HONG KONG: Update of SFC FAQs Concerning the Code on Unit Trusts and Mutual Funds

Wednesday September 26 2012

The Securities and Future Commission of Hong Kong has recently published an updated version of Questions 14 and 20 of the frequently asked questions (FAQs) on the code of unit trusts and mutual funds.

The FAQs have been prepared by the Investment Products Department and aims to provide basic information to market practitioners concerning the Code on Unit Trusts and Mutual Funds.

Please refer to the link below for a full copy of the FAQs:

http://www.sfc.hk/web/EN/faqs/product-authorization/code-of-unit-trusts-and-mutual-funds.html

Question 14 concerns the authorization of ETFs/listed funds and states that the SFC would generally seek to require the Participating dealers (PDs) to process creation/redemption requests from third party investors save for exceptional circumstances.

Question 20 concerns investment in ETFs by SFC-authorized funds and states that the SFC, in principle, considers and treats the following ETFs as listed securities:

• all SFC-authorized ETFs; and
• ETFs that are listed and regularly traded on internationally recognized stock exchanges open to the public (nominal listing not accepted) and the principal objective of which is to track, replicate or correspond to a financial index or benchmark, which complies with the applicable requirements under 8.6 of the UT Code.

It is worth noting that there is a European UCITS context for both of these points:

• The UCITS VI consultation is considering the need for liquidity safeguards in ETF secondary markets, and asking the question of whether the ETF provider be directly involved in providing liquidity to secondary market investors.
• A long standing UCITS issue is whether investment into an ETF can be treated as an investment into a transferable or whether it must be treated as investment into a CIS. The difficulty with the latter approach is that (i) UCITS are restricted from investing more than 30% into CIS which are not UCITS and hence which are domiciled outside of Europe and (ii) many CIS, even leading ETFs, can struggle to meet the requirements to be UCITS equivalent. Therefore, adopting an approach such as the SFC approach would possibly enable UCITS to invest into a wider range of ETFs and for example make possible a fund of funds where the underlying are a wide range of overseas domiciled ETFs.

Should you wish to discuss any of the matters raised above, please do not hesitate to email info@funds-axis.com