Download Securities and Futures Bill on Contract Notes, Statements of Account

HONG KONG BAR ASSOCIATION
COMMENTS ON SFC’S DRAFT SECURITIES AND FUTURES
(CONTRACT NOTES, STATEMENTS OF ACCOUNT AND RECEIPTS) RULES
INTRODUCTION
1.
The Draft Securities and Futures (Contract Notes, Statements of Account and
Receipts) Rules (“the Draft Contract Notes Rules”) are made pursuant to Clause
148 of the Securities and Futures Bill (“the Bill”). By way of the Draft Contract
Notes Rules, the SFC seeks to set out detailed requirements regarding issuance of
contract notes, statements of account and receipts which must be fulfilled by all
intermediaries (licensed or exempt under Part V of the Bill) or their associated
entities.
2.
Clause 148 of the Bill empowers the SFC to make rules regarding preparation of
contract notes, statements of account, receipts and notification by intermediaries
and their associated entities. However, we note that the Draft Contract Notes
Rules deal only with contract notes, statements of account and receipts, and make
no specific provision for notification.
3.
The existing requirements in respect of issuance of contract notes and statements
of account can be found in the Securities Ordinance Cap 333, the Commodities
Trading Ordinance Cap 250, the Leveraged Foreign Exchange Trading (Books,
Contract Notes and Conduct of Business) Rules Cap 451, the Code of Conduct for
Persons Registered with the Securities and Futures Commission (“Code”) and the
Fund Manager Code of Conduct (“FMCC”). The Draft Contract Notes Rules are
intended to rationalise and streamline the existing requirements.
EXEMPTION FROM DUTY TO PROVIDE CONTRACT NOTE
4.
Section 5 states that an intermediary or its associated entity is not required to
provide a contract note, statement of account or receipt if it knows or has
reasonable cause to believe that another intermediary has prepared and delivered
the same for the client. According to the consultation document, it is the SFC’s
policy to allow introducing brokers, assets managers and some others not to issue
contract notes to the client where another intermediary, for example, the
execution broker, already provides clients with necessary information. There is,
however, a risk that intermediaries who fail to issue the documents required may
make use of section 5 as a general defence as it may not be difficult to
demonstrate “reasonable cause to believe”.
INFORMATION IN THE CONTRACT NOTE
5.
Section 4 sets out the basic information which needs to be contained in every
contract note, statement of account and receipt. Section 6(3)-(6) lists other
particulars which must be contained in a contract note. For the sake of
completeness, it is submitted that section 6 should cross-refer to section 4 so that
it will be clear that a contact note should contain the information required under
section 6 in addition to that required under section 4.
6.
According to section 6(3)(b), where the intermediary that has entered into the
relevant contract is acting as principal, a contract note must include a statement
that it is so acting except in the case of a leveraged foreign exchange contract. It
is unclear and we see no reason why a leveraged foreign exchange contract should
be an exception in this regard. According to the current requirement as stipulated
in r. 4 of the Leveraged Foreign Exchange Trading (Books, Contract Notes and
Conduct of Business) Rules Cap 451, a contract note shall include, where the
licensed trader is acting as principal, a statement that it is so acting.
AVERAGE PRICE
7.
Section 6(4) states that the intermediary, at the request of the client, needs to
provide in the contract note an average price per unit for the sale or purchase of
the same description of securities. We presume that the average price per unit as
stated in section 6(4)(b)(ii) is the average price per unit for the purchase or sale of
the same description of securities covered by that contract note.
8.
Section 6(7) of the Draft Contract Notes Rules provides that an intermediary is
required to provide a detailed analysis of an average price no later than the end of
the second business day after the request is received. The Draft Contract Notes
Rules do not contain any provision relating to general requests and we suggest
that this should be considered.
SHORT SELLING
9.
Pursuant to section 6(4)(b)(iii), a contract note must include “an indication where
it relates to:(A)
a short selling order, where the intermediary knows this; or
(B)
a borrowing or lending under a securities borrowing and lending
agreement.”
10.
There appears to be missing from the section what indication is required. It is
submitted that the contract note should include a statement as to whether the
transaction is for short selling. Further, according to paragraph 14 of Schedule 3
to the Code of Conduct for Persons Registered with the Securities and Futures
Commission (“the Code of Conduct for Registered Persons”), the registered
person is required to ensure that the designated security in respect of the short
selling transaction will be available to the registered person or that the client
should make delivery of the same of the settlement date. It should be considered
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whether the basis as to how the designated security is to be available on the
settlement date should be set out in the contract note.
11.
Section 6(4)(b)(iii) requires a contract note to contain an indication regarding
short selling only when the intermediary knows it. It is submitted that a higher
standard should be imposed because of the following reasons:(1)
In view of the provisions of the Code of Conduct for Registered Persons, a
registered person has a duty to take certain steps on receipt of an order for
the sale of an amount of securities in the context of short selling. In the
circumstances, even if an intermediary does not have direct knowledge as
to whether the transaction is of a short-selling nature, it should be able to
ascertain whether the order is of such a nature or not.
(2)
12.
According to Clause 166 (11) of the Bill, a person shall be guilty of the
offence of conveying or accepting a short selling order unless he has
received an assurance that the client has a presently exercisable and
unconditional right to vest the securities in the purchaser or that the
securities in question are available to be lent or delivered to the client.
Further, it is a general defence if a person can prove that he had reasonable
grounds to believe and did believe that the order was not a short selling
order or he did not know that the order was a short selling order.
It is submitted that in view of the matters stated in paragraph 11 above, section
6(4)(b)(iii) should make it plain that a contract note must include an indication
that the transaction is for short selling where it relates to a short selling order. A
defence, similar to that set out in Clause 166(11) of the Bill, should be available
to the intermediary or its associated entity.
SUMMARY OF TERMS AND STATEMENT OF ACCOUNT
13.
The matter raised in paragraph 6 above in relation to contract note equally applies
to statement of accounts.
MARGINED TRANSACTIONS
14.
Section 9 deals with statements of account in relation to margined transactions. If
both ordinary transactions and margined transactions are carried out on one
business day, the Draft Contract Notes Rules do not contain any clear provision
on whether the statement should set out both types of transactions or whether
separate statements should deal with separate types of transactions.
PENALTY
15.
Clause 148(3) of the Bill states that rules can set out the penalty for an
intermediary or its associated entity for breach of the rules without reasonable
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excuse whereas Clause 148(4) imposes more severe penalty on those who
contravene the rules with intent to defraud. We note that the Draft Contract Notes
do not draw any such distinction and simply provide for penalty for an
intermediary or its associated entity who fails to comply with the Rules without
reasonable excuse. Further, according to the Bill, both fine and imprisonment can
be imposed. However, the Draft Contract Notes only provide for a maximum fine
at level 4. It should be considered whether a provision reflecting Clause 148(4)
with a higher maximum penalty should be enacted.
OTHER MATTERS
16.
Finally, we note that the Draft Contract Notes Rules do not contain any specific
provision that deals with discretionary accounts. We would invite the SFC to
consider whether those accounts pose different requirements and merit separate
treatment.
25th January 2002
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