Hong Kong’s financial markets watchdog will be able to identify investors behind the trades they are making in real time with a plan to require identification codes.
The Securities and Futures Commission (SFC), which now monitors live trading only at the broker level, is developing policies and data protection measures for the new system, SFC market supervision executive director Keith Lui (雷祺光) said, adding that the commission would consult banks and brokerages on the plan prior to implementation.
Under the proposal, the commission is to assign an identity record to each investor trading in the market, Lui said in an interview in Hong Kong, declining to comment on the timing of the planned consultation.
Unless the SFC can access client-level information, “we are skimming on the surface,” he said.
Improving market surveillance is a priority for regulators worldwide as they seek to avoid disruptions such as the US flash crash in May 2010 and to combat rogue traders.
The SFC — which already has the authority to order brokers to disclose information about suspicious trades — has been examining the US Securities and Exchange Commission’s plan to improve its ability to scrutinize markets, as well as reviewing markets in China, South Korea and Malaysia which use investor identity records, Lui said.
“Ultimately, we have to trust the regulators to use the information with the best of intentions,” Hong Kong-based Instinet Pacific Services Ltd (極訊亞太有限公司) trader Neil McLean said. “If you have nothing to hide, then you have nothing to fear, and this will foster further trust in the market long term.”
SFC chief executive officer Ashley Alder in October last year said that the commission would look into the feasibility of identifying market orders for clients rather than brokers.
The proposal for so-called see-through surveillance is already drawing criticism from some brokers and investors.
“It will give the SFC too much unpublished information about what people are doing in the market,” shareholder activist and member of the SFC’s takeovers and mergers panel David Webb said. “If they are thinking of a dragnet surveillance system, then it’s a question how they can demonstrate a public benefit can be achieved from that versus the invasion of privacy that comes from that.”
Hong-Kong based Oriental Patron Financial Group (東英金融集團) founding partner Jeffrey Chan (陳立德) said he expects the SFC to consult market participants next month.
“The industry has a few concerns,” said Chan, who is also a director at Hong Kong Securities Association Ltd (香港投資基金公會).
Among the worries are that the transfer to the new system would incur additional costs for brokerages and might result in information leaks about their client trading strategies.
The SFC’s access to investor information should be governed by an independent panel and disclosed only on the watchdog’s request when it investigates suspicious transactions, he said.
For some of the city’s investors the see-through model is not new, because they have to comply with the mainland investor identification regime when they trade in China, said Hong Kong Investment Funds Association (香港投資基金公會) chief executive officer Sally Wong (王慈明), whose members include Goldman Sachs Group Inc and JPMorgan Chase & Co.
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