Introduction to Regulatory Framework 
31/10/2013 
 

Structure and regulation of Hong Kong's securities and futures markets
 
 
(a) Hong Kong Regulatory Structure
 
  (i) Securities and Futures Commission

The principal regulator of Hong Kong’s securities and futures markets is the Securities and Futures Commission (SFC), which is an independent statutory body established in 1989 by the Securities and Futures Commission Ordinance (SFCO). The SFCO and nine other securities and futures related ordinances were consolidated into the Securities and Futures Ordinance (SFO), which came into operation on 1 April 2003.

The SFC is responsible for administering the laws governing the securities and futures markets in Hong Kong and facilitating and encouraging the development of these markets. Its regulatory objectives as set out in the SFO are:

  • to maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry;
  • to promote understanding by the public of the operation and functioning of the securities and futures industry;
  • to provide protection for members of the public investing in or holding financial products;
  • to minimise crime and misconduct in the securities and futures industry;
  • to reduce systemic risks in the securities and futures industry; and
  • to assist the Financial Secretary in maintaining the financial stability of Hong Kong by taking appropriate steps in relation to the securities and futures industry.

The SFC is divided into four operational divisions: 

  • The Corporate Finance Division is responsible for the dual filing functions in relation to listing matters, administering the Takeovers and Mergers Code and Share Repurchases Code, overseeing the Stock Exchange's listing-related functions and responsibilities, and administering securities and company legislation relating to listed and unlisted companies.
     
  • The Intermediaries and Investment Products Division is responsible for devising and administering licensing requirements for securities and futures, and leveraged foreign exchange trading intermediaries, supervising and monitoring intermediaries' conduct and financial resources, and regulating the public marketing of investment products.
     
  • The Enforcement Division is responsible for conducting market surveillance to identify market misconduct for further investigation, undertaking inquiry into alleged breaches of relevant ordinances and codes, including  insider dealing and market manipulation, and instituting disciplinary procedures for misconduct by licensed intermediaries.
     
  • The Supervision of Markets Division is responsible for supervising and monitoring activities of the exchanges and clearing houses, encouraging development of the securities and futures markets, promoting and developing self-regulation by market bodies.

  (ii) HKEx

HKEx is a recognised exchange controller under the SFO.  It owns and operates the only stock exchange and futures exchange in Hong Kong and their related clearing houses, namely Hong Kong Securities Clearing Company Limited (HKSCC), HKFE Clearing Corporation Limited (HKCC) and The SEHK Options Clearing House Limited (SEOCH).
 

  (iii) The Stock Exchange of Hong Kong Limited (Stock Exchange)

The Stock Exchange, a wholly-owned subsidiary of HKEx, is a recognised exchange company under the SFO. It operates and maintains a stock market in Hong Kong and is the primary regulator of Stock Exchange Participants with respect to trading matters and of companies listed on the Main Board and Growth Enterprise Market (GEM) of the Stock Exchange.
 

  (iv) Hong Kong Futures Exchange Limited (Futures Exchange)

The Futures Exchange, a wholly-owned subsidiary of HKEx, is a recognised exchange company under the SFO. It operates and maintains a futures market in Hong Kong and is the primary regulator of Futures Exchange Participants with respect to trading matters.
 

  (v) Clearing Houses

HKSCC, SEOCH and HKCC (wholly-owned subsidiaries of HKEx), and OTC Clearing Hong Kong Limited (a subsidiary of HKEx) are recognised clearing houses for the purposes of the SFO. HKSCC and SEOCH provide services for the clearing and settlement of securities and stock option transactions respectively, including trades and transactions effected on, or subject to the rules of, the Stock Exchange. HKCC provides services for the clearing and settlement of transactions on the Futures Exchange. OTC Clearing Hong Kong Limited provides services for the clearing and settlement of OTC derivatives transactions.
 

(b) Regulation of the markets
 
  (i) Legislative framework

The securities and futures markets in Hong Kong are currently governed by the SFO. The SFO consolidates and modernises the 10 previous ordinances regulating the securities and futures markets. The primary legislation and the subsidiary legislation commenced operation on 1 April 2003.
 

  (ii) Trading Rights

By law, any person carrying on a business of dealing in securities, or carrying on a business of dealing in futures contracts in Hong Kong, has to be licensed by the SFC or fall within one of the licensing exemptions.

In addition, the rules promulgated by the Stock Exchange and Futures Exchange require any person who wishes to trade on or through their respective facilities to hold a Trading Right. The Trading Right confers on its holder the eligibility to trade on or through the relevant exchange. However, the holding of a Trading Right does not, of itself, permit the holder to actually trade on or through the relevant exchange. In order to do this, it is also necessary for the person to be registered as a participant of the relevant exchange in accordance with its rules, including those requiring compliance with all relevant legal and regulatory requirements.

