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Hong Kong plans to uncloak investors with see-through system

[HONG KONG] Hong Kong's financial markets watchdog will be able to identify investors behind the trades they are making in real time with a plan to require identification codes.

The Securities and Futures Commission, which currently can monitor live trading only at the broker level, is developing policies and data protection measures for the new system, said Keith Lui, executive director for market supervision at the agency. The agency will consult banks and brokerages on the plan prior to implementation, he said.

Under the proposal, the watchdog will assign an identity record to each investor trading in the market, Lui said in an interview in Hong Kong, declining to comment on the timing of the planned consultation. Unless the SFC can access client-level information, "we are skimming on the surface," he said.

Improving market surveillance is a priority for regulators worldwide as they seek to avoid disruptions like the US flash crash in May 2010 and combat rogue traders. The SFC, which already has the authority to order brokers to disclose information about suspicious trades, has been examining the US Securities and Exchange Commission's plan to improve its ability to scrutinize markets, as well as reviewing markets in China, South Korea and Malaysia, which use investor identity records, Lui said. 

"Ultimately, we have to trust the regulators to use the information with the best of intentions," said Neil McLean, head of trading for Asia ex- Japan at Instinet Pacific Services Ltd. in Hong Kong. "If you have nothing to hide, then you have nothing to fear, and this will foster further trust in the market long term." Ashley Alder, chief executive officer of the SFC, said in October that the agency would look into the feasibility of identifying market orders for clients rather than brokers.

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The proposal for so-called see-through surveillance already is drawing criticism from some brokers and investors.  "It will give the SFC too much unpublished information about what people are doing in the market," said David Webb, a shareholder activist and member of the SFC's takeovers and mergers panel. "If they are thinking of a dragnet surveillance system, then it's a question how they can demonstrate a public benefit can be achieved from that versus the invasion of privacy that comes from that." Jeffrey Chan, a founding partner at Oriental Patron Financial Group in Hong Kong, said he expects the SFC to consult market participants in April.

"The industry has a few concerns," said Chan, who is also a director at Hong Kong Securities Association Ltd. Among the worries are that the transfer to the new system would incur additional costs for brokerages and may result in information leaks about their client trading strategies. The SFC's access to investor information should be governed by an independent panel and disclosed only on the watchdog's request when it investigates suspicious transactions, he said.

For some of the city's investors the see-through model is not new, because they have to comply with the mainland investor identification regime when they trade in China, said Sally Wong, CEO at the Hong Kong Investment Funds Association, whose members include Goldman Sachs Group Inc. and JPMorgan Chase & Co.

In a speech last year, SFC CEO Alder said that examining the feasibility of client-level identification was necessary because Hong Kong's markets are larger and more complex.

"This is a longer-term project," Alder said at the 6th Pan- Asian Regulatory Summit on Oct. 13. "But it would mean that we would have a much better overview of market-wide trading patterns, and also reduce the number of times we would need to bother brokers for client-level information." The agency wants to maintain market integrity and transparency along with minimizing volatility, Lui said in the interview. The new system would also improve monitoring of trading through Stock Connect between Hong Kong and Shanghai equity markets.


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