8 February 2021
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A new fund structure in the form of an “open-ended fund company” (an “OFC”) was introduced under the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) (the “SFO”) in July 2018. We discuss in this Note some of the issues that market participants should be aware of when trading derivatives with OFCs.
What is an OFC?
An OFC is a Hong Kong-incorporated investment fund established in corporate form with limited liability and variable share capital. As an investment fund in corporate form, an OFC is different from the traditional unit trust in that it has separate legal personality and has a board of directors. The OFC’s assets have to be segregated and entrusted to a custodian for safekeeping. An OFC must have an investment manager who is licensed or registered with the Securities and Futures Commission (“SFC”) to conduct the Type 9 (asset management) regulated activity.
Why OFCs?
The OFC structure was created to provide more flexibility to the asset management industry in the choice of the investment fund vehicle. Prior to the introduction of the OFC structure, an open-ended investment fund could only be established in Hong Kong in the form of a unit trust (but not in a corporate form) due to the restrictions on capital reduction under the Hong Kong companies legislation. Although new in Hong Kong, corporate fund structures already exist in a number of overseas jurisdictions so the introduction of the OFC structure in Hong Kong was also Hong Kong’s attempt to catch up with other developed fund centers and to enhance Hong Kong’s position as an international asset management center.
What are the features of an OFC?
An OFC may be created as an umbrella fund with a number of sub-funds; each sub-fund has a pool of assets that is managed in accordance with its own investment objectives and policies. Each sub-fund is subject to a “protected cell” regime whereby the assets and liabilities of each sub-fund will only belong to that sub-fund.
OFCs are required to be registered by the SFC under the SFO and may be publicly or privately offered funds.
Trading derivatives with OFCs
As a relatively new corporate form, market participants trading derivatives with OFCs under industry standard ISDA documentation should be aware of the following issues:
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Does an OFC have capacity to enter into derivatives transactions? Which rules establish the capacity, rights, powers and privileges of an OFC?
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Does standard derivative documentation have to be amended to account for the sub-funds structure under an umbrella fund?
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Is there any special circumstance which would lead to the dissolution of an OFC? How would this affect standard derivatives documentation?
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Are OFCs subject to specific winding up rules?
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Do the industry standard netting and collateral opinions cover this new counterparty type? If not parties are advised to obtain top-up opinions.
Singapore Variable Capital Companies
To stay ahead in the competition with other fund domiciles to be the leading wealth and fund management hub, Singapore launched the Variable Capital Company (“VCC”) framework in January 2020. The VCC is a new corporate structure for investment funds designed to provide greater operational flexibility and is similar in many respects to the OFC in Hong Kong – for instance, the VCC also provides for a variable capital shareholding structure and may also be created as an umbrella fund with multiple sub-funds, the assets and liabilities of which are required to be segregated. The issues set out above would similarly be relevant to market participants trading derivatives with VCCs and should be given appropriate consideration.
For further information, please contact:
Sonia Lim, Linklaters
sonia.lim@linklaters.com
