What is FRR?
As required by Section 4 of Securities and Futures (Financial Resources) Rules (Cap. 571N), “a (SFC) licensed corporation shall at all times maintain financial resources in the amount required…”
https://www.elegislation.gov.hk/hk/cap571N
The Financial Resources Rules (“FRR”) applies to all SFC licensed corporations (Types 1 through 10).
Managing financial resources are key to running and managing successful cash intensive securities operation in Hong Kong.
There are two types of capitals under the FRR rules.
(1) Paid-up Share Capital
(2) Required Liquid Capital
It is critical that licensed corporations meet the above capital requirements at all times.
(1) Paid-up Share Capital
Let us start with the easiest part of the FRR.
Paid-up Share Capital essentially means “total amount ($) of capital provided by shareholders.” In practice, it means the capital amount registered with the Companies Registry (e.g. capital amount found in Annual Return).
For ordinary RA Type 1 (e.g. brokers), minimum Paid-up Share Capital is HK$5,000,000. This means the paid-up share capital in the Companies Registry record must exceed HK$5,000,000.
Note that Paid-up Share Capital does not change as compared to Required Liquid Capital which will be discussed later.
You can find Minimum Paid-up Share Capital Amount for your operation in Schedule 1 of FRR.
(2) Required Liquid Capital
Firstly, let us understand that it means by “Liquid Capital”.
Here is how Liquid Capital is calculated as follows:
Liquid Capital (LC) = Liquid Asset – Ranking Liabilities
(Refer to definition of “Liquid Capital” under Section 2 of FRR)
What is Liquid Asset?
Essentially, it is cash held by an authorized banking institution in Hong Kong (Section 20 of FRR)
But it also includes accounts receivable from client if not outstanding for 2 weeks (section 23 of FRR).
What is Ranking Liabilities?
It is accounts payable (AP) (e.g. for brokers, AP lingers for T+2/3 settlement ).
It also includes overdraft, loans, guarantee or other financial commitment.
(Please note that approved subordinated loans are not included under Section 5 of FRR)
Please further note:
1. Accrual is deemed occurred on a trade data basis (Section 8 of FRR)
2. Back-to-Back trades are considered separate (Section 10 of FRR)
3. Assets and Liabilities shall not be set-off each other (Section 11 of FRR)
After understading the Liquid Capital, let us now explore the Required Liquid Capital.
Required Liquid Capital means the higher of: –
1. 5% of Basic Amount = Adjusted Liabilities (Variable Required Liquid Capital / “VRLC” )
2. Minimum Required Liquid Capital (“MRLC”)
Please note that the Required Liquid Capital may vary depending on the VRLC. The common misconception among the newely admitted licensed corporation is to comply with MRLC. However, this is not enough for FRR.
MRLC can be found on Schedule 1 Table 2 of the FRR.
What is VRLC?
VRLC means 5% of Adjuted Liabilities = Basic Amount
“Adjusted Liabilities” includes
On-balance sheet liabilities (not ranking liabilities)
Minus (-)
Client Money
Minus (-)
Approved Subordinated Loans
If you wish to explore RLC, please go here:
https://visence.info/en/hk-frr-how-to-calculate-required-liquid-capital-rlc/
Conclusion:
1. If $ of VRLC (=5% of Adjuted Liabilities) is more than HK$3,000,000 (MRLC), then Liquid Capital needs to be more than VRLC.
2. If not, Liquid Capital needs to be more than HK$3,000,000.
If you have any questions about FRR rules, please contact Visence Professional Services Limited.