Compiled by: Blog, Bailu Living Room
On December 22, the official website of the Hong Kong Securities and Futures Commission announced the "Notice on Funds Involving Virtual Assets Recognized by the SFC", replacing the "Virtual Asset Futures Trading" issued on October 31, 2022. Traded Fund Circulars".
Also pointed out: For virtual assets (such as Bitcoin, Ethereum) that are allowed to be traded on licensed trading platforms, the license Institutions can issue and manage corresponding spot ETFs, and subscribe and redeem them in kind and in cash on licensed trading platforms or recognized financial institutions.
The following is a compilation of the full text:
This circular sets out the requirements that the Securities and Futures Commission (SFC) must meet when considering authorizing investment funds1 involving virtual assets. According to Sections 104 and 105 of the Securities and Futures Ordinance, funds offered to the public in Hong Kong (virtual asset funds authorized by the Securities and Futures Commission) exceed 10% of their net asset value (NAV).
This circular replaces the "Virtual Asset Futures Exchange Traded Fund Circular" issued on October 31, 2022.
Globally, the pattern of virtual assets (hereinafter referred to as VA) has been Evolving rapidly. Both retail and professional investors now have access to a wider and greater number of investment products that provide exposure to value-added risk, including exchange-traded funds (ETFs) linked to value-added risk offered in major overseas markets, and getting more popular. Demand for these products has also increased in Hong Kong.
In light of these developments, the SFC has introduced a regime to allow certain VA service products to be offered to the public in Hong Kong subject to appropriate investor protection measures. For example, in October 2022, the Hong Kong Securities and Futures Commission began accepting applications from ETFs that obtain VA exposure primarily through futures contracts. The Hong Kong Securities and Futures Commission’s Virtual Asset Trading Platforms (VATPs) licensing regime also comes into effect in June 2023, enabling Hong Kong investors to directly access large-scale spot VATs, subject to certain qualification requirements and robust investor protection measures.
This circular sets out that SFC-authorized funds must (i) directly invest in the same spot VA tokens that the Hong Kong public can trade on VATPs licensed by the SFC ; and/or (ii) obtain indirect investments in such VA, such as through futures and other exchange-traded products traded on a conventional regulated futures exchange.
Authorized by the CSRC VA funds should comply with the "Umbrella Principles" and the "Unit Trusts and Mutual Funds Code" (UT Code). and;
The additional requirements listed below, as well as the relevant requirements in the Joint Notice on Intermediary Virtual Asset-Related Activities (Joint Notice), shall be met.
The management company of VA funds recognized by the China Securities Regulatory Commission should have (i) Good regulatory track record; and (ii) at least one qualified employee with relevant experience in managing VA or related products.
Managers of VA funds authorized by the SFC are subject to additional terms and conditions imposed by the Licensing Department (if applicable)
VA funds authorized by the Hong Kong Securities and Futures Commission should only invest (directly or indirectly) in Hong Kong VA tokens that can be traded by the public on the VA trading platform licensed by the Hong Kong Securities and Futures Commission.
VA funds authorized by the Securities Regulatory Commission can invest directly or indirectly according to the following requirements on eligible VA tokens.
For VA futures, only those trading on traditional regulated futures exchanges are allowed, but the management company must demonstrate that (i) the relevant VA futures have sufficient Liquidity and (ii) related VA futures roll costs are manageable, and how these roll costs are managed.
Indirect exposure to qualified VAs through other exchange-traded products is subject to applicable requirements in the UT Code and other requirements that may be imposed by the Securities and Futures Commission.
VA funds authorized by the Securities Regulatory Commission should not have leverage exposure to VA at the fund level.
For VA funds approved by the Securities Regulatory Commission that mainly use futures investment strategies, active investment strategies need to be adopted to achieve flexibility in the investment portfolio (such as having multiple diversification of futures positions across expirations), rollover strategies, and handling any market disruptions.
