Hong Kong Regulatory Update
It has been a busy period in Hong Kong in respect of regulatory developments. Both the QFII and RQFII schemes have undergone changes, mandatory clearing has been introduced and the Securities and Futures Commissions (“SFC”) has been active on issues such as liquidity and cyber-security.
QFII / RQFII – 2016 Updates
Both the QFII and RQFII regimes underwent further changes in 2016 designed to render them more attractive to foreign investors.
The principal amendments are as follows:
- Quota rules have been changed so that, in some circumstances, where a quota is within certain parameters, there is no longer a requirement to obtain SAFE approval, instead a simple filing suffices.
- QFIIs now have up to a year to invest their quota, any balance remaining being liable to be revoked by the SAFE at its discretion.
- Lock-in periods remain in place for QFIIs, and RQFIIs which are not open-ended, and are set at 3 months from the time US$20million (for QFIIs) or US$100million (for RQFIIs) is paid into the relevant entity’s onshore account. In practice this represents a reduction in the effective lock-in period.
- Open-end China QFII funds now benefit from daily liquidity whilst daily liquidity has also been extended to non-open-ended RQFII funds.
OTC Derivatives Regime
The Hong Kong Monetary Authority and the SFC jointly issued consultation conclusions on the proposals to introduce mandatory clearing and the Phase 2 of the expanded mandatory reporting obligations under the new OTC derivatives regime on 6 February 2016 and 15 July 2016.
The principal requirements for mandatory clearing (as of 1 September 2016) are as follows:
- “Prescribed persons” are required to carry out clearing. This will affect authorised institutions, money brokers, licensed corporations and clearing houses acting as central counterparties where contracting either with other prescribed persons or with financial services providers and where both counterparties cross a threshold (currently US$20billion) based on the portfolio of OTC derivative transactions of each counterparty.
- Mandatory clearing applies to certain transactions of standardised interest rate swaps in HKD, USD, EUR, GBP or JPY along with related record keeping obligations.
- Intra-group transactions and transactions booked in certain jurisdictions are exempt.
- The compliance timeline is T+1.
The requirements for mandatory reporting are to be implemented in summer 2017.
SFC Liquidity Risk Management Circular – key points
The SFC issued a Circular on 4 July 2016, based on IOSCO standards, providing guidance to managers on what the SFC expects in order to ensure effective liquidity risk management of retail funds.
The circular focuses on:
- -Management governance structures – including the requirement to establish effective liquidity risk management policies and procedures and functions.
- -Product design and disclosure – including clarifying that liquidity profiles should be a key consideration in the design process. Appropriate liquidity disclosures should be made in offering documents.
- -Ongoing liquidity risk assessment and stress testing – including continuous regular assessment of risk profiles and appropriate stress testing.
- -Liquidity risk management tools – including requirements for managers to review and consider all liquidity risk management tools and ensure these are appropriately disclosed in offering documents.
Hong Kong Open-ended Funds Companies (“OFCs”)
The Securities and Futures (Amendment) Ordinancewas gazetted on Friday 10 June 2016 introducing the legal, regulatory, and tax framework for an OFC regime in Hong Kong. Structurally, OFCs will bear substantial resemblance to the ICVC or ICAV regimes in the UK and Ireland, and may be publicly or privately offered. Local tax requirements will, of course, differ to those applicable to similar structures in the UK or Ireland.
Under the new regime, the SFC will become the primary regulator responsible for registration and regulation of OFCs. Day-to-day management and investment functions of OFCs must be delegated to investment managers licensed by or registered with the SFC to carry out Type 9 (asset management) regulated activity.
SFC Cyber-security Review
On 13 October 2016 the SFC announced the commencement of a new cyber-security review to raise awareness of cyber-threats. The review comprises a questionnaire, on-site inspections and a benchmarking exercise against the requirements of regulators in other major financial services hubs. In this, the SFC is very much in line with other influential regulators, such as the FCA, who specifically referred to cyber-security in its 2016/2017 Business Plan and has subsequently focused on the issue in speeches, guidance papers and consultations over the course of this year, whilst the CBI published a Thematic Review last year and published a guidance note on 13 September 2016 on the subject.
Paul Moloney, Of Counsel, Eversheds LLP Hong Kong