Cybersecurity Rules Proposed for Hong Kong Securities Industry

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By Yu-Tzu Chiu

The Hong Kong Securities and Futures Commission’s recent proposals on mitigating hacking risks in the securities industry are aimed at an upswing in cybersecurity incidents in internet trading systems in Hong Kong, technology attorneys told Bloomberg BNA.

The commission proposals include two-factor authentication for clients’ system login and prompt notification informing clients of certain activities in their internet trading accounts, the SFC said in a statement.

The Hong Kong commission proposed expanding the scope of cybersecurity-related regulatory principles and requirements to cover online trading of securities that aren’t listed or traded on an exchange. It also seeks to clarify that an internet-based trading facility may be accessed through a computer, mobile phone or other electronic device.

According to SFC, 27 cybersecurity incidents had been reported in Hong Kong over an 18-month period ending in March, and most involved hackers accessing clients’ internet-based trading accounts with securities brokers. The result was unauthorized trades totaling more than HK$110 million ($14.12 million).

The SFC proposals are “further evidence of increased regulatory focus on cybersecurity concerns,” Scott Thiel, technology partner at DLA Piper and head of the firm’s Hong Kong office, told Bloomberg BNA May 15.

“Hacking of internet trading accounts is the most serious cybersecurity risk faced by internet brokers in Hong Kong,” Ashley Alder, SFC’s chief executive officer, said in a statement.

Gary Cheung, vice chairman of Hong Kong Securities Association, told Bloomberg BNA May 16 that “cybersecurity prevents hackers from breaking into systems and should be implemented as a form of protection and defense enforcement.”

Pump and Dump

Mark Parsons, technology, media and telecommunications partner at Hogan Lovells International LLP in Hong Kong, said the commission proposal highlights the prevalence of a particular “pump and dump” scheme in which hackers gain unauthorized access to internet trading accounts and use the cash and securities to fund the purchase of penny stocks targeted by the hackers.

The hacked accounts are used to pump up the prices of penny stocks, while the hackers dump the stock at artificially inflated prices, causing significant losses to the hacked accounts, Parsons told Bloomberg BNA May 15.

Cheung said that “with so many aspects of a brokerage heavily reliant on online access, from account opening to accessing trading platforms, brokerages have to constantly be on the alert.”

Thiel said he was disappointed with the commission’s proposals. “It has a very narrow focus and provides little more than common sense guidance which we would expect sophisticated licensed entities to be doing in any event,” he said.

This regulatory approach in Hong Kong, which detractors see as piecemeal, differs from comprehensive regimes being adopted in other areas, including Singapore and China, where new, holistic cybersecurity laws are going live in June, he said.

There isn’t a mandatory breach notification under existing Hong Kong law, and no evidence Hong Kong’s Privacy Commissioner for Personal Data is considering adopting such measures, Thiel said. “On these issues, Hong Kong is behind other countries in the Asia-Pacific Region, such as Australia and the Philippines,” he said.

Hong Kong’s data protection authority did issue voluntary guidance in June 2010 on data breach notification. The guidance says that companies should “seriously consider” telling those impacted by a breach when there is a real risk of harm.

To contact the reporter on this story: Yu-Tzu Chiu in Taipei at correspondents@bna.com

To contact the editor responsible for this story: Donald Aplin at daplin@bna.com

For More Information

Text of the proposals are available at http://src.bna.com/oUt.

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