In April 2022, the Hong Kong Securities and Futures Commission (SFC) launched a consultation on proposed changes to the position limits and large open position reporting regime in Hong Kong (First Consultation). On 22 November 2022, the SFC published the consultation conclusions on the First Consultation and began a further consultation on the proposed changes (Further Consultation).
Proposals related to funds
Our earlier article discussed the SFC’s key proposals in the First Consultation to clarify how the Securities and Futures (Contract Limits and Reportable Positions) Rules (Rules) are to be applied to unit trusts and mutual funds. In the consultation conclusions and Further Consultation, the SFC outlined some misconception and questions from the public, the industry’s comments on the proposals and the SFC’s response, which are summarised below:
| Comments / questions on key proposals in the First Consultation | SFC’s response |
| (1) The SFC proposed to clarify that (i) limits and reportable positions are applicable to each sub-fund individually and separately, as if each sub-fund were a stand-alone fund and (ii) for a fund manager who has discretion over the positions of all the sub-funds in question, aggregation would be expected. The SFC noted there might have been some confusion or misconception that the proposal would result in duplicated efforts to comply with the position limits and reporting requirements. | The SFC reiterated that the policy intention is to impose position limits and reporting requirements at the individual fund level because each fund is distinct and has its own investment mandate. Hence, where a person holds or controls positions for more than one fund, the SFC will require the person to apply the position limits and reporting levels to the position of each fund. However, if the person has discretion over the funds’ positions, for the purpose of compliance with the Rules, the person will have to aggregate the positions of all the funds together with his or her own position.Similarly, for umbrella funds, the policy intention is to apply position limits and reporting requirements to positions of each of the sub-funds under an umbrella fund because each sub-fund is managed independently, like a standalone fund, according to its investment mandate or strategy. Therefore, applying the position limits and reporting requirements at the sub-fund level would be sensible and in line with how each sub-fund’s positions and the associated risks are managed.The concerns about duplicated efforts in reporting (ie, multiple parties having to report the same position) is a misconception because asset managers generally have discretion over the positions of their funds and hence they will need to aggregate the positions of the funds under their control to comply with the position limits and reporting requirements. |
| (2) While it is proposed to clarify that, for a unit trust, the trustee shall have the obligation to observe the prescribed limits in relation to the positions of the unit trust, as well as to report the unit trust’s reportable positions, the SFC received comments that trustees are not in a position to comply with the position limits and reporting requirements due to operational difficulties. For example, trustees do not have timely access to funds’ position information, nor do they have the expertise to monitor and calculate funds’ positions and reporting obligations. | The SFC considers that it would be more appropriate for the person responsible for the day-to-day investment and operation of funds (ie, the asset manager) to have the primary responsibility for observing position limit compliance and reporting obligations at the individual fund and sub-fund level because they control trading and have first-hand information about the funds’ positions.Nevertheless, as the Rules apply to any person who “holds or controls” positions, trustees are still subject to the requirements of the Rules. If a trustee can demonstrate that it has measures in place to ensure the asset manager who manages its unit trusts has observed position limit compliance and reported positions on its behalf, the SFC will consider that the trustee has discharged its obligations under the Rules. |
| (3) A query was raised as to whether the Rules would also cover funds constituted in other legal forms or structures, apart from unit trusts. | The SFC confirmed that the Rules are intended to cover funds of all legal forms and structures. The SFC highlighted unit trusts in the First Consultation mainly because there could be uncertainties about whether unit trusts were subject to the Rules.The proposals in the First Consultation was to clarify the application of the Rules to sub-funds of unit trusts or corporate funds, considering that the two forms are the dominant fund types in Hong Kong. The SFC proposes to further amend the Rules to clarify how they should apply to funds in general. |
| (4) The SFC proposed that for reporting on behalf a unit trust, the unit trust’s name should be specified in the notice rather than the trustee’s identity.The SFC received comment that the disclosure of the name of a unit trust or sub-fund in a reportable notice would be sensitive. | The SFC considers that this information is essential for market monitoring. However, the SFC takes note of the industry’s concern and will ensure that the information will not be disclosed to the public. |
For the proposal highlighted in (2) above, since the SFC now proposes to require (i) asset managers to observe position limit compliance and report positions at the individual fund or sub-fund level and (ii) trustees to demonstrate that they have measures in place to ensure the asset manager who manages its unit trusts has observed the requirements, the SFC is further consulting the public on this revised proposal by way of the Further Consultation.
In addition, the Hong Kong Exchanges and Clearing Limited launched a consultation in June 2022 on proposed enhancements to the exchange-level position limit regime, which will eventually trigger amendments to the Rules. Therefore, the SFC is taking this opportunity to consult the public on these additional amendments in the Further Consultation.
The deadline for submitting comments on the Further Consultation is 23 December 2022. The SFC has not indicated any proposed implementation timeline in the consultation paper.
For further information, please contact:
Pinky Siu, Partner, Deacons
pinky.siu@deacons.com
