On 19 October 2018, the SFC published the Conclusions to Further Consultation on Proposed General Changes to Update the Securities and Futures (Financial Resources) Rules (FRR) and gazetted the proposed FRR amendments.
The one-month consultation, which was launched in July 2017, covered both proposed FRR changes that would apply generally to all licensed corporations (LCs) and specific changes relating to OTC derivatives activities. Last month’s conclusions paper relates only to the changes with general application. On the OTC derivatives front, the SFC will publish the draft amendment rules “once the drafting is completed”. Subject to the legislative process, the SFC will be implementing the FRR amendments on 1 April 2019, with the exception of amendments related to a new accounting standard which will take effect on 1 January 2019.
These changes are generally welcomed by market participants and will “streamline the existing financial resources requirements and facilitate licensed corporations’ participation in Mainland and overseas markets,” said Mr Ashley Alder, the SFC’s Chief Executive Officer.
Effective 1 January 2019
- New treatment for liabilities arising from tenancy agreements. An LC will be able to exclude from its ranking liabilities and from the calculation of its variable required liquid capital, the amount of recognised liabilities arising from its tenancy agreement (for premises used in carrying on regulated activity) up to the amount of its recognised assets arising from the tenancy agreement which is not included in its liquid assets. This change will alleviate the additional burden arising from the implementation of the new accounting standard, which requires lessees to recognise nearly all leases on the balance sheet.
Effective 1 April 2019
- Updating the haircut percentages. The haircut percentages for certain types of securities and investments will be updated, to better reflect their market risks. For example, the haircut percentage for SFC-authorized and recognized jurisdiction money market funds will be reduced from 20% to 5% whilst the haircut percentage for constituent stocks of the Euro Stoxx 50 Index will be reduced from 20% to 15%. If an LC has proprietary investments with reduced haircut percentages, more liquid assets can be calculated from such investments.
- Relaxing the treatment for foreign currencies subject to exchange control. An LC may treat controlled assets (where remittance or exchange controls apply) as liquid assets so long as such assets can be freely applied to meet the LC’s existing liabilities or obligations which are denominated in the same currency. This amendment will facilitate cross-border business.
- Updating the list of specified exchanges. Various stock, futures and commodity exchanges have been added to the list of specified exchanges, set out in Schedule 3 to the FRR. The FRR prescribe more favorable treatments for assets and liabilities arising from, or related to, dealings in products traded on those exchanges.
- Adjusting the treatment of client money received for securities transactions. An LC will be allowed to include in its liquid assets any client money held for settling outstanding transactions. The change will give LCs more flexibility - under the existing FRR, client money held by an LC must not be included in the LC’s liquid assets whilst the corresponding amount payable to the clearing house or issuer is required to be included in the LC’s ranking liabilities and variable required liquid capital calculation.
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