Published On: Fri, Feb 28th, 2014

HK SFC Proposes To Strengthen Regulation Of Alternative Liquidity Pools

Ashley Alder, HK SFC CEO

Ashley Alder, HK SFC CEO

The Securities and Futures Commission (SFC) has begun on 27 February a two-month consultation concerning the future regulation of alternative liquidity pools (ALPs), which are also known as alternative trading systems and “dark pools” (Note 1).

The SFC proposes to enhance and standardize the regulatory obligations imposed on Hong Kong licensed corporations that operate ALPs, by including within the Code of Conduct (Note 2) comprehensive requirements governing their operation. As a consequence of doing this, the SFC will cease its current practice of imposing conditions on the licences of ALP operators on a case-by-case basis.

The SFC’s proposals draw on initiatives for the regulation of ALPs that have been developed in other major markets and also reflect regulatory responses that the SFC considers desirable within the particular context of the Hong Kong market.

The proposals set out in the SFC’s consultation paper cover the following key areas:

  • Restricting access to ALPs to institutional investors only.
  • Enhancing the level of disclosure to ALP users.
  • Ensuring the priority of agency orders over proprietary orders initiated by ALP operators and their affiliates.
  • Limiting the level of visibility of trading information available to the staff of ALP operators.
  • Maintaining system adequacy.
  • Introducing additional control, record keeping and reporting requirements.

“The growth in the number of ALPs has catalysed global recognition that these systems must be appropriately operated to protect client interests and preserve market integrity. These same considerations apply in Hong Kong as they do in other markets,” said Mr Ashley Alder, the SFC’s Chief Executive Officer.

“The proposals aim to strike a balance between market development, market integrity and investor protection, taking into account the needs and circumstances of the Hong Kong market,” he added.

The public is invited to submit comments to the SFC by 25 April 2014. Written comments may be submitted on line via the SFC website (www.sfc.hk), by email to alpconsultation@sfc.hk, by post or by fax to (852) 2501 0375.

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