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The Securities and Futures Commission (SFC) published a circular on 16 December 2019 which introduces a streamlined approach in respect of the authorization of index tracking exchange traded funds (ETF) adopting a master-feeder structure. In essence, the SFC is prepared to allow an SFC-authorized feeder ETF to invest its assets in an overseas-listed master ETF without the latter obtaining the SFC authorization on a case-by-case basis, so long as certain conditions are met.
Before this relaxation, index-tracking ETFs adopting a master-feeder structure were permitted only if both the feeder ETF and the master ETF were authorized by the SFC.
To rely on the streamlined approach, the feeder ETF must be a Hong Kong-domiciled ETF authorized by the SFC and managed by a management company which is licensed or registered for type 9 regulated activity and has a good compliance record.
In addition, the master ETF should, at a minimum, meet the following key eligibility requirements:
| (a) | the master ETF must be a scheme regulated in a recognised jurisdiction managed by a management company in an acceptable inspection regime or a scheme eligible under a mutual recognition of funds arrangement; |
| (b) | the master ETF, together with its management company and trustee/custodian, must have a good compliance record with the rules and regulations of its home jurisdiction and (in the case of master ETF) the listing venue; |
| (c) | the master ETF must have a fund size of not less than USD 1 billion and a track record of more than five years at the time of the feeder ETF’s listing on the Stock Exchange of Hong Kong; |
| (d) | the master ETF must adopt physical replication of the underlying index through either a full replication or a representative sampling strategy; and |
| (e) | the master ETF’s engagement in securities financing transactions should not exceed 50% of its total net asset value unless there are comparable safeguards and disclosures. |
The SFC commented that the streamlined approach is adopted in response to requests from the industry for greater flexibility in the master-feeder ETF structure, with an aim to facilitate the development of ETF product offerings in a more cost-effective manner, thereby providing more investment choices to investors.
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