Hong Kong
25 November 2016
Reporter: Stephanie Palmer

SFC proposes new rules for asset managers


The Hong Kong Securities and Futures Commission (SFC) has issued a consultation paper proposing changes to extend regulation of the asset management industry.

The paper outlines proposed changes to the SFC’s Code of Conduct for those licensed by or registered with the SFC, and the Fund Manager Code of Conduct (FMCC), and are intended to better protect investors’ interests and ensure market integrity.

Amendments to the FMCC included additions to existing requirements around custody of fund assets, liquidity risk management, leverage disclosure and securities lending and repurchase agreements.

The consultation said: “The SFC is mindful of the need to strike a proper balance between facilitating market development and competitiveness on the one hand, and ensuring protection of investors’ interests and market integrity on the other hand.”

The SFC suggested that fund assets should be segregated. If assets are held in an omnibus account, safeguards should be put in place to ensure assets belonging to each client are properly recorded with frequent reconciliations, the paper said.

Under the proposed rules, fund managers responsible for the overall operation of a fund should arrange the appointment of the custodian, and entrust the fund’s assets to a custodian that is functionally separate from itself.

The changes would also add due diligence to existing rules around the selection, appointment and ongoing monitoring of a custodian. Safeguards would also be put in place to mitigate conflict of interest and ensure custody agreements are fully disclosed to investors.

Regarding liquidity risk management, the SFC proposed that fund managers should implement procedures to monitor liquidity risk and ensure the effectiveness of these procedures are frequently reviewed and updated.

Managers should also conduct regular liquidity assessments in various scenarios—including stress scenarios—on all funds. However, the paper noted that the nature and frequency of these tests could vary depending on the profile of the fund in question.

The SFC also suggested that fund managers should disclose the maximum level of leverage that it can employ on behalf of each fund it manages.

Although the SFC did not prescribe a method for calculating leverage, it said: “We propose that the fund manager should take into account financial leverage arising from borrowings and synthetic leverage arising from the use of derivatives in calculating leverage and disclose the basis of calculation it has adopted, which should be reasonable and prudent, having due regard to international best practices.”

Changes to securities lending and repo agreements included introducing a collateral valuation and management policies, eligible collateral and haircut policies, reinvestment of cash collateral and reporting to investors.

Additional proposals related to fund portfolio valuation, auditing financial statements, risk management, side pockets, reporting and house account, and the changes to the Code of Conduct include restrictions on use of the term ‘independent’ and enhancing disclosure requirements.

Ashley Alder, CEO of the SFC, said: “A robust and responsive regulatory regime is fundamental to the development and growth of an international asset management centre. As part of the SFC’s broader initiative to enhance Hong Kong’s position as a major international asset management centre, it is important to ensure that our regulations are properly benchmarked to evolving international standards.”

Market participants are invited to respond to the proposals by 22 February 2017.

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