Legal update: Client facilitation in the execution of residual odd lots30Dec2020
The Hong Kong Securities and Futures Commission (the “SFC”) issued an FAQ on 18 December 2020 clarifying the applicability of the exemption from the requirement for licensed corporations (“LCs”) to obtain explicit client consent on a trade-by-trade basis prior to each client facilitation trade.
As a matter of background, the SFC issued a circular on 14 February 2018 stating its observations during a thematic review of client facilitation and its expected standards of LCs in four areas:
- Controls, monitoring and management supervision;
- Segregation of agency and facilitation activities;
- Consent and disclosure; and
- Indications of interest.
The SFC issued another circular on 14 May 2019 setting out its inspection findings regarding compliance with the expected standards in the area of client facilitation since mid-2018 and reiterating that brokerage firms and their traders should obtain explicit client consent prior to each client facilitation trade.
Having observed that LCs may pre-arrange with their clients standing agreements for the execution of residual odd lots (i.e. residual of an order being less than one board lot) through client facilitation services (“Standing Agreement”), the SFC clarified in its 18 December 2020 FAQ that where a Standing Agreement is in place, LCs are exempted from the requirement to obtain explicit client consent on a trade-by-trade basis prior to the execution of trades for a residual odd lot through client facilitation services. A Standing Agreement should:
- be clearly worded to emphasise that such an exemption is only applicable for any residual odd lot with no other variation allowed;
- clearly document, explain and agree with client the pricing mechanisms adopted by the LC to determine the execution price for residual odd lots arising from different types of parent order;
- have a validity of not more than 12 months; and
- provide client the flexibility to revoke the Standing Agreement at any time.
LCs engaging in facilitation trades for residual odd lots should check the terms of their client engagements and agreements on this issue to ensure they comply with this requirement, and ensure annual renewals take place.
The above SFC publications can be accessed here:
- Circular issued on 14 February 2018
- Circular issued on 14 May 2019
- FAQ on residual odd lot execution issued on 18 December 2020
Russell Bennett and Agnes Lau
To contact the Tanner De Witt Regulatory and Compliance Practice, please reach out to Russell, Edmond or Pádraig at:
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.