The Securities and Futures Commission (SFC) of Hong Kong has reprimanded and fined XHK Limited $2.5 million for regulatory failures in relation to the firm’s preparation of financial returns, maintenance of required liquid capital, and handling of client money and non-client money.

XHK is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities.

The disciplinary action follows an SFC investigation triggered by self-reports made by XHK. The SFC’s investigation found that XHK made various accounting errors in its financial returns submitted to the SFC under the Securities and Futures (Financial Resources) Rules (FRR), resulting in both overstatements and understatements of its liquid capital from January 2020 to June 2021.

After correcting the errors, it was revealed that XHK’s required liquid capital was in deficit – ranging from $3.6 million to $32.3 million – for four months during this period, in contravention of the FRR.

XHK’s failure to ensure the accuracy of the financial returns was mainly attributable to its failure to ensure that the external service providers appointed to prepare and compile the financial returns were competent and possessed the relevant knowledge and experience. In addition, XHK’s staff were not familiar with the FRR requirements and consequently failed to identify the errors in the financial returns before submission to the SFC.

The SFC also found that between March and April 2021, XHK transferred up to $206 million of client money from its segregated accounts to its overseas brokers’ accounts to facilitate the client’s trading activities without obtaining a written direction or standing authority from the client, as required by the Securities and Futures (Client Money) Rules (CMR).

The regulator further found that between February 2019 and October 2021, XHK failed to promptly transfer non-client money – including approximately $38 million in commissions and interest earned on client money – out of segregated accounts within one business day after becoming aware that such funds were not client money, contrary to the CMR.

Furthermore, these failures of XHK constituted breaches of the Code of Conduct.

In deciding the disciplinary sanctions, the SFC has taken into account a variety of factors, including:

• the duration and extent of XHK’s failures;
• the fact that XHK has taken remedial measures to enhance its procedures and processes for compiling financial returns and segregating client money;
• the absence of client losses as a result of XHK’s failures;
• XHK’s otherwise clean disciplinary record; and
• XHK’s co-operation with the SFC and acceptance of the SFC’s findings and disciplinary action facilitated an early resolution of the matter.