Facing criticism that it was too lenient towards the scandal-shrouded Hong Kong Mercantile Exchange, the Securities and Futures Commission says it handled the fiasco appropriately.
Three out of four people arrested have been charged since the HKMEx surrendered its trading licence last Saturday after failing to maintain the necessary financial requirement.
"The SFC had been closely monitoring the financial situation of the HKMEx for a year before it finally closed its doors. This is because we noticed it struggling with thin turnover," said SFC non-executive director Chan Kam-lam.
Chan said the SFC could not intervene earlier as the HKMEx, which provided an automated trading platform for gold and silver futures, met the financial requirement every time it checked.
It was not until a cheque bounced earlier this month that the body, founded and chaired by Barry Cheung Chun-yuen, could no longer show it had sufficient funds on hand, and that allowed the SFC to step in, an SFC source said.
Chim Pui-chung, a former legislator for the financial sector, rejected Chan's argument.
"If the SFC identified a potential problem a year earlier, it should have dealt with it then, not last week," Chim said. "The SFC has to safeguard the stability of the market. After all, it reacts quickly whenever brokers have a problem."
Another SFC director said the regulator could not have taken action too early. "HKMEx was a newly set-up exchange, and it is natural its turnover would not be huge in the early stages," this director said.
"As long as the exchange could find enough money to prove it could support its operations, we let it continue to operate. If the SFC closed it just because its turnover was low, there would be no chance for any new exchange operator to be set up."
He said from the SFC's point of view, what is crucial is that no investor interest was hurt. Since the HKMEx operated a platform that executed trades but did not keep clients' money, the SFC could allow it more flexibility.
But Chim said the SFC had been kind to the HKMEx from the outset.
"At the launch of HKMEx, Mr Barry Cheung appeared not to have a huge sum of money. This raised questions whether the SFC had checked its funding sources and financial strength enough before granting it the licence," he said. "The SFC was likely under political pressure to give the licence to HKMEx, as the government always wanted the city to have a commodities exchange."
Chim made an urgent loan of HK$8 million to Cheung two months before the launch of the HKMEx. He got his money back about a month later. "I think HK$8 million was too small a sum to borrow for an exchange like HKMEx, which had a set-up cost of HK$500 million," Chim said.
He said the SFC had not sufficiently examined the business model of the HKMEx, which originally traded oil contracts but later shifted to gold and silver.
"Everyone knows gold and silver contracts could be traded at any gold trading firms or the Chinese Gold and Silver Exchange Society. Nobody will believe you can run an exchange by trading these products only," Chim said.
A person familiar with the SFC licensing process said the commission had negotiated with Cheung for over a year before granting HKMEx the licence.
Cheung initially sought an authorised exchange licence, the person said, but only an exchange with a great deal of capital to support clearing facilities could qualify for it. Eventually, the SFC granted the HKMEx a lower-level licence to offer an electronic trading platform.