Hong Kong

Is there any legislation or proposed legislation in your jurisdiction under which financial institutions are prohibited from dealing in investments as a principal?

There is no such legislation in place, or indeed proposed, in Hong Kong.  Further, under the Hong Kong Securities and Futures Ordinance (the main piece of legislation governing securities activities in Hong Kong), trading in financial instruments for the bank’s own account is not an activity for which any kind of licence or authorisation is needed as long as: (i) the trades involve the bank buying, selling or underwriting shares or other instruments for its own account; or (ii) the trades are performed with  “professional investors” on the other side (i.e. sophisticated, experienced and wealthy institutions or high net worth individuals).  There is also a similar rule that applies specifically to trading in future contracts.  A bank may do this without any prior authorisation as long as the trades are performed for their own account and have “professional investors” on the other side.

In contrast, if a bank was to perform trades using funds raised from outside investors or on their behalf, as opposed to its own funds for its own account, it would need to be registered with the Securities and Futures Commission (Hong Kong’s securities regulator) (HKSFC) to do so.  Such registration is distinguished from, and in addition to, a Hong Kong banking authorisation (i.e. authorisation to take deposits and to be described as a “bank” in Hong Kong) which is required from the Hong Kong Monetary Authority (HKMA).  For the purposes of any registration with the HKSFC, the HKMA remains the bank’s primary regulator.

To which financial institutions do the prohibitions relate?

All banks regulated in Hong Kong by the HKMA, whether as a locally incorporated entity or as a branch of a foreign bank, are subject to the Hong Kong rules in respect of business conducted in and from Hong Kong.

What exceptions to the ban on proprietary trading are contemplated by the legislation?

Not applicable as there is no such legislation in place, or indeed proposed, in Hong Kong.

Can any other entity within the relevant financial institution’s group of companies carry on the prohibited activity?

No. If a company within a banking group (whether a bank or a non-bank) was to arrange a trade for the account of another group company (i.e. the arranger of the trade and the beneficiary are separate legal entities), the arranging entity would require a licence from the HKSFC (or to be registered with them, if a bank) for doing so. Essentially, the exemption outlined above in the answer to question 1 only applies to an entity dealing for its own account.

When will the proposed legislation come into effect?

Not applicable as there is no such legislation in place, or indeed proposed, in Hong Kong.