The SFC aims to identify potential conduct issues arising from the practice adopted by prime brokers, to assess the internal controls in place, and to provide guidance on how the risks are managed.
As well as reviewing the front-to-back business processes of prime brokers and the interaction between prime services and related equity derivatives activities, the review will also cover key risks and controls for prime services.
Evaluation of risks and controls will specifically concentrate on risk management, governance and compliance with existing regulations, and will explore areas for future regulatory focus.
Due to the growth of asset management businesses and the hedge fund industry in Hong Kong, prime services have become “a key revenue stream for financial institutions”.
The commission said it would also measure derivative activities of prime brokers against other major financial market regulators and try to lessen common problems the industry is facing.
The SFC said it has engaged an external consultant to assist in conducting the thematic review, of which will be conducted through a combination of industry survey, meetings and on-site inspections.
Findings of the review “would form the basis for the SFC to issue further guidance to the market”.