September Compliance Newsletter

Happy Halloween.

What a month its been – horror for hedge funds in India, shocks in the credit markets, ghosts of Oct 87 in the USA, booming equities in China, tricky results for those sitting exams in Hong Kong, tax treats in Singapore, the promise of regulatory treats in Hong Kong, even a phoenix in Australia.

The SFC Director of Licensing, Stephen Tisdall, gave an interesting and informative presentation on Hong Kong licensing to our breakfast meeting attendees in October. Stephen talked about the need to increase resources in his department and about a number of reforms instituted and coming up.

He said that all elements of the licensing process are currently up for review: procedures, forms, FAQ’s, circulars, even the requirement for individuals to be licensed at all.

We have been of the view for some time that the Securities and Futures Ordinance was never designed to take into account a number of major trends that have taken place in Hong Kong and the licensing regime has been problematic for many firms for the wrong reasons.

This review is to be welcomed by the industry and reflects the ongoing desire of the SFC to ensure that it remains a leading regional regulator. Those firms that wish to make submissions on any element of the licensing process should write to Stephen directly at the Commission. ComplianceAsia will also be making a submission and clients and contacts who would like to have their views incorporated into our submission should email Philippa Allen.

Stephen also discussed recent exam results at the HKSI in answering a question from one of the attendees. We were shocked to learn that only 16% of candidates passed Paper 1 at the HKSI in September and only a slightly greater number the month before. This compared to a pass rate of approximately 60% a year earlier.

The HKSI’s exams are a gateway to getting a business up and running in Hong Kong as the HKSI has a monopoly on the provision of exams for the securities industry in Hong Kong. They affect employment, investment and the ongoing relevance of Hong Kong in the financial markets. Poor questions and double negatives have been issues in the past. These horrendous results suggest there are issues again.

We call upon the HKSI and its executive to expedite the reviews of the examinations which has been discussed for some time so that the HKSI can remain an important way of developing new entrants to the industry but not stand in the way of the economic progress of Hong Kong.

The Hong Kong exams issues however are small potatoes compared to the dramas unfolding in India in relation to hedge funds investing in participatory notes or P Notes. Essentially to invest in India requires registration. Large investment banks have done this and then went about issuing derivatives to mirror the economic interests of various securities. Professional investors, particularly hedge funds (who SEBI would not allow to have direct access as FII unlike traditional managers) bought a lot of these and a large part of the inventory of securities being held by these named parties was actually bought for other, as far as the Indian regulator was concerned, unnamed parties.

About two to three weeks ago the Securities and Exchange Board of India announced that they would halt investments using this process and introduced a number of provisions to affect this. This has caused considerable disruption and discomfort in the industry despite the valiant efforts of a number of prime brokers and AIMA to resolve the situation.

Recent pronouncements by SEBI have confirmed that the new provisions are here to stay.

SEBI had made public noises that they will loosen the registration process so that those people previously using P Notes could register formally. However the devil is in the details, if you will pardon our last Halloween pun. It has always been the case that FII approval will only be given to fully regulated managers (which rules out most Singapore based hedge funds) but even with this comfort, SEBI has a backlog of about a year’s worth of applications.

While we have no view either way as to whether the old situation should have been allowed to continue or not, we do believe that if SEBI, and the RBI for that matter, are going to take a sledge hammer to an established market practice then they need to ensure that they have the capacity to efficiently process a very large number of applications that will come in from large institutional investors. We do not believe they can do this and thus the current arrangements will economically disadvantage India.

India seems like a wonderful place to invest in. An emerging economy, lots of talented people, a regulatory system that is essentially easy to understand and great international interest in its development. It would be a shame if poorly thought through regulatory action resulted in foreign investors looking elsewhere.

Elsewhere around the region we report on the changes to the Singapore tax system in relation to fund managers and for those of you who did not see it, we refer you to our earlier technical article prepared by the tax team at Ernst & Young. We also note some new licensing guidelines in Malaysia and continued announcements in Japan on the FIEL.

In Indonesia, DBS has had trouble with its dealing license registration and this highlights the ongoing problems that foreign firms can face with their businesses there.