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Authored by: Pinky Siu and George Ho
On 25 February 2022, the Hong Kong Securities and Futures Commission (SFC) published a supplemental circular (Supplemental Circular) which further streamlines the requirements for eligible exchange traded funds (ETFs) adopting a master-feeder structure.
The streamlined requirements for eligible ETFs adopting a master-feeder structure were first introduced by the SFC in December 2019, as discussed in our earlier article (available here). In essence, provided that certain conditions are met, the SFC will allow an SFC-authorised feeder ETF to invest its assets in an overseas-listed master ETF without the latter obtaining the SFC authorisation.
Before the relaxation in the Supplemental Circular, the overseas-listed 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 (SEHK). The SFC is now prepared to relax the fund size and track record requirements for overseas-listed master ETFs. Under the revised requirements announced in the Supplemental Circular, an eligible master ETF must have a fund size of not less than USD 400 million and a track record of more than one year at the time of the feeder ETF’s listing on the SEHK.
Notwithstanding the relaxation on the fund size and track record requirements, the following conditions remain unchanged:
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 adopt physical replication of the underlying index through either a full replication or a representative sampling strategy; and
d) 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 disclosure.
The relaxation aims to provide greater flexibility to ETF issuers and to offer more investment choices to investors. This would facilitate the growth of Hong Kong ETF market while maintaining an appropriate level of investor protection.
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