Proposed changes to position limits and large open position reporting requirements

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Authored by: Pinky Siu

The Hong Kong Securities and Futures Commission (SFC) has launched a two-month consultation on proposed changes to the position limits and large open position reporting regime in Hong Kong.

By way of background, the Securities and Futures (Contract Limits and Reportable Positions) Rules (Rules) (i) impose restrictions on the maximum number of futures contracts or stock options contracts traded in Hong Kong that may be held or controlled by a person, and (ii) require a person holding or controlling a reportable position for futures contracts or stock options contracts to file a notice.

Key proposals related to funds

One of the SFC’s key proposals is to provide clarity and legal certainty about how the Rules are to be applied to unit trusts and mutual funds, which is summarised below:

Application to unit trusts

• The SFC noted there might have been misconception that a fund established as a unit trust (which does not have a legal personality) is not subject to the position limits and reporting requirements under the Rules. The proposed amendments seek to clarify that, for a unit trust, the trustee shall have the obligation to observe the prescribed limits in relation to the positions of the unit trust, as well as to report the unit trust’s reportable positions.
• Where a person holds or controls positions of more than one unit trust, the SFC will require the person to separately apply the prescribed limits and reportable positions to the positions of each unit trust. Therefore, if a trustee acts for multiple unit trusts, it should report the reportable positions for each unit trust separately and ensure that all positions comply with the prescribed limits. In contrast, an asset manager would have to aggregate the positions of all the funds over which it has discretion to comply with the Rules.
• For reporting on behalf a unit trust, the unit trust’s name should be specified in the notice rather than the trustee’s identity.
• For the purposes of the Rules, a unitholder is not regarded, only by virtue of the unitholder holding one or more units in a unit trust, as holding or controlling futures contracts or stock option contracts in respect of a unit trust.

Application to umbrella funds

• Given that each sub-fund is managed independently accordingly to its own investment policy, the SFC would like to clarify that the prescribed limits and reportable positions are applicable to each sub-fund individually and separately, as if each sub-fund were a stand-alone fund.
• However, for a fund manager who has discretion over the positions of all the sub-funds in question, aggregation would still be expected. As the fund manager has discretion in relation to the positions held or controlled for the funds it manages, it is not allowed to disaggregate the positions for each fund for the purposes of applying the Rules.

The SFC believes the proposed changes would ensure that unit trusts and sub-funds of an umbrella fund observe prescribed limits and report reportable positions in a manner which is consistent with how these positions are managed and monitored in practice.

However, unit trusts, umbrella funds and their key operators such as the trustees, custodians and fund managers will have to adjust their monitoring arrangements and systems to ensure compliance with the prescribed limits and reporting requirements, if they are currently monitoring the positions in a different manner. Nevertheless, the SFC considers that overall the proposed amendments should not create undue burden on the fund management industry.

Other proposals

The other proposals in the consultation include:

• expanding the list of specified contracts so as to enable exchange participants and asset managers to seek authorisation from the SFC to hold or control certain new contracts in excess of the prescribed limit;
• amending the Rules to provide for reporting of positions traded during holidays;
• clarifying that a clearing participant is not considered to have discretion over a client’s position when it exercises its right to dispose of its client’s position due to the client’s default;
• introducing an authorisation mechanism for a clearing participant to hold excess positions when providing clearing services; and
• prescribing the position limits and reportable positions for new futures and options contracts.

Market participants are interested parties are invited to submit their comments on the proposals by 27 June 2022. The SFC has not indicated any proposed implementation timeline in the consultation paper.

Key Contacts

Pinky Siu

Partner | Financial Services

Email or call +852 2825 9568