Recent Updates to HKSI Paper 6 Version 2.6.2 Manual – Regulation of Asset Management

The following updates are examinable from 2 October 2024

 

TOPIC 1 – GENERAL REGULATORY FRAMEWORK

 

Depositary

  • An authorised CIS is required to appoint a trustee/custodian to safeguard the scheme’s assets, ie a depositary
  • A CIS may appoint an institution subject to oversight by an overseas regulatory body, but it can also appoint a person licensed/registered for Type 13 regulated activity (providing depositary services for relevant CISs)
  • A relevant CIS is one that is authorised by the SFC, but excludes certain schemes under the Mandatory Provident Fund Schemes Ordinance (MPFSO)

Open-ended Fund Companies

  • An overseas corporate fund can re-domicile to Hong Kong, subject to:
    • Meeting all the requirements applicable to a newly established OFC under the SFO and the OFC Rules; and
    • Various documentary and procedural requirements

 

General Principle 4 – Information about Clients

Investor Identification Regime

  • An intermediary involved in trading on behalf of a client is required to give each client a unique and permanent Broker-to-Client Assigned Number (BCAN) and to maintain up-to-date client identification data (CID)
  • Each BCAN and CID must be submitted in a BCAN-CID Mapping File whenever a trade is submitted to the SEHK on behalf of a client. The order must also include the intermediary’s SFC assigned unique central entity identification number (CE number)
  • OTC securities trades involving ordinary shares and REIT units traded on the SEHK are required to be reported directly to the SFC – reporting must be within 3 days of the trade, including intermediary CE number and client CID
  • The intermediary must ensure that individual clients give consent to the use of their data

Conduct Requirements for Providing Depositary Services to Authorised CIS

  • Persons engaged in Type 13 regulated activity (depositaries), namely top-level trustees and custodians of authorised CIS will need to be licensed and will be subject to corresponding conduct requirements

Management and Supervision

  • A Depositary should communicate with the management company in an effective and timely manner
  • Any legal breaches should be reported to the management company
  • If a third party is engaged to carry out any relevant activity, the Depositary should assess the party’s competence. The Depositary shall remain primarily responsible for such activities

Operational Controls and Compliance

  • The Depositary’s record keeping policies should comply with applicable legal and regulatory requirements and any requirements in the constitutive documents of the authorised CIS
  • The Depositary should ensure the following:
    • The CIS is operated in accordance with the CIS’s constitutive documents
    • Subscription and redemption procedures are processed on a timely basis and related proceeds are appropriately deposited/paid out
    • Calculation methodology of net asset value (NAV) complies with the constitutive documents
    • Distribution payments are in line with constitutive documents of the CIS and are timely, complete and accurate
    • CIS/management company has proper procedures/controls for bank account openings
    • The Depositary is able to identify cash flows that are inconsistent with CIS operations
    • Monitoring of investments to ensure they are consistent with investment limitations/restrictions as per the constitutive documents
    • Assess and manage risks associated with custody of CIS property
    • Controls to ensure that different classes of investors are treated fairly

CIS Authorised under the Code on REITs

  • REIT depositaries should also be aware of the following:
    • Pricing errors are not relevant as REITs are traded on the SEHK
    • Where appropriate, the Depositary will ensure that assets are properly segregated and held so that the Depositary has effective oversight

 

 TOPIC 2 – BACK-OFFICE COMPLIANCE
  • Licensed corporations must maintain not less than the amount of paid-up share capital shown below. If engaged in more than one activity, a licensed corporation must keep the highest paid-up capital specified
Regulated Activity Required Paid-up Share Capital

(s.5 and Sch. 1 Table 1 FRR)

Dealing in securities

(i)             where it provides securities margin financing

(ii)            others

 

HK$10 million

HK$5 million

Dealing in futures contracts HK$5 million
Advising on securities HK$5 million
Advising on futures contracts HK$5 million
Asset management HK$5 million
Providing credit rating services HK$5 million
Providing depositary services for relevant collective investment schemes (CISs) HK$10 million
  • If engaged in more than one activity, Liquid Capital must be more than the highest Required Liquid Capital, as specified below:
Regulated Activity Required Liquid Capital

(s.6 and Sch. 1 Table 2 FRR)

Dealing in securities

(i)    where it is an approved introducing agent or trader

(i)             others

 

HK$500,000

 

HK$3 million

Dealing in futures contracts

(i)    where it is an approved introducing agent, futures non-clearing dealer or trader

(ii)            others

 

HK$500,000

 

HK$3 million

Advising on securities

(i)             and may not hold client assets

(ii)            others

 

HK$100,000

HK$3 million

Advising on futures contracts

(i)                  and may not hold client assets

(ii)                 others

 

HK$100,000

HK$3 million

Asset management

(i)             and may not hold client assets

(ii)            others

 

HK$100,000

HK$3 million

Providing credit rating services

(i)                  and may not hold client assets

(ii)                 others

 

HK$100,000

HK$3 million

Providing depositary services for relevant CISs HK$3 million
  • The Client Securities Rules also cover the responsibilities of intermediaries licensed/registered for Type 13 regulated activity (providing depositary services for relevant CISs) and their associated entities
  • As per the Client Money Rules, a Type 13 (providing depositary services for relevant CISs) licensed corporation that receives money of a CIS must, within three business days of receipt, deposit the money into an account designated as a trust account or client account for the relevant CIS
  • Contract Notes Rules do not apply to an intermediary licensed or registered for Type 13 regulated activity (providing depositary services for relevant CISs) or their associated entities
  • Under the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules (“OTCD Reporting Rules”), a licensed corporation that is a counterparty to the transaction in the course of undertaking a Type 13 activity (providing depositary services for relevant CISs) as a trustee for a CIS is not subject to the reporting obligation

 

TOPIC 3 – ASSET MANAGEMENT REGULATIONS

 

Custody of Fund Assets

  • Where a custodian is appointed, the custodian should be properly qualified, be functionally independent from the Fund Manager, and be any of the following:
    • A registered trust company
    • An AFI or a subsidiary of a licensed bank
    • An overseas bank or trust company with satisfactory supervision
    • A depositary licensed or registered to carry on Type 13 regulated activity under Part V of the SFO; or
    • Any other appropriately qualified institution
  • A trustee/custodian must be either:
    • A banking institution incorporated outside of Hong Kong which is subject to prudential regulation and supervision on an ongoing basis, or an entity which is authorised to act as trustee/custodian of a CIS and prudentially regulated and supervised by an overseas supervisory authority acceptable to the SFC; or
    • A depositary licensed or registered to carry on Type 13 regulated activity

 

TOPIC 4 – MISCONDUCT

No updates to report

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