The SFC has started a thematic review on prime services and related equity derivatives activities in Hong Kong to identify potential conduct issues arising from the practice adopted by prime brokers, to assess the internal controls in place, and to provide guidance on how the risks are managed.
Major prime brokers have a strong presence in Hong Kong to provide services to hedge funds and other institutional clients, including Asian clients and global clients trading through the Stock Connect and access products. Many of the client servicing activities and related internal control functions and risk management activities related to prime services are carried out in Hong Kong.
In light of this development, the SFC decided to conduct the thematic review focusing on the following areas:
- Industry landscape, needs, and concerns – covering, inter alia, market dynamics, market trends, services provided by prime brokers, key concerns and issues faced by prime brokers and their clients, market developments and the impact on prime services;
- Business structures of prime brokers – covering, inter alia, front-to-back business processes, features of different services/products and their respective revenue drivers;
- Interaction between prime services and related equity derivatives activities – covering, inter alia, revenue allocations, cross-departmental governance and conflicts of interest management; and
- Key risks and controls for prime services and related equity derivatives activities – covering, inter alia, asset segregation, and rehypothecation, client on-boarding, risk management, governance, compliance with existing regulations and areas for future regulatory focus.