Hong Kong’s SFC Said to Survey Participants on Investor Codes

  • Brokers seek clarity on how identity codes would be assigned
  • See-through data disclosure may increase investor costs

Hong Kong’s financial regulator is moving forward with its project for real-time identification of the investors behind every trade, with an initial survey of market participants about the plan to assign see-through codes under way, according to people with knowledge of the matter.

The Securities and Futures Commission is discussing with brokerages the design of the proposed ID codes and the degree of their disclosures to the market before having a public consultation period, the final step before implementation, in the second half of the year, the people said. The introduction of the new system is still at least a year away, they said.

The purpose of the codes is to facilitate so-called see-through market oversight that allows regulators to trace trades beyond the broker to the investor who provided the funds. That would help to more efficiently detect and deter manipulation, Keith Lui, executive director for market supervision at the SFC, said earlier this year. The agency, which currently can track live trading only to the brokers, would be able to react more quickly to market disruptions, such as the two-minute plunge and recovery in Chinese stock futures in Hong Kong on Monday. 

Global regulators have been working to improve market surveillance to avoid events like the U.S. flash crash in May 2010 and catch rogue traders. The SFC, which already can order brokers to reveal information about questionable trades, has been reviewing the U.S. securities watchdog’s plan to enhance its ability to scrutinize markets, as well as examining markets in China, Malaysia and South Korea, which use see-through records, Lui said in an interview in February. 

China System

Lui didn’t specify how the ID codes would be assigned, or whether the new system would be similar to mainland China’s, where regulators assign identifiers to investors, or to Australia’s, where brokers provide acronyms for their clients, which can be seen by the local watchdog. Some brokers are worried that the added layer of regulation may damage the city’s appeal to investors.

“It’s just one more complication for people to trade,” said Andrew Sullivan, managing director for sales trading at Haitong International Securities Group in Hong Kong. “It’s a retrograde step. It’s more unnecessary policing. I can’t see any benefit of it.”

A spokesman for the SFC declined to comment.

Some brokers have been asking the regulator about the disclosure of trading data and whether exchange participants would be able to see investors’ real-time orders. This could increase impact costs for large investors, because the market may turn against them when a big order is traded. Risk of exposure for investors would be less if orders reported at the end of the day or could be only seen by the SFC.

The introduction of investor see-through ID codes would make Hong Kong market surveillance similar to the system in China, where the regulator can monitor investors’ trading in real time, said Francis Lun, chief executive officer at Geo Securities Ltd. in Hong Kong. That would give the government too much information about investors’ strategies and the ability to interfere in the market, he said. China last year banned some major shareholders from selling stocks for six months during the $5 trillion equity selloff.

“I don’t want the government to know my every single move when I buy or sell shares,” Lun said. “It’s a matter of privacy and freedom of investment.”

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