The Securities and Futures Commission (SFC) has imposed a HK$2.5 million fine on XHK Limited for multiple regulatory breaches relating to financial reporting, capital adequacy and client money handling requirements.
XHK operates as the Hong Kong regulated entity associated with the EXANTE trading group, a multi-asset brokerage offering trading services in securities, futures, FX and contracts for difference (CFDs) through regulated entities in various jurisdictions. The SFC's disciplinary action followed an investigation initiated after XHK self-reported issues to the regulator.
Financial reporting and capital adequacy failures
The SFC found that accounting errors in financial returns submitted by XHK under the Securities and Futures Rules led to both overstatements and understatements of its liquid capital between January 2020 and June 2021. Once these errors were corrected, XHK's required liquid capital was found to be in deficit for four months during this period, with shortfalls ranging from HK$3.6 million to HK$32.3 million, in breach of the relevant rules.
According to the SFC, these deficiencies arose from failures by XHK to properly oversee the external service providers engaged to prepare its financial returns. The firm did not ensure that these providers were competent or sufficiently experienced to carry out the work. In addition, XHK's own staff were not familiar with the Financial Resources Rules requirements and did not identify the accounting errors before submitting the returns to the regulator.
Client money handling breaches
The investigation also identified serious breaches of client money protection requirements. Between March and April 2021, XHK transferred up to HK$206 million of client money from segregated client accounts to overseas brokers without obtaining written directions from clients or holding standing authorities, as required under the Client Money Rules.
Furthermore, between February 2019 and October 2021, XHK failed to transfer non-client money out of segregated client accounts within one business day after identifying it as such. This non-client money included approximately HK$38 million in commissions and interest. The failure to promptly remove non-client funds from segregated accounts constituted additional breaches of the Client Money Rules.
Regulatory response and mitigating factors
In determining the disciplinary outcome, the SFC considered the duration and extent of XHK's regulatory failures and the seriousness of the deficiencies in financial reporting, capital adequacy management and client money handling. The regulator also took into account several mitigating factors, including remedial measures taken by XHK, the absence of any client losses, the firm's clean disciplinary record, and its cooperation with the SFC's investigation, which facilitated an early resolution of the matter.
