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Update on key risks

Focus on through-trains and high-speed trading

To a flurry of interest and expectation, a "through-train" scheme has been announced, whereby mutual stock trading will be permitted between Hong Kong and Shanghai. The trading arrangements would allow Mainland Chinese investors to invest in overseas (ie Hong Kong) stocks and for foreigners to invest in the Shanghai market.

There are, inevitably, risks which could arise in that context, in relation to the disclosure and information provision to investors in the Chinese market and the need to manage the relevant reputational and other risks in the context of significant activity in the Hong Kong market. The potential for significant cross-border compliance issues is an obvious concern.

Slightly less obvious is the underlying subject matter of the Securities and Futures Commission's (the SFC) consultation on "Alternative Liquidity Pools", ie so-called dark pools (multilateral trading facilities in Europe). The stated intention of the regulators is to formalise the "dark pools" regime by restricting access to them solely to institutional investors (both directly and indirectly). The plan is to ensure that the current regime of conditions placed on licences (policy for which has evolved over time, leading in some cases to a non-level playing field) is harmonised and codified. That is laudable, but the intent to formalise certain aspects, for example, the need to provide terms of use to participants, and to prescribe a range of protections for users, together with heavy recordkeeping requirements, is more difficult to justify given the restrictions on access.

The proposals are designed to address perceived risks of "dark pools", notwithstanding that the current market share in Hong Kong is around 2% of trading volume, and there is the Hong Kong Stock Exchange's ongoing monopoly for retail trading. The high-speed trading element of electronic trading in Hong Kong is currently catered for in the context of direct market access, algorithm trading and general internet trading under separate regulatory requirements previously introduced. The consultation exercise on dark pools is intended to provide a seamless connection with those requirements. These developments indicate the regulators' ongoing wish to broaden and deepen the markets geographically, as well as to address perceived risks to the integrity of markets by virtue of technological change.

Enforcement – no longer playing catch-up

Regulators across the Asia Pacific region (APAC) have traditionally been perceived as playing catch-up to their European or U.S. counterparts, allowing regulators in those larger jurisdictions to lead the charge in the enforcement agenda. Recent developments may indicate that the tide may now be turning. As has been widely reported, regulators from across APAC are now actively investigating alleged FX manipulation. The Hong Kong Monetary Authority (the HKMA) has stated that it is investigating the FX, requiring several banks to conduct independent reviews of their FX divisions and to then send their results to the HKMA. The Australian Securities and Investment Commission and (most recently) New Zealand's Commerce Commission have also commenced their own enquiries.

Each regulator will no doubt have its own agenda and rationale for why it has taken this step. But no regulator will wish to discover an issue which is relevant to its own jurisdiction through the enforcement agenda and findings of another regulator. For financial institutions across the region this raises real practical and substantive issues as they deal with enquiries from multiple regulators, with agendas and areas of focus which may not be consistent. These challenges may continue for some years to come.  
Legal and Regulatory Risk Note
Asia