What is HKIDR and who does it impact?
HKIDR is an abbreviation for ‘Hong Kong Investor Identification Regime’. HKIDR is a regulatory initiative which is in the process of being rolled out by the Securities and Futures Commission (“SFC“) and the Hong Kong Exchange (“HKEX“) with the view to being fully implemented by Q3/Q4 of 2022.
The aim of HKIDR is to enable the SFC and HKEX to easily identify the end investor of securities transactions executed on the Stock Exchange of Hong Kong (“SEHK“), principally in instances where they detect and are looking into suspicious trading activities. As things currently stand, the SFC and HKEX are only able to identify exchange participants (i.e., brokers) which place securities orders directly through HKEX on behalf of their clients (or indeed their clients’ clients). HKIDR has been on the SFC’s agenda for a number of years, having been in consultation since 2020, and is similar to exchange-identifier-regimes [1] in other jurisdictions.
Hong Kong companies that are considered to be ‘Relevant Registered Intermediaries’ (“RRIs“) under HKIDR are required to assign a unique number (i.e., a Broker-to-Client Assigned Number (“BCAN“)) to certain clients (i.e., ‘Relevant Clients’) in connection with the execution of securities transactions on the SEHK.
An RRI is a Hong Kong company that (i) carries out proprietary trading or (ii) provides securities brokerage services for another person in respect of orders placed through an account opened and maintained for that person.
A Relevant Client generally refers to a person who has placed a securities order through a securities trading account with an RRI.
In our experience, there has been some confusion within the industry regarding whether or not certain companies should be considered as being RRIs or not, particularly in relation to those evaluating whether they fall under category (ii) of the definition.
Below are some of the common scenarios we have come across and our high-level analysis as to the applicability of HKIDR:
Type of company
1. Execution Broker
Activity description
A company who is an SEHK participant that places securities orders directly through the HKEX on behalf of their clients.
RRI status analysis
The general consensus is that these companies would be considered as RRIs.
Type of company
2. External Asset Manager
Activity description
A company that manages their clients assets on a discretionary basis under a Power of Attorney agreement.
RRI status analysis
The general consensus is that these companies would not be considered as RRIs as they do not ‘maintain’ securities accounts for their clients.
These companies generally instruct execution brokers who are SEHK exchange participants to execute trades on behalf of their clients where often the end-client has a brokerage account with the execution broker.
The execution brokers would generally maintain securities brokerage accounts for the investor and execute the trade on behalf of the investor per the instruction of the external asset manager and thus would be considered as the RRIs.
Type of company
3. Wealth Manager
Activity description
A company that typically provides investment advice to their clients and then upon instruction, assists their clients to buy / sell SEHK listed securities.
RRI status analysis
The general consensus is that these companies would not be considered as RRIs as they do not maintain securities accounts for their clients.
Rather, these companies relay their clients’ securities order instructions to execution brokers who are typically SEHK exchange participants who then proceed to execute the securities trades on behalf of the client that originates the order (i.e., the end investor).
In these instances, the client who originates the securities order instruction would often maintain brokerage accounts with the execution broker and the execution broker would execute the trade on behalf of the client (and not on behalf of the wealth manager).
Therefore, the execution brokers would generally be considered as the RRIs.
Where a wealth manager holds its clients assets, it is likely that it would be considered as an RRI on the basis that (1) it is maintaining a securities brokerage account for its client and (2) the execution broker would generally execute the trade on behalf of the wealth manager (and not on behalf of the client who originated the order) and therefore the wealth manager would need to assign the BCAN to the end-investor (i.e., its client who originated the order).
Type of company
4. Introducing Broker
Activity description
A company that simply helps their clients buy / sell SEHK listed securities by introducing their clients to execution brokers / counterparties.
RRI status analysis
The general consensus is that these companies would not be considered as RRIs as they do not maintain securities accounts for their clients.
Rather, these companies relay their clients’ securities order instructions to execution brokers / introduce their clients to execution brokers / counterparties who are SEHK exchange participants who proceed to execute the securities trades on behalf of the client that originates the order / interest.
In these instances, the client who originates the securities order instruction / interest would often maintain brokerage accounts with the execution broker and the execution broker would execute the trade on behalf of the client (and not on behalf of the introducing broker).
Therefore, the execution brokers would generally be considered as the RRIs.
Where an introducing broker holds its clients assets, it is likely that it would be considered as an RRI on the basis that (1) it is maintaining a securities brokerage account for its client and (2) the execution broker would execute the trade on behalf of the introducing broker (and not on behalf of the client who originated the order) and therefore the introducing broker would need to assign the BCAN to the end-investor (i.e., its client).
Type of company
5. Central Dealing Desk
Activity description
A company that assists affiliated fund managers to buy / sell securities listed on the SEHK.
RRI status analysis
In these instances, the central dealing desk would generally relay securities order instructions on behalf of their affiliated fund managers to execution brokers who are SEHK exchange participants.
The fund which is being managed by the affiliated fund manager will generally have a securities brokerage account with the execution brokers and the execution brokers would execute the securities transaction on behalf of the fund (as opposed to on behalf of the central dealing desk).
Therefore, the execution brokers would generally be considered as the RRIs.
The above analysis is by no means a ‘one-size-fits-all’ as different business and operational workflows bring into question additional analysis with regards to HKIDR.
Should you wish to speak to one of our consultants to find out more about HKIDR, please feel free to reach out to us directly on info@pcacompliance.com.
