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The Securities and Futures Commission (SFC) issued a circular on 17 April 2020 (Circular) to managers and market makers of SFC authorised exchange traded funds (ETFs) reminding them of their responsibility to manage ETFs in the best interests of investors. The circular was prompted by the suspension of market making activities by the sole market maker of an ETF due to the quarantining of some of its trading staff.
The market making function is critical to the liquidity of ETFs, and liquidity is one of the main concerns of the SFC in the context of products sold to retail investors.
An ETF manager should:
An ETF market maker should:
ETF managers should satisfy themselves through appropriate due diligence that market makers which they appoint are adequately resourced to discharge their function and that they have appropriate contingency plans in place to manage the risk of interruption of their operations. This obligation applies on appointment and during the life of the appointment, so regular monitoring is necessary.
The SFC reminds ETF managers to familiarise themselves and comply with the listing requirements of including the procedures for the publication of announcements or notices on the SEHK’s website such as the publication windows cut-off times, so that they can ensure that information affecting secondary market trading is disclosed in a timely manner.
The Circular requires the market maker of an ETF to alert the ETF manager, the SFC and the SEHK if it experiences or foresees that it will experience any operational difficulties or disruptions that may affect the proper discharge of its market making functions. ETF market makers which are themselves listed (whether in Hong Kong or overseas) need to consider whether such information amounts to price sensitive non-public information relating to the market maker itself, in which case provision of such information could potentially trigger a requirement for the market maker to disclose the information on the exchange where the market maker is listed.
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