SFC Extends Deadlines for Implementing Regulatory Expectations and Reminds Intermediaries of Order Recording Requirements amidst COVID-19 Pandemic

1. COVID-19 Pandemic SFC Guidance

   Hong Kong’s Securities and Futures Commission (SFC) issued a
   circular[1] on 31 March 2020 to Hong Kong-licensed intermediaries extending by six months the deadlines for the implementation of three regulatory expectations coming into effect in 2020.
   The SFC Circular also reminds intermediaries of the need to observe order recording requirements during the COVID-19 pandemic.

   In the circular, the SFC states that it is closely monitoring the development of the global COVID-19 pandemic and acknowledges industry concerns that recent government policies such as travel bans, regional lockdowns and mandatory quarantine periods make
   it difficult for staff performing different functions locally and overseas in working from their usual place of business. The SFC notes that some intermediaries have decided to reconfigure their staffing arrangements to limit COVID-19
   infection risks.

   As set out in the SFC’s press release “Arrangements relating to SFC’s public services” of 5 February 2020,[2] SFC-licensed intermediaries are generally expected to make all reasonable efforts to maintain “business as usual” in relation to their regulatory obligations and all regulatory
   filing, reporting and other deadlines. Those who encounter specific difficulties arising from the COVID-19 situation are encouraged to communicate with their usual SFC contact points at the SFC.

   The SFC’s latest circular adds that SFC-licensed intermediaries are expected to remain focused on internal controls and risk management to ensure financial and operational resilience given the unprecedented market activity and volatility. It recognises,
   however, that intermediaries face operational and “business as usual” challenges, which differ between intermediaries depending, among other factors, on their individual sizes and the types of regulated activity they carry out.

   SFC-licensed intermediaries are also reminded of the alternative order recording options under the existing regulatory framework that may be adopted during the pandemic.

2. SFC Circular to Intermediaries: Extended Deadlines for Implementation of
   Regulatory Expectations and Reminder of Order Recording Requirements under
   COVID-19 Pandemic

   1. Extended Deadlines for Implementation of Regulatory Expectations

      The SFC has extended by six months the implementation deadlines for the following regulatory expectations due to take effect in 2020:

      Upcoming regulatory expectations for implementation	Original implementation deadline	Extended implementation deadline
      Use of external electronic data storage (EDSP): Where a data centre of an EDSP used by a licensed corporation has been approved under section 130 of the Securities and Futures Ordinance before 31 October 2019, the licensed corporation’s provision of the documents to the SFC’s Licensing Department set out in paragraph 25 of the SFC’s Circular to Licensed Corporation – Use of External Electronic Data Storage[3] of 31 October 2019.	30 June 2020	31 December 2020 Note: Licensed corporations that are already keeping records exclusively with electronic data storage providers, whether in Hong Kong or overseas, are reminded to notify the SFC without delay.
      New measure to protect client assets[4] Where SFC-licensed intermediaries are required to have countersigned client asset acknowledgment letters from relevant banks in place before depositing any client money or securities into new client asset accounts.	31 July 2020	31 January 2021
      Data standards for order life cycles[5] Where in-scope brokers are expected to implement system changes and make other arrangements needed for compliance with the data standards.	31 October 2020	30 April 2021

   2. Compliance with Order Recording Requirements

      Due to the global COVID-19 pandemic, SFC-licensed intermediaries’ staff may
      not be working from their usual place of business. The SFC notes that many
      licensed intermediaries have provided their staff with remote access to order
      management systems, which are capable of centralised order recording for
      orders placed from a remote location.

      However, some intermediaries may encounter challenges in ensuring compliance
      with the order recording requirements of paragraph 3.9 of the Code of Conduct
      for Persons Licensed by or Registered with the Securities and Futures
      Commission[6] (SFC
      Code of Conduct) which requires licensed and registered
      persons to:

      1. record and immediately time stamp records of the particulars of the
         instructions for agency orders and internally generated orders; and

      2. use a telephone recording system, where order instructions are received from
         clients through the telephone, to record the instructions and maintain
         telephone recordings as part of its records for at least six months.

      The SFC reminds licensed intermediaries that alternative order receiving and
      recording options are available to comply with the regulatory requirements,
      which can be adopted by intermediaries as appropriate to meet the needs of
      their current circumstances:

      1. The notes to paragraph 3.9 of the SFC Code of Conduct explain how orders
         should be recorded when, exceptionally, they are not recorded by the
         intermediaries’ telephone recording or order management systems.
         Specifically:

         • where orders are accepted by mobile phones outside the trading floor,
           trading room, usual place of business where orders are received or usual
           place where business is conducted, intermediaries’ staff members should
           immediately call back to the intermediaries’ telephone system and record the
           time of receipt and the order details.

         • the use of other formats (e.g. in writing by hand) to record details of
           clients’ order instructions and time of receipt can be used if the
           intermediaries’ telephone recording system cannot be accessed.

      2. Intermediaries may receive client orders through instant messaging where the
         requirements set out in the
         SFC’s Circular to Intermediaries – Receiving Client Orders through
         Instant Messaging^[7]
         dated 4 May 2018
         (2018 Circular) in relation to record keeping, security and
         reliability, compliance monitoring and establishing internal policies and
         procedures are observed.

      When considering order placing and recording alternatives, the SFC reminded
      intermediaries that they should have in place appropriate control measures for
      ensuring that the alternatives are properly implemented in compliance with the
      order recording requirements.

      As explained in the SFC’s 2018
      Circular to Intermediaries – Receiving Client Orders through Instant
      Messaging,[8] complete and accurate
      records are an integral part of the audit trail. They ensure that reliable
      evidence is available to assess disputes with clients about the particulars of
      a trade order. This protects the interests of both the intermediary and the
      client. Proper records also serve as a useful supervisory tool to detect
      irregularities and potential malpractices for intermediaries and the SFC.