Hong Kong - The SFC’s Proposed Updates To The Fund Manager Code Of Conduct.

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Asia Pacific Legal Updates


11 July, 2017


Hong Kong - The SFC’s Proposed Updates To The Fund Manager Code Of Conduct.


SFC Consultation Paper on FMCC and Code of Conduct


Once a fund manager is licensed in Hong Kong, it is subject to various Securities and Future Commission (“SFC”) regulations and guidelines governing the fund manager’s fitness and behavior. These guidelines are set out in the Fund Manager Code of Conduct (FMCC).  In an attempt to amend the FMCC, the SFC initiated a three-month consultation in November 2016 with a view to enhancing point-of-sale transparency, addressing conflicts of interest in the sale of investment products by intermediaries, and strengthening Hong Kong’s status as a leading asset management center. The proposal further seeks to minimise shadow banking risks by implementing new policies for Fund Managers.  To get more insight on the initiative’s key features, we spoke with Kristi Swartz, Managing Partner at Bryan Cave, Hong Kong, and here is what she had to say.


Conventus Law: What is the overall aim of the consultation, and what was the motivation behind the proposed changes? 


Bryan Cave: The initiation of the three-month consultation by the Securities and Future Commission (“SFC”) is to enhance point-of-sale transparency and address conflicts of interest in the sale of investment products by intermediaries, thereby strengthening Hong Kong’s status as a leading asset management center. Such an aim is corroborated in the SFC’s statement that the consultation aims to ‘protect investors interests and to ensure market integrity’ as well as ‘enhance Hong Kong’s position as a major international asset management centre. The motivation behind the SFC’s consultation can be attributed to the general regulatory shift towards transparency in financial markets. Therefore, the SFC is attempting to ensure its regulation complies with broader international initiatives such as those of the International Organization of Securities Commissions (“IOSCO”). This is certainly validated by its statement that it’s considerations on the Fund Manager Code of Conduct (“FMCC”) and the Code of Conduct are ‘to ensure that our regulations are properly benchmarked to evolving international standards. 


CL: Who would all the proposals apply to? 


BC: The proposals are designed to enhance the FMCC, and the Code of Conduct applies to all persons licensed by or registered with the SFC whose business involves the management of collective investment schemes and discretionary accounts. Moreover, the SFC is attempting to encompass all licensed or registered fund managers, regardless of whether the funds are domiciled in Hong Kong or overseas and if the funds in question are private or public. 


CL: What are some of the key proposals of the FMCC, and what impact will they have on those affected? 


BC: The SFC’s proposed revisions to the FMCC can be confined to four areas.


The first being its revisions to securities lending which it deems will address ‘shadow banking risks’. Fund managers will now be required to implement a series of policies, namely collateral valuation and management as well as a haircut policy and a cash collateral reinvestment policy for any over-the-counter transactions made on behalf of the funds they are managing. ​

​The second proposal by the SFC concerns the safe custody of fund assets and attempts to align its standards with those established by IOSCO. It stipulates that fund assets must be separated from the assets of the fund manager and that individual client’s assets should be recorded and reconciled where they are held in an omnibus of accounts. Furthermore, fund managers should appoint an independent custodian and disclose key custodial arrangements, conflicts and risks policies to investors.

The third proposed change to the FMCC is with respect to managing the liquidity risk of a fund. The SFC will ensure that managers implement effective liquidity management policies that are in line with the investment strategy of the fund as well as its underlying obligations and redemption policy. These policies need to be reviewed and maintained as necessary. Moreover, the use of these policies should allow for appropriate stress testing, the results of which should be reviewed by a responsible committee. The SFC also submits in its proposals that Liquidity risk management tools should only be used when appropriate and with the investors interests in mind. ​​​ 


Finally, the SFC proposes that funds disclose their maximum level of leverage to investors to aid in transparency. In calculating the maximum level of leverage, fund managers are advised to take into account financial leverage arising from borrowings and synthetic leverage arising from the use of derivatives. 


CL: What are some of the key proposals for the Code of Conduct, and what impact will they have on those affected? 


​BC: The SFC’s proposals for the Code of Conduct consist of two major factors which intend to enhance point-of-sale transparency.


The first is with regards to the conduct of intermediaries when defining themselves as ‘independent’. The SFC clarifies that it no longer regards an intermediary as independent should they receive monetary or non-monetary benefits from other parties in the distribution of an investment product to clients, or if the intermediary has any relationships with the product issuers. 


The SFC’s second key proposal is aimed at the varied disclosure practices which may not help investors compare costs and fees amongst different intermediaries. Accordingly, the SFC has enforced a disclosure of monetary benefits received or receivable by the intermediary which are unquantifiable, at or before point-of-sale on a per transaction basis. Fund managers therefore will have to disclose the annualized range of monetary benefits received and the maximum annual dollar amount of monetary benefits receivable in prescribed form. 


CL: One of the key proposed amendments to the FMCC pertains to securities lending and repo with the aim of addressing shadow banking risks.  Will the proposal be effective in reducing these risks in the long run?

BC: New policies required to be implemented include the “collateral valuation and management policy” and “eligible collateral and haircut policy”, which need to comply with guidance on haircut methodology standards by the Financial Stability Board. A second proposal requires a cash collateral reinvestment policy to be put in place with the aim of ensuring liquidity of assets in the portfolio, which should be stress tested in case of calls for ongoing return of cash collateral. Fund managers are advised to obtain access to relevant information from third-party agents where there is an agency arrangement in place.  


​In addition, risk management policies such as a haircut policy and selection criteria of securities lending counterparties are now required to be disclosed in fund offering documents. Fund managers are also subject to an information reporting system, under which they should provide information regarding securities lending, repo and similar over-the-counter transactions, at least annually and upon request. 

Going forward, securities lending and repo in the funds arena will be under tighter regulation and scrutiny should the proposals be adopted. It is expected that fund managers, whether private or public, will have to amend fund offering documents to include the relevant information and policies. It will address the current lacuna in shadow banking risk management by the SFC where only SFC-authorized funds are under obligations when engaging in securities lending, repo and over-the-counter transactions.



For further information, please contact:


Kristi Swartz, Managing Partner, Bryan Cave

[email protected]