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