Stock Exchange Trading Rights and Futures Exchange Trading Rights are issued by the Stock Exchange and Futures Exchange at a fee and in accordance with the procedures set out in their respective rules. Alternatively, Stock Exchange and Futures Exchange Trading Rights can be acquired from existing Trading Right holders subject to the rules of the respective exchanges.
 

(c) Checks and balances in the operations of the HKEx Group

Given HKEx's status as the sole operator of the exchange-based stock and futures markets in Hong Kong, the need to ensure that HKEx discharges its responsibilities in regard to safeguarding the integrity of these markets and its strategic importance to Hong Kong’s success as an international financial centre, a comprehensive framework of checks and balances has been put in place:

  • corporate governance - a corporate governance structure, which is intended to enable HKEx to balance its public functions and its commercial profit making objectives, has been implemented.
     
  • status as the sole operator of the exchange-based stock and futures markets in Hong Kong – the fees imposed by HKEx in its capacity as a recognized exchange controller, the Stock Exchange and Futures Exchange as recognised exchange companies, and their related clearing houses as recognised clearing houses  are required under the SFO to be set out in their respective rules and approved by the SFC. The making of, and changes to, the rules of HKEx, the Stock Exchange and Futures Exchange and their related clearing houses require the approval of the SFC. In deciding whether or not to approve a fee or changes to a fee, the SFC is required by the SFO to have regard to:
     
    • the level of competition, if any, in Hong Kong for the matter for which the fee is to be imposed; and
       
    • the level of fee, if any, imposed by another recognised exchange controller, recognized exchange company or recognised clearing house or any similar body outside Hong Kong for the same or a similar matter to which the fee relates.
       
  • risk management – As required under the SFO, HKEx established a Risk Management Committee  to formulate policies on risk management matters relating to the activities of HKEx, the Stock Exchange and Futures Exchange and their related clearing houses and to submit such policies to HKEx for its consideration.  The chairman of HKEx is the chairman of the Risk Management Committee.
     
  • restrictions on control - pursuant to the SFO, no person shall become a minority controller of HKEx, the Stock Exchange, the Futures Exchange or any of their related clearing houses except with the approval in writing of the SFC after consultation with the Financial Secretary.  A minority controller is a person who, either alone or with any associated person or persons, is entitled to exercise, or control the exercise of 5 per cent or more of the voting power at any general meeting of any of these companies.  The SFC shall not give such an approval unless it is satisfied that it is appropriate to do so in the interest of the investing public or in the public interest.

    In addition, pursuant to the SFO, no person shall become or continue to be a controller of the Stock Exchange, the Futures Exchange or any of their related clearing houses unless that person is a recognised exchange controller or has been exempted from such prohibition by the Financial Secretary.  HKEx is the only person that has been recognised as a controller of the Stock Exchange, the Futures Exchange and their related clearing houses.  Other relevant members of the HKEx group, namely, the Stock Exchange, the Futures Exchange, HKEC Nominees Limited and The Stock Exchange Nominee Limited have been exempted by the Financial Secretary from the prohibition on their controlling other relevant members of HKEx.
     
  • HKEx as a listed company - HKEx, as a listed company on its own stock market, is regulated by the SFC to avoid any conflict of interest and to ensure a level playing field between HKEx and other listed companies which are subject to the Listing Rules of both the Main Board and GEM. Regulation by the SFC is imposed through two sets of provisions, namely, (1) Chapter 38 of the Main Board Listing Rules and Chapter 36 of the GEM Listing Rules which together certain provisions relating specifically to the listing of HKEx and set out the requirements that must be satisfied for the securities of HKEx to be listed on the Stock Exchange as well as the powers and functions of the SFC in the event of a conflict of interest, and (2) a Memorandum of Understanding dated 22 August 2001 between the SFC, HKEx and the Stock Exchange which sets out the way the parties to it will relate to each other in relation to:
     
    • HKEx's and other applicants and issuers' compliance with the Listing Rules; 
       
    • the Stock Exchange's enforcement of its rules in relation to HKEx's securities and those of other applicants and issuers;
       
    • the SFC's supervision and regulation of HKEx as a listed issuer and, where a conflict of interest arises, other applicants and issuers;
       
    • conflicts of interest which may arise between the interests of HKEx as a listed company and companies of which it is the controller, and the interests of the proper performance of regulatory functions by such companies; and
       
    • market integrity.

Copies of Chapter 38 of the Main Board Listing Rules, Chapter 36 of the GEM Listing Rules and the Memorandum of Understanding have been posted on this website.