HKMA Warns of Risks in Leveraged Investment Products

Source: Regulation Asia Editors, Regulation Asia 2020-08-10

Banks should take into account Covid-19 in product due diligence and client suitability assessments, and exercise caution when dealing in leveraged products.

The HKMA (Hong Kong Monetary Authority) has issued a circular to banks emphasising the importance of fair treatment of customers and the best interests obligation in the sale of investment products, particularly in leveraged transactions.

Banks are reminded to observe requirements related to product due diligence, taking into account prevailing market conditions amid the Covid-19 situation and the impact on the risk return profile and prospect of an investment. Heightened risks ratings identified during continuous reviews of investment products should be disclosed to customers.

When assessing client suitability, banks should take into account changes in customers’ circumstances arising from the Covid-19 situation. When explaining the risks and features of investment products to customers, banks should present balanced views, and avoid focusing solely on advantageous terms such as high coupon rates or yields.

With regard to leveraged transactions or the provision of margin trading services, banks should adequately disclose the risk that customers may lose more than the invested amount, and ensure customers are willing and able to bear the potential losses.

“[Authorised institutions] are expected to put in place policies and controls to ensure that targeted customers have been provided with adequate disclosure of, and are capable of understanding the risk of leveraged or margin trading, and the possibility of being subject to margin calls within a short time period,” the HKMA says, adding that mechanisms to monitor margins maintained by customers with banks must be in place.

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Margin Trading

COVID-19

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HKMA Warns of Risks in Leveraged Investment Products

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