the standard Discretionary Account Agreement and similar confirmation statements, as in (m) and (n), from the responsible director and legal advisers respectively (for leveraged foreign exchange trader only).

For a Representative Application

a. certified true copy of his identity card/passport; b. certified true copy of document evidencing educational, professional, technical

or other qualifications; c. letter from previous/present employer providing details of work experience; d. copy of employment visa/documentary proof of application for employment visa,

if applicable; e. for director of a securities margin financier who is applying for approval under

section 121I of the Securities Ordinance, a certified true copy of the board resolution authorizing the applicant to act in such capacity; and

f. for a responsible director of a leveraged foreign exchange trader, a certified true copy of the board resolution authorizing the applicant to act in such capacity.

The SFC may require other supporting documents on an individual case basis to satisfy it that the applicant is fit and proper to be licensed.

55

Appendix F

Application Fees

HK$

Securities Dealer 4,900 Investment Adviser 4,900 Securities Dealer’s Representative 1,850 Investment Representative 1,850 Securities Margin Financier 4,900 Securities Margin Financier’s Representative 1,850 Commodity Dealer 4,900 Commodity Trading Adviser 4,900 Commodity Dealer’s Representative 1,850 Commodity Trading Adviser’s Representative 1,850 Exempt Dealer 23,500 Exempt Investment Adviser 7,000 Leveraged Foreign Exchange Trader 133,750 Additional fee for acting as Introducing Agent 6,950 Leveraged Foreign Exchange Trader’s Representative 2,500

As at August 2001

Appendix G

Annual Fees

HK$

Securities Dealer 4,900 Investment Adviser 4,900 Securities Dealer’s Representative 1,850 Investment Representative 1,850 Securities Margin Financier 4,900 Securities Margin Financier’s Representative 1,850 Commodity Dealer 4,900 Commodity Trading Adviser 4,900 Commodity Dealer’s Representative 1,850 Commodity Trading Adviser’s Representative 1,850 Exempt Dealer 14,000 Exempt Investment Adviser 7,000 Leveraged Foreign Exchange Trader 133,750 Leveraged Foreign Exchange Trader’s Representative 2,500

As at August 2001