News & Insights

New opportunities for type 1 intermediaries to act for Hong Kong OFCs

Private open-ended fund companies (OFCs) can now appoint intermediaries licensed or registered for type 1 (dealing in securities) regulated activities by the Securities and Futures Commission (SFC) to act as custodians (T1 Intermediary Custodian), aligning custody and prime brokerage arrangements with major overseas fund jurisdictions.

Under the current requirements, a T1 Intermediary Custodian must:

  • not be subject to the restriction that it cannot hold client assets;
  • for a licensed corporation, maintain at all times paid-up share capital of not less than HK$10 million and liquid capital of not less than HK$3 million;
  • have at least one responsible officer or executive officer responsible for the overall management and supervision of its custodial function; and
  • be independent of the investment manager.

In addition, the private OFC must be a client of the intermediary in respect of its business in type 1 regulated activity.

Overseas prime brokers which are subject to equivalent regulations as type 1 intermediaries in their home jurisdictions may also act as custodians for private OFCs. In the SFC’s Consultation Conclusions on Proposed Enhancements to the Open-ended Fund Companies Regime published on 2 December 2020, the SFC indicated that an overseas entity may be eligible if it is either (i) authorised to act as a trustee or custodian of a scheme in overseas jurisdictions and prudentially regulated and supervised by an overseas supervisory authority acceptable by the SFC or (ii) is a banking institution incorporated outside of Hong Kong subject to prudential regulation and supervision on an ongoing basis.

Multiple custodians are permitted, as is delegation to one or more sub-custodians.

Intermediaries intending to expand their services to cater for private OFC clients should take the opportunity to update their internal custodian agreements to ensure that the terms and conditions of which meet the stipulated requirements and rules governing custodians under the Securities and Futures Ordinance, the SFC’s OFC Code and the Securities and Futures (Open-ended Fund Companies) Rules.

Related Services and Sectors:

Investment Funds, Regulatory

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