Tighter regulation of the online trading activities of brokers and cyber-exchange operators is in proposals to be released soon by the Securities and Futures Commission. A consultation paper to be issued at the end of the month, or early next, would see the securities watchdog propose measures to regulate brokers trading online, SFC executive director Andrew Procter yesterday told some 200 market participants at a Hong Kong Securities Institute seminar. He admitted the proposals were likely to increase brokers' operating costs. In turn this could make it difficult for the smaller brokers to provide online trading. He said guidelines were needed as many brokers did not have sufficient security and contingency measures to safeguard the interest of clients trading online. 'We do not plan to close the online operations of these brokers,' he said. 'We just want to help them improve their standards by issuing guidelines.' They focus on account-opening requirements, investor protection, and operational standards. They also cover how brokers should ensure the real identity of clients. The options being considered were a face-to-face meeting with clients; or a third party such as a bank manager may be needed to vouch for a client's identity; or a client might need to get a digital certificate from the Post Office. Another proposal concerns restricting access to brokers' chat room services - used by investors to discuss market rumours or company news. The SFC is also expected to propose that brokers have back-up computer tapes of transaction details - with copies stored outside the brokers' offices. As well, staff of brokerages offering online trading services are likely to have to meet certain IT proficiency standards, and brokers will need to ensure the integrity of their systems. Options being considered are that senior management sign a standard declaration of system integrity or that independent firms are hired to certify brokers' systems. The SFC is also expected to propose mandatory adoption of the Hong Kong Monetary Authority's guideline on 'management of security risks in electronic banking services'. Other proposals were: Brokers should monitor and regularly test their systems, and be able to carry out timely repairs. They should disclose a range of information to clients - including warnings of market risks, counter-party risks, risks of system delays and outages and confirmation of orders. Brokers should follow the privacy law to protect client information, and They should have client consent to use the Internet to communicate with them. In a separate move, the commission next month will issue guidelines on how cyber-exchanges - the networks which allow investors to trade securities via the Internet - should operate, Mr Procter said. They form part of the Composite Securities and Futures Bill. Mr Procter said the SFC had tried to achieve a balance between investor protection and the additional costs imposed on brokers.