Hong Kong Kicks Off Talks to Boost Scrutiny on Stock Markets

Hong Kong's markets regulator has taken the first step to introduce rules that would force stock brokers to disclose the individual identities of investors making equities trades in the city, three sources familiar with the matter said.

The sources said Hong Kong's Securities and Futures Commission (“SFC”) has commenced initial discussions with several leading brokerages on the matter, a prelude to a more formal consultation process over proposed rules that could take effect as early as next year.

The proposals have alarmed some brokerages and banks in the global financial hub who worry such rules leave their trading strategies exposed.

"Implementing such a system will give no extra benefits to the trading community and might cause some unease among investors because of the increased scrutiny," said Alex Wong, a fund manager who helps oversee $100 million at Ample Capital in Hong Kong.

While the moves to monitor trades at an investor level are in line with global efforts to mitigate market volatility through better transparency, they also come as China seeks to woo foreign institutions to invest in their stock markets.

Hong Kong markets are increasingly engaging with mainland markets through the Shanghai-Hong Kong Stock Connect scheme and other schemes such as the proposed Shenzhen connect.

Nick Ronalds, head of equities at The Asia Securities Industry & Financial Markets Association (“ASIFMA”), which includes global banks and investors, said such a move could have "implications for (brokers') execution, IT and post trade settlement systems."

Sources said the problem would be particularly acute at an institutional level, where tagging individual identities to large volumes of client orders could result in potential delays.

The proposals include a number of options though it isn't yet clear which model authorities prefer at this stage of discussions.

At one extreme, the suggestions include attaching an investor profile to stocks on a real-time basis and disclosing this information to all market participants.

A lighter touch, meanwhile, would involve assigning the identity on a delayed basis and disclosing this information only at the regulatory level.

The SFC declined to comment.

Adopting an investor identification system would bring the level of scrutiny in Hong Kong in line with some other markets in the world.

"Investor ID" platforms that allow regulators to track trades in real time are already used by other major markets in Asia, such as China, South Korea and Taiwan.

Currently, Hong Kong operates under a "nominee model" through which the city's 525 brokers would provide information on client activity only when requested to do so by authorities.

In October, Ashley Alder, the CEO of the SFC, was one of the first to raise the prospect of identifying market orders at a client level, rather than a broker level, to better detect potential misconduct.

While the Hong Kong stock exchange initially expressed reservations over the cost of overhauling the trading and clearing systems, the exchange has come around to the SFC's view in recent weeks, two sources with knowledge of the matter said.