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Regulatory updates on investments in virtual assets and insurance-linked securities by SFC-authorised funds

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Authored by: Eve Leung

On 8 July 2022, Hong Kong’s Securities and Futures Commission (SFC) issued new guidance and requirements regarding investments in virtual assets and insurance-linked securities (ILS) by SFC-authorised funds.

(a) Investments in virtual assets

The SFC stated that authorised funds are not expected to invest directly in virtual assets. Management companies should consult the SFC in advance if their funds may have any indirect investment in or exposure to virtual assets. Such indirect investment or exposure should not be more than 10% of the relevant fund’s net asset value and should be consistent with the objectives, investment strategy and the overall risk profile of the fund.

(b) Investments in ILS and ILS-related products

The SFC clarified that authorised funds are prohibited from investing in ILS issued in Hong Kong and their repackaged products and derivatives. ILS means securities issued through insurance securitization, e.g. catastrophe bonds. An SFC-authorised fund may invest in ILS issued outside Hong Kong and/or any ILS-related products, subject to an investment limit of not more than 10% of the fund’s net asset value. The fund should disclose in its key facts statement (KFS) the types / examples of such ILS investments together with its expected total investment limit. The risks associated with ILS investments should also be disclosed in the offering document. The fund’s management company is required to put in place suitable and adequate risk management and control systems to monitor and manage all risks relevant to such investments.

Management companies of existing authorised funds are required to update / enhance their offering documents (including the KFS) in accordance with the above requirements as soon as reasonably practicable and at the next earliest opportunity if the funds may invest in ILS.

In light of the new requirements, management companies should review the investment policies of their authorised funds in respect of the above investments as soon as possible and consider whether any updates or enhancements are necessary. They should consult the SFC if there are any questions.

The SFC has updated the following documents to provide further guidance on the above investments. The SFC’s information checklist for new fund application has also been enhanced to include confirmations relating to such investments.

a) Guide on Practices and Procedures for Application for Authorisation of Unit Trusts and Mutual Funds

b) Frequently Asked Questions on the Code on Unit Trusts and Mutual Funds

c) Information Checklist for Application for Authorisation of Unit Trusts and Mutual Funds under the Revamped Process

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