In view of the increased use of electronic trading by intermediaries, the SFC proposes to build on the existing regulatory requirements by providing a more coherent and comprehensive regulatory framework for electronic trading (Note 1). The proposals also aim to bring the regulation of DMA activities in line with the standards set by the International Organization of Securities Commissions (IOSCO) (Note 2).
“The proposed framework aims to strike a balance between facilitating market developments and maintaining market integrity,” said the SFC’s Chief Executive Officer Mr Ashley Alder. “To manage risks arising from the use of sophisticated trading technology and practices, the industry must have appropriate controls in place when conducting electronic trading business.”
Key elements of the proposals include:
general requirements on all forms of electronic trading in respect of responsibility for orders, management and supervision, adequacy of system and record keeping;
specific requirements on the provision of Internet trading and DMA services, in particular, requiring that an intermediary put in place effective risk management and supervisory controls to monitor orders, including automated pre-trade controls and regular post-trade monitoring; and
specific requirements on algorithmic trading related to testing of the algorithmic trading system and trading algorithms, user qualification and risk management controls.
The public is invited to submit their comments to the SFC on or before 24 September 2012. Written comments may be submitted on line via the SFC site (www.sfc.hk), by email to (email@example.com), by post or by fax to 2293 4900.
1. Existing regulatory requirements are set out in various codes and guidelines including the Code of Conduct for Persons Licensed by or Registered with the SFC, the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC, and the Guidance Note on Internet Regulation.
2. The standards are set out in IOSCO’s Final Report on the Principles for Direct Electronic Access to Markets that is available on IOSCO’s site at www.iosco.org.