Carried out by VA funds recognized by the Securities Regulatory Commission Spot VA transactions and acquisitions should be conducted through SFC-licensed VA institutions or recognized financial institutions (or subsidiaries of locally registered authorized institutions) and comply with the regulatory requirements of the Hong Kong Monetary Authority (HKMA). In particular:
(a) For cash subscriptions and redemptions, it is expected that spot VA ETFs authorized by the SFC will be traded through value-added transactions licensed by the SFC The platform (on or off the platform) acquires and sells spot value-added transactions; and
(b) For physical subscriptions, participating dealers must place local or overseas The spot VA held is transferred to the custody account of the spot VA ETF approved by the SFC on the VA trading platform or authorized institution licensed by the Hong Kong Securities Regulatory Commission (or a subsidiary of a locally registered authorized institution). This process is the opposite of physical redemption.
The spot VA ETF approved by the Securities and Futures Commission can be subscribed and redeemed in kind and in cash.
For ETFs investing in spot VA, its responsible person should be (i) a corporation or registered institution licensed by the Securities and Futures Commission; and (ii) subject to Subject to additional terms and conditions imposed by the Licensing Department (if applicable).
The trustee/custodian of a VA fund recognized by the SFC shall only Its VA custody functions (if applicable) are delegated to (i) value-added service end customers licensed by the Securities and Futures Commission, or (ii) authorized institutions (or subsidiaries of locally registered authorized institutions) that comply with the VA custody standards issued by the HKMA from time to time. ).
The trustee/custodian and any grantee responsible for the custody of VA shares held by a VA fund authorized by the SFC shall comply with the following requirements:
< p style="text-align: left;">(a) VA Holdings should ensure that its own assets and those held for other clients are kept separate;( b) Most VA should be stored in cold wallets. VA holdings and holding periods stored in hot wallets should be minimized to prepare for subscription and redemption needs; and
(c) Assistance should be ensured Tokens and private keys are securely stored in Hong Kong; (ii) strictly restricted to authorized persons; (iii) sufficiently resistant to speculation (e.g., by generating them in an undetermined manner) or collusion (through multi-signatures and key splitting) measures such as tablets); and (iv) appropriate backups to mitigate any individual risk.
For the valuation of spot VA, the management of VA funds recognized by the China Securities Regulatory Commission Firms should adopt an indexing approach based on VA trading volume on major VA trading platforms (i.e. a benchmark index published by a reputable provider that reflects a significant share of the underlying spot VA trading activity).
The management company should identify all required service providers (e.g. funds Managers, PDs, market makers and index providers) all have sufficient capabilities and can provide support to VA funds approved by the SFC at any time.
Sales documents of VA funds approved by the Securities Regulatory Commission ( Investment limits and major risks related to VA risks should be disclosed (including product highlights).
The KFS of a VA fund approved by the Securities Regulatory Commission should disclose in advance the investment objectives and the main risks related to VA risk exposure, such as:
(a) Price risk, custody risk, network security risk and fork risk of spot VA;
(b) VA futures investments are subject to potentially significant roll costs and operational risks (such as margin risk and risks associated with related party enforcement actions).
Managers of SFC-authorized VA funds are required to conduct investor education before launching the product in compliance with the current provisions of the UT Code.
Please refer to the joint circular regarding intermediaries and SFC-authorized VAs Relevant regulations on fund distribution.
When performing its functions, the Securities Regulatory Commission may consider introducing what it deems necessary or Appropriate additional provisions or conditions.
Except as otherwise provided in paragraph 29, the above provisions do not apply. Applicable to schemes in recognized jurisdictions (including transferable securities scheme funds) and schemes under mutual recognition of funds arrangements.
For funds that (i) own or intend to own VA exposure exceeding 10% of their net asset value and wish to seek authorization from the Securities and Futures Commission, or (ii) plan to obtain more than Existing SFC-authorized funds with 10% of their net asset value must first consult and obtain approval from the SFC.
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