Futu, Tiger Brokers fall sharply as Chinese central banker warns on offshore trading by online brokers

US-listed brokers Futu Holdings and Tiger Brokers fell sharply in early trading in New York on Thursday after a top Chinese central bank official warned online brokers who offer cross-border trades to mainland investors without a domestic licence are operating illegally.

Sun Tianqi, head of the Financial Stability Department at the People's Bank of China (PBOC), said at a financial forum over the weekend that brokers, even if they are licensed elsewhere, were running afoul of the law if they offer such trading in US and Hong Kong markets without a relevant licence in China.

"Cross-border internet brokerages are driving without a licence in China and are conducting illegal financial activities," Sun said in the speech, according to a transcript released on Wednesday.

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On Thursday, Tencent Holdings-backed Futu's shares fell as much as 25 per cent in early trading, while Xiaomi-backed Up Fintech Holding, which is known as Tiger Brokers in Asia, declined as much as 20 per cent.

China passed a sweeping data privacy law this year, which imposes some of the strictest limits on how personal data can be collected, used and managed. The law comes into effect on November 1.

The People's Daily, a Chinese Communist Party mouthpiece, said this month that Futu and Tiger faced regulatory risks in meeting the requirement to protect user data.

"It remains a concern that whether the Chinese government will issue any new regulations to restrict domestic individuals to open an account under an offshore bank, e.g., Bank of China (Hong Kong)," Jefferies analysts Zoey Zhong and Thomas Chong said in a research note on Thursday. "It's another concern that assuming domestic individuals are able to open a bank account in overseas countries or regions like Hong Kong, whether they can use this bank account to open a trading account under offshore brokers like Futu."

Sun, the PBOC official, did not name the firms directly, but said 80 per cent of accounts at a Cayman Island-registered broker and 55 per cent of accounts at a Hong Kong-registered broker were opened by mainland investors.

"Financial licences have national boundaries," Sun said at a summit organised by the China Finance 40 Forum.

"In the past, we received inquiries relating to our business from certain regulatory authorities in China. We have since then taken measures to modify and enhance our business and platform to be in compliance with the applicable [People's Republic of China] PRC laws and regulations," the company said in its 2020 annual report. "However, we cannot assure you that the measures we have taken or will take in the future will be effective or fully satisfy the relevant regulatory authorities' requirements."

Futu's business model is similar to other foreign, domestic and Hong Kong companies licensed in the city, according to Leaf Hua Li, Futu's founder, chairman and CEO.

"Bank securities institutions are no different," he said in a statement.

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