Index-based exchange traded funds (ETFs) in Hong Kong could soon be promoted to the public, if chang...
Index-based exchange traded funds (ETFs) in Hong Kong could soon be promoted to the public, if changes to the Securities and Futures Commission (SFC) code is agreed.
Until now, the only ETF to be authorised by the SFC is the TraHK fund, but the consultation paper on proposals to include index funds in its Unit Trusts and Mutual Funds code could lead the way to more ETFs being approved. It is thought the SFC will revise the code as soon as the Securities and Futures Bill at the Hong Kong legislative council is passed, which is expected to be by the end of the year.
According to Keith Docherty at Linklaters & Alliance, mutual funds have had limited success in Hong Kong, so if the new proposals are agreed, it remains to be seen if the public will choose to invest in them.
The proposed provisions identify four key points the index must conform to if authorisation is to be given. It must: be set-up by a reputable company; have transparency in how it was established; be broadly based; provide documentation on disclosures and warnings; and notify the SFC when significant events affect its performance.
No single part of the portfolio can exceed 40% of the value of the index and the top five stocks must be reasonably liquid. Where a stock exceeds 10% of the index, the normal rule, that no single stock can represent more than 10% of the NAV of a fund, will be waived.
After authorisation, any major incidents affecting an index will need to be communicated to the SFC and notice may be given to the fund investors. The offering document must include warning information, for example where there could be a risk with tracking errors.
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