In April 1997, the Response of the Securities and Futures Commission to the Public Consultation on the Review of the Leveraged Foreign Exchange Trading Regulatory System (the Response) to the Consultation Paper on the Review of the Leveraged Foreign Exchange Trading Regulatory System (the Consultation Paper) was released by the Securities and Futures Commission (the SFC).
The Response incorporated public comments on the original Consultation Paper issued in August 1996, and forms the bulk of the final changes to the Consultation Paper that will be formulated into detailed rules and regulations to be submitted to the Legislative Council for consideration. The Consultation Paper aims to rationalize the present regulatory regime and reverse a disturbing two-year trend that has seen the number of licensed forex dealers in Hong Kong shrink from 52 in 1994 to 22 in March 1997. It has been reported that some traders have moved their operations to Macau, which has less stringent forex rules.
According to the Response, the key proposed changes to the Leveraged Foreign Exchange Trading Regulatory System include the following:
- The minimum liquid capital requirement will be lowered from HK$25 million (US$3.2 million) to HK$15 million;
- The minimum 5% margin level will be abolished and forex traders will be permitted to set margin levels themselves, provided that a 'no-over-loss' arrangement (ie where the client can only lose the amount of the deposit given to the dealer) will be introduced when minimum margins are eliminated;
- Traders can extend credit to high net worth individuals with investments more the US$1 million;
- Traders can use client funds, at present segregated in trust accounts and inaccessible to the traders, for the purpose of laying off client positions, provided that clients' interests are properly safeguarded.
The SFC also recommended that all leveraged forex traders acquire fidelity insurance against trader defaults. In view of the inherent risks of the business of a leveraged forex trader, it is proposed that the existing initial capital requirement remain unchanged at HK$30 million.
Damien Yeow and Mabel Lam