SECURITIES FINANCE

Hong Kong regulator to probe prime brokerage practices

Hong Kong's SFC will look into the conduct and risk management practices of prime brokers in the country.

By Joe Parsons joe.parsons@strategic-i.com November 08, 2017 11:40 AM GMT

Hong Kong’s Securities and Futures Commission (SFC) has launched a review into the risk management practices and conduct of prime brokers.

The watchdog has commenced a thematic review on prime services and other related equity derivatives activities in the country to assess internal controls and identify any potential issues.

The review follows the launch of the Shanghai-Hong Kong Stock Connect, the cross-border stock exchange linkage, which has seen a wave of hedge funds and institutional investors using prime brokers to access the platform.

“Many of the client servicing activities and related internal control functions and risk management activities related to prime services are carried out in Hong Kong,” the regulator stated.

The review will focus on business structures of prime brokers, including front-to-back business processes, along with interaction between prime services and equity derivatives activities, and key risks and controls for prime services.  

The prime brokerage business has come under enhanced scrutiny of their business practices globally. In August, three US pension funds filed a class action against six major prime brokers over an alleged ‘boycott’ of securities lending trading platforms and block competition.