고객 증권 규정 / Client securities requirements

General . client securities and money
3.1 Intermediaries in the securities and futures industry are called upon to handle client assets, including money, in a fiduciary capacity. The SFC protects the assets of investors by making rules regarding:
(a) the holding of and dealing with client assets and securities collateral (under s. 148, SFO); and
(b) the holding of and dealing with client money (under s. 149, SFO) (see section 4 of this Topic).

3.2 No person may receive or hold in Hong Kong client assets of an intermediary unless the person is:
(a) the intermediary;
(b) an associated entity of the intermediary; or
(c) an excluded person (see Note below).
Note: An excluded person includes any AFI, another intermediary with whom client securities collateral is deposited under financial accommodation arrangements, any company or overseas company approved by the SFC, and any person specified under rules made by the SFC with whom designated trust accounts or client accounts are to be maintained (see s. 164, SFO).

3.3 We shall first consider client securities and securities collateral and then take up client money in section 4 below. The SFC has made the Client Securities Rules under s. 148, SFO, which:
(a) provide for intermediaries and associated entities receiving client assets and securities collateral to deposit them in safe custody, in segregated accounts, or to register them in the names of the clients; and
(b) specify the circumstances in which the intermediaries or associated entities may deal with these assets or collateral.

Securities and Futures (Client Securities) Rules
Part 1 . Preliminary
The assets
3.4 The assets to which the Client Securities Rules apply are limited to client securities or securities collateral of an intermediary that are:
(a) are either listed or traded on a recognized stock market (i.e. a stock market operated by a recognized exchange company, currently only the SEHK); or are interests in a CIS authorized by the SFC under s. 104, SFO; and

(b) received or held in Hong Kong by or on behalf of the intermediary (in the course of conducting a regulated activity) or an associated entity of the intermediary in relation to such regulated activity; and further

(c) they do not apply to client securities of an intermediary that are in an account in a client’s name, set up by that client with persons other than the intermediary or its associated entity.

Note: There are limitations of application of the Client Securities Rules. Importantly, they only apply to Hong Kong stocks (not overseas stocks) received or held in Hong Kong (not to
Paper 1 Version 2.4 4 -15 c Hong Kong Securities and Investment Institute those received or held overseas), and then only to those received by an intermediary or associated entity in the course of conducting regulated activities.

Standing authority
3.5 A standing authority is the normal standing instruction from a client to an intermediary or associated entity which enables the intermediary or associated entity to deal with client assets.
(a) It is a written notice authorizing the intermediary or associated entity to deal with the assets in ways specified.

(b) It specifies a period that must not be more than 12 months during which it will be effective (no limit has been specified by the SFC for a client who is a PI).

(c) It specifies the way in which it may be revoked.

Renewal
3.6 A standing authority may be renewed or deemed to be renewed at any time prior to expiry for further periods each not exceeding 12 months (for any duration in the case of a PI):
(a) on the written request of the client; or

(b) by the intermediary or associated entity giving a written notice at least 14 days prior to the expiry date, reminding the client of the impending expiry and informing him that it would be renewed on the same terms for an equivalent period, or for a period not exceeding 12 months (a period of any duration for a PI if the original was for a specific period) unless the client objects.

Under the latter procedure, which provides for a deemed renewal, the intermediary or associated entity has to provide a written confirmation of the renewal within a week after the expiry date.

Part 2 . Treatment of client securities and securities collateral
3.7 The objective of this part is to provide within reason for the safety of investors’ assets.

Depositing or registration of client assets
3.8 The intermediary shall, as soon as reasonably practicable after receiving client securities or securities collateral, deal with them as mentioned in the sections below.

3.9 If a deposit is to be made, it must be:
(a) with any of:

(i) an AFI;

(ii) an approved custodian (see section 3.18 below); or

(iii) another intermediary licensed for dealing in securities (Type 1 regulated activity);

(b) in the following manner:

(i) in the case of client securities and securities collateral, in safe custody in separate segregated accounts for each of these two categories, designated as trust accounts or client accounts; or

(ii) in the case of securities collateral only, it may also be deposited in an account in the name of the intermediary or its associated entity maintained with any of the above entities.

3.10 If registered, it must be done in the name of:
(a) the client on whose behalf the client securities or securities collateral has been received;

(b) an associated entity of the intermediary; or

(c) additionally, in the case of securities collateral only, the intermediary itself.

Dealings with client securities and securities collateral
3.11 Section 6, Client Securities Rules considers three basic authorities under which the intermediary or the associated entity may deal with client securities or securities collateral:
(a) an oral or written direction to sell or settle a sale order;

(b) a written direction; or

(c) a standing authority.

3.12 The Client Securities Rules do not allow the use of the standing authority by the intermediary or its associated entity to:
(a) transfer client securities or securities collateral to an account of the intermediary, its associated entity or any entity which has a controlling entity relationship with the intermediary or is linked to the associated entity by a controlling entity relationship unless that account is one mentioned in section 3.9 above; or

(b) make any such transfer to any officer or employee of these entities unless that officer or employee is the client; or

(c) deal with the client securities or securities collateral in any manner that is unconscionable. (For clarification, “unconscionable” is something contrary to a sense of justice, decency or reasonableness.)

3.13 Generally, the Client Securities Rules allow, with the written agreement of the client, for:
(a) the withdrawal of client securities to sell or settle a sale order on his behalf; or

(b) the disposal or initiation of the disposal of client securities and securities collateral, in settlement of a liability of the client to the intermediary, associated entity or a third person.

Permitted transactions
3.14 If it has a standing authority to do so, an intermediary licensed or registered to conduct Type 1 regulated activity (dealing in securities) or its associated entity may:
(a) use the client securities or securities collateral it holds for a stock borrowing and lending transaction;

(b) re-pledge the securities collateral with an AFI to borrow money (but subject to the limitations mentioned in section 3.15 below);

(c) deposit the securities collateral with a recognized clearing house or another Type 1 intermediary as collateral for settlement obligations; or

(d) if the intermediary provides financial accommodation to a client in the course of its Type 1 regulated activity, apply or deposit any securities collateral in the manner stated in this section.

3.15 In relation to the re-pledging of securities collateral, intermediaries licensed for dealing in securities (Type 1 regulated activity), as well as intermediaries licensed for SMF (Type 8 regulated activity), must ascertain the aggregate market value of the re-pledged securities collateral by reference to respective closing prices of the collateral on that business day. If the aggregate value exceeds 140% of the intermediary’s aggregate margin loans on the same business day, the intermediary must by the close of the next business day, reduce the aggregate value of re-pledged securities collateral so that it does not exceed 140% of aggregate margin loans.

3.16 There are similar provisions in the Client Securities Rules for intermediaries licensed for Type 8 and Type 2 regulated activities.

Part 3 . Miscellaneous
3.17 Intermediaries and their associated companies are not permitted to deal with client securities and securities collateral otherwise than as provided in Part 2, Client Securities Rules.

3.18 The SFC may approve, in writing and subject to such conditions as it considers appropriate, any company or overseas company as being a suitable custodian for safe custody of client securities and securities collateral of an intermediary.

3.19 In addition, non-compliance with the specified provisions of the Client Securities Rules must be reported to the SFC within one business day after discovery.

Revision question:
Question 7: How should an intermediary deal with securities collateral it has received from a client?
Answer 7: The intermediary should, as soon as reasonably practicable, deposit the securities collateral with an AFI, approved custodian or other intermediary licensed to conduct dealing in securities, in a segregated account or an account in the name of the intermediary or its associated entity maintained with any of these entities, or register them in the name of the client, an associated entity or the intermediary.

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