Hong Kong’s SFC issues circular regarding new measure for protection of client assets

Maria Nikolova

To strengthen the safeguarding of client assets, a standardised acknowledgement letter is to be adopted and signed by intermediaries and authorised institutions.

Hong Kong’s Securities and Futures Commission (SFC) has earlier today issued a circular to intermediaries reminding them of their obligations to comply with the requirements under the Code of Conduct when they are in possession or control of client assets. Paragraph 11.1(a) requires intermediaries to ensure that client assets are adequately safeguarded.

The SFC has become aware that in some cases the standard Terms and Conditions entered into between intermediaries and authorised institutions (AIs) with respect to current, deposit or securities accounts that are client or trust accounts contain clauses which grant AIs a right of set-off or lien. The regulator explains that such clauses are fundamentally incompatible with the requisite standard of protection afforded to client assets under the Code of Conduct.

To improve the safeguarding of client assets, a standardised acknowledgement letter is to be adopted and duly signed by both intermediaries and Ais.

The key elements of the acknowledgement letter include the notification of purpose clauses, the no-recourse clause and the conflict clauses.

The no-recourse clause in the letter template prohibits recourse against client assets in Client Asset Accounts. For the avoidance of doubt, in case of an issuer’s default, clawback by AIs of prepaid dividends or interest in respect of the issuer’s securities would not be considered as recourse against client assets for the purposes of this requirement. In addition, the no-recourse clause does not apply to any recourse against assets required by legislation or court order.

The letter template also clarifies that in the event of any conflict between the client asset acknowledgement letter and any other agreement between the parties in connection with the Client Asset Accounts, the client asset acknowledgement letter shall prevail.

The client asset acknowledgment letter is applicable to and required for the following types of Client Asset Accounts which are opened with AIs in the name of intermediaries:

  • (a) accounts for holding client money;
  • (b) accounts for holding client securities; and
  • (c) accounts for holding non-repledged clients’ securities collateral.

To comply with this requirement, intermediaries shall prepare and sign client asset acknowledgement letters, and then obtain countersignatures from the appropriate AI. Intermediaries are required to have the countersigned letters in place before depositing any client money or securities into any new Client Asset Accounts. The transition period for implementing this requirement ends on July 31, 2020, where the SFC expects the countersigned letters are in place for all applicable Client Asset Accounts.

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