SFC Consultation Conclusions and Consultation Proposal on Financial Resources Rules

The SFC recently proposed various amendments to the Securities and Futures (Financial Resources) Rules (“FRR”) for public consultation which would be relevant for any licensed corporations engaging in, or seeking to engage in, over-the-counter derivatives (“OTCD”) activities.

The SFC initially proposed changes to the FRR in 2017 which included introducing (i) minimum capital requirements for licensed corporations engaging in OTCD activities; and (ii) a set of basic market risk and counterparty credit risk capital requirements.

There were subsequent international developments to the regulation of OTCD activities in the US and under the Basel capital standards which have been adopted by various major financial centres. In particular, the Basel capital standards have been applied in Hong Kong via the amendments to the Banking (Capital) Rules.

The SFC considers that while the amendments to the FRR proposed by them in 2017 remain generally applicable, certain finetuning changes would be appropriate to reflect the Basel capital standard. These include (i) expanding the definition of “asset management group central OTCD dealer”; (ii) reducing the minimum capital requirements and computation burden for OTCD dealers that are inter-dealer brokers; (iii) requiring licensed corporations to use the latest Basel capital standards for market risk or counterparty credit risk; and (iv) modifying the FRR’s standardized approach for market risk and counter party risk.

As such, the latest SFC consultation paper proposes implementing revised FRR amendments to reflect the latest international developments.

For licensed corporations seeking approval to use the internal models approach, the latest SFC consultation paper also proposes updates to (i) the Guidelines for Internal Models Approach for FRR Market Risk Charges Calculation; and (ii) the General Principles for Model Risk Management to align with the latest international developments.

Licensed corporations should stay informed of the updates from the SFC in this area to ensure that they will remain in compliance with any new developments when they become finalised.

For any Licensed corporation which wish to make submissions on the proposed amendments, the SFC consultation paper can be accessed here: [Consultation Paper on FRR Amendments]

Russell Bennett and John Lee

For more information, please contact:

Russell Bennett
Partner | Email

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.