Clifford Chance

The SFC's publication of its strategic priorities for the next three years is welcomed. Whilst the SFC has from time to time indicated its priorities through annual and quarterly reports, bulletins, and forums and events, this is a notably different approach in terms of presenting standalone strategic priorities. The priorities reflect the global landscape and technological advances, and unsurprisingly include virtual assets, tokenisation and ESG. In addition, the SFC has highlighted the growing sophistication of investigation and enforcement tools available to it such as suptech and international collaboration.

Introduction

The SFC has set out its Strategic Priorities for the next three years encompassing its approach to developing Hong Kong's securities markets, as well to safeguard the integrity of Hong Kong markets through addressing risks and protecting investors. Ms Julia Leung, the SFC's CEO, emphasised bringing the full range of resources and tools to achieve positive regulatory outcomes, keeping investors out of harm's way and bringing wrongdoers to justice.

The Strategic Priorities were developed recognising the shifts in capital market conditions and the challenges brought about by the evolving global landscape (including the challenging global market environment and geopolitical tensions), as well as technological advances and cybersecurity.

SFC's priorities and tools

Of relevance to its investigation and enforcement, the SFC's high-level priorities in the coming three years are as follows: at the market level, to strive to maintain resilience and mitigate serious harm and lead market transformation through technology and ESG, and at the individual institution level, similarly, to enhance resilience and operational efficiency.

Of note are the following limbs of the SFC's strategic priorities and investigation and enforcement tools that it intends to rely on:

• Virtual assets and tokenisation – advance the regulatory regime for virtual asset trading platforms by giving regulatory guidance to new virtual asset activities and safeguard investors' interests in the tokenisation of traditional products.
  
  With the rapid evolution of the virtual asset landscape and its expansion into mainstream finance, the SFC has steadily been issuing guidance including its latest circulars on tokenisation of SFC-authorised investment products dated 2 November 2023 here; on intermediaries engaging in tokenised securities-related activities dated 2 November 2023 here and on intermediaries' virtual asset-related activities dated 22 December 2023 here.
  
  In the November circular for intermediaries, the new risks arising from tokenisation were highlighted such as ownership risks (surrounding how ownership is transferred and recorded) and technology risks (such as blockchain network outages and cybersecurity risks). The SFC's thinking regarding tokenisation was highlighted in a speech dated 26 September 2023 by the Executive Director, Investment Products of the SFC here. The SFC sees tokenisation as a "wrapper" of a product in the form of a smart contract using blockchain technology. The underlying product itself must meet all applicable requirements of the SFC comprising product authorisation requirements, the product provider's eligibility requirements and other structural, investment, disclosure and ongoing compliance requirements. The SFC's current approach is to first allow primary dealing of tokenised SFC-authorised products with secondary trading (where the risks are magnified) to be further considered.

• ESG – pragmatically steer the local and regional development of corporate sustainability disclosure standards and stem greenwashing.
  
  Whilst the ESG reporting framework for Hong Kong listed companies is relatively more mature with disclosure requirements for green and ESG SFC-authorised funds and fund managers emerging, it remains to be seen what enforcement will look like.

• Operational resilience and efficiency – institutions are expected to connect people, functions and technologies and keep abreast of the changing market and regulatory landscape in their upholding of effective governance, robust budgeting and internal controls, streamlining of processes and automation including introduction of AI, digitisation of application and authorisation processes, and cyber resilience.
• Technology and surveillance – harnessing technology to make investigations and enforcement more effective and leveraging surveillance capabilities to identify market misconduct among listed companies and intermediaries.
  
  By way of example, the SFC has developed a data analytics platform driven by big data and artificial intelligence to analyse trading data to identify red flags of potential misconduct in equities trading and systematic control deficiencies such as uncovered short selling, pricing anomalies in alternative liquidity pools, unfair handling of client orders, wash trading and spoofing. The platform also supports cross-firm analysis, for example, of trading activities conducted by an individual across different firms (as discussed in speech dated 28 June 2022 here and circular dated 22 December 2022 here).
• Misconduct and crime with cross-border elements – exploring new regulatory tools to monitor and investigate companies with multi-jurisdictional operations. The SFC has further indicated that it will continue to build and maintain close collaboration with regulatory counterparts in Hong Kong, Mainland China and overseas to combat cross-border market misconduct and with local and international law enforcement agencies to combat crime amidst fast-evolving technology, all to ensure timely protection for investors. The SFC divides the tools that it has at its disposal into diagnostic, monitoring, proactive and sanctioning / remedial in nature. Extra-territorial investigation and enforcement using these tools are limited by jurisdiction. Collaboration is therefore key in fighting cross-border misconduct and crime. Recent success stories in cross-boundary and international cooperation have been publicised particularly to deal with ramp and dump schemes. For example, in the most recent operation in October 2023, the SFC conducted its first tripartite operation with the Independent Commission Against Corruption (ICAC) and Accounting and Financial Reporting Council (AFRC) with which the China Securities Regulatory Commission (CSRC) also assisted. In the operation, three persons including an executive director of a listed company were arrested in relation to a conspiracy with a suspected ramp-and-dump syndicate to falsify corporate transactions with companies in Hong Kong and Mainland China. The SFC's priority in combatting cross-border market misconduct is also highlighted by confirmation of the expansion of insider dealing provisions to cover dealing conducted outside Hong Kong with respect to Hong Kong listed securities and dealing in Hong Kong with respect to overseas listed securities.

Conclusion
The SFC's strategic priorities are nothing new. They are a continuation of what the SFC has been stating including in a fireside chat with us in March 2023 (for more, see here). A key area of focus remains market misconduct. With technology such as virtual assets, operational resilience and cybersecurity are key concerns, as well as the fast-moving and cross-border nature of related fraud and crime and the need to cooperate with local and international enforcement agencies. Of note, stemming greenwashing has been brought to the forefront as a strategic priority in line with the relative maturing of the listed company ESG reporting framework and emerging ESG disclosure requirements for funds.

The SFC's drive to be transparent is to be welcomed. The SFC has indicated that in its upcoming annual report, it will set out what it has done and plans to do in the financial year to implement its strategic plan.