Hong Kong: SFC Consults on UT Code Amendments

Note (3) to 5.10(f) of the UT Code

5.10(g) of the UT Code and Notes

Additional requirements:

• A fund's investment strategy and the liquidity of its assets should be consistent with the terms and conditions governing subscription and redemptions;
• Funds investing in less liquid assets should use anti-dilution liquidity management tools (ADTs) to mitigate material investor dilution to ensure that investors bear the costs of liquidity associated with fund subscriptions and redemptions; and
• Funds allocating a significant portion of their assets to illiquid assets should create and redeem shares at a lower frequency than daily or require long notice or settlement periods.

Note (3) to 5.10(f) of the UT Code

8.2(p) of the UT Code (as proposed in the Consultation Paper)

Additional requirements:

• Management company should have a prudent credit risk assessment and monitoring procedure as to whether or not an MMF invested by the scheme is of high quality, having regard to multiple factors, including liquidity and credit quality but without over-reliance on external credit rating. MMFs are generally not expected to invest in unrated or low-investment-grade money market instruments; and
• Short-term deposits are expected to be repayable on demand or with the right to be withdrawn by the MMF at any time.

Additional requirements for CNAV MMFs:

• CNAV MMFs must invest at least 99.5% of their net asset value in liquid and high quality money market instruments issued or guaranteed by a government, its public or local authorities or other multilateral agencies, reverse repurchase transactions secured by these instruments and in cash;
• CNAV MMFs will be subject to higher liquidity requirement, with minimum daily liquid assets at 15% and weekly liquid assets at 50% of the MMF's net asset value; and
• Management companies of CNAV MMFs must establish robust internal controls and systems to monitor discrepancies between the CNAV per unit or share and the net asset value per unit or share calculated using the latest market value.

Such key personnel requirement is deemed to have been complied with:

• By Hong Kong management companies belonging to a well-established fund management group with relevant investment management experience and a track record; and
• By non-Hong Kong management companies licensed to manage public funds in jurisdictions which have entered into mutual recognition of funds arrangements with the SFC and are subject to the supervision of their respective home jurisdictions which are considered to be comparable with the SFC’s regulatory requirements. 

An SFC-authorized feeder fund may invest 90% or more of its net asset value in an eligible master fund which is approved by the SFC without separate authorization, provided that the following minimum requirements are met:

• The master fund must be a fund with safeguards and measures in place to provide substantially comparable investor protection as an SFC-authorized fund; and
• The master fund, together with its management company and trustee/custodian, must have a good compliance record with the rules and regulations of its home jurisdiction and (in the case of listed funds) the listing venue.