SFO Subsidiary Legislation Gazetted

The SFC announces that the last items of subsidiary legislation necessary for the commencement of the Securities and Futures Ordinance (SFO) are gazetted today.

The items published in the Gazette today are (S&F stands for Securities and Futures):

1.     S&F (Insurance) Rules

2.     SFO (Cap.571) (Commencement) Notice

3.     SFO (Cap.571) (Appointment of Day – Repeal of Ordinances) Notice

4.     SFO (Cap.571) (Appointment of Day – Unified Exchange Compensation Fund) Notice

5.     SFO (Cap.571) (Appointment of Day – Futures Exchange Compensation Fund) Notice

A brief background of the Rules and Notices appears in the endnotes (note 1).

Background of the SFO

The SFO was enacted on 13 March 2002. It consolidates and modernises 10 existing Ordinances governing the securities and futures markets into a composite piece of legislation to keep the Hong Kong regulatory regime on a par with international standards and practices.

For effective regulation, the SFO provides flexibility in addressing changing market practices and global conditions by empowering the Chief Executive in Council, the Financial Secretary, the Chief Justice and the SFC to prescribe detailed and technical regulatory requirements as necessary by way of subsidiary legislation, to supplement the regulatory framework laid down under the primary legislation.  A total of 40 sets of subsidiary legislation have to be put in place for commencement of the SFO (note 2).  Also gazetted today are two notices commencing the transitional arrangements relating to investor compensation.

Each set of subsidiary legislation has gone through a consultation process where appropriate. The relevant items have been amended where necessary to reflect the comments received during the consultation.

On 22 February 2002, the House Committee of the Legislative Council established the Subcommittee on Draft Subsidiary Legislation to be made under the SFO. From March to October, the Subcommittee held 12 meetings to study the subsidiary legislation in draft form.

Way forward

Once gazetted, the subsidiary legislation is subject to the LegCo negative vetting process, which takes seven weeks.

The subsidiary legislation will come into operation on the day appointed for the commencement of the SFO. The target date for commencement is 1 April 2003.

The Gazette is available at the Government Publications Centre, and accessible on the website of the Government Printer or via the SFC’s website under the SFO section.

Ends

Notes to Editor:

1.               A brief background introduction of the Rules and Notices:

1.     Securities and Futures (Insurance) Rules

The Rules supplement the new licensing regime provided in Part V of the SFO which requires persons who carry on business in a regulated activity to be licensed or registered.  Subject to certain exceptions, corporations licensed to carry out securities dealing, futures dealing or securities margin financing activities are required to take out and maintain insurance against specified risks when such requirements are triggered pursuant to the Rules.

The insurance requirement aims to provide indemnity protection to the insured licensed corporations against fidelity risks (e.g. theft by employees). Where an insured licensed corporation suffers financial loss caused by such fidelity risks materializing in practice, the proposed insurance would indemnify the licensee concerned thus alleviating the adverse impact on its financial position and reducing the likelihood that the corporation may go into liquidation in the case of a more severe loss. This would also help to maintain the stability of the financial market and contribute to enhancing confidence in the Hong Kong market.

As for investors, the proposed insurance coverage would increase the likelihood that investors would be compensated by licensed corporations and the amount that they would receive in relation to losses caused by fraudulent acts.

2.     Securities and Futures Ordinance (Cap.571) (Commencement) Notice

The Notice is made by the Secretary for Financial Services and the Treasury under section 1(2) of the SFO and will commence the SFO on 1 April 2003 (the Banking Amendment Ordinance 2002 is being commenced on the same date). The subsidiary legislation made under the SFO has been drafted in such a way that it would commence "automatically" on the day when the primary law comes into effect.

3.     Securities and Futures Ordinance (Cap.571) (Appointment of Day – Repeal of Ordinances) Notice

The Notice is made by the Secretary for Financial Services and the Treasury under section 406 of the SFO and will repeal the existing 10 Ordinances (and subsidiary legislation made under them) on 1 April 2003.

4.     Securities and Futures Ordinance (Cap.571) (Appointment of Day – Unified Exchange Compensation Fund) Notice

The Notice is made by the Secretary for Financial Services and the Treasury under section 74(13) of Schedule 10 to the SFO and appoints 1 April 2003 as the day on which the existing Unified Exchange Compensation Fund will be replaced by the new investor compensation fund and the transitional arrangements in Schedule 10 of the SFO will commence.

5.     Securities and Futures Ordinance (Cap.571) (Appointment of Day – Futures Exchange Compensation Fund) Notice

The Notice is made by the Secretary for Financial Services and the Treasury under section 75(13) of Schedule 10 to the SFO and appoints 1 April 2003 as the day on which the existing Futures Exchange Compensation Fund will be replaced by the new investor compensation fund and the transitional arrangements in Schedule 10 of the SFO will commence.

2.   Please refer to SFC press release on 13 December 2002 for background of the items previously gazetted.