SFC concludes consultation on risk management guidelines for futures dealing activities

Following a consultation in November 2022 on proposed new risk management guidelines for futures dealing activities, the Securities and Futures Commission of Hong Kong, SFC, has now published a corresponding consultation conclusion paper. In this paper, the Commission briefly summarizes the responses it has received to its consultation and outlines the final guidelines as they will apply from February 25, 2024.
#### Background
On November 25, 2022, the SFC launched noted consultation in an effort to support and assist firms in appropriately handling their risks when engaged in futures dealing and brokering activities (please see EventID 18430 in this context for a detailed description of the consultation). The consultation followed the observation of multiple deficiencies in future brokers‘ and dealers‘ practices, particularly in the areas of monitoring margin calls, observing client thresholds, and performing stress tests to ensure adequate financial resources in cases of stress. Hence, the new guidelines would address these issues and outline the Commission’s expectations with respect to market risk management, liquidity risk management, client credit risk management, concessionary margining and risk management over executing or clearing agents and other relevant and related issues such as the safeguarding client assets, trading in futures markets outside Hong Kong, or stress testing.
#### Responses and way forward
Generally speaking, brokers and dealers „appreciated“ the SFC’s intent to guide futures brokers in risk management practices. As noted by the SFC, the majority of feedback centered around practical issues related to certain prescriptive and quantitative requirements. These included concerns about „limitations on granting waivers of margin calls and forced liquidation after two margin call failures, the threshold for identifying client concentration in stress testing, and the controls and thresholds for applying concessionary margining“. There were general worries that these proposed requirements might curtail business flexibility and hinder the development of smaller firms.
In response to these concerns, the SFC has replaced some prescriptive rules and quantitative thresholds with more principles-based risk management guidance. Additionally, the SFC has made some changes to the draft version for clarification purposes to prevent misunderstandings regarding certain requirements. The revisions to the draft version are outlined in Appendix B which is part of the same document.
According to the SFC, there will be a transitional period of six month during which firms can assume preparation to comply with any new requirements. Brokers will also have an additional 12 months to incorporate the necessary system changes to meet the compliance standards concerning client risk limit controls and stress testing.
The final guidelines are expected to take effect on February 25, 2024 and will include the following key elements:
– the establishment of an adequate risk governance framework;
– guidelines as to the monitoring and control of market risk;
– general guidance as to commodity futures trading and the knowledge a broker shall have in this context;
– the management of client credit risk, including appropriate controls;
– guidance on concessionary margining, including when a broker may refrain from collecting initial margins;
– the management of risks when a broker engages an executing or clearing agent to execute or clear futures contracts;
– guidelines as to the management of liquidity risks; and
– guidance on the safeguarding of customer assets, including the separation of assets from own assets and funds.