The Hong Kong office of Deacons responded to the SFC’s November proposals to enhance asset management regulation and point-of-sale transparency at the end of February.
Under the proposals, which were put forward to ensure Hong Kong’s regulatory framework meets international standards, including those formulated as part of the Financial Stability Board’s investigation into and reform of shadow banking, fund managers would be required to report securities lending and repo transactions to investors on an annual basis or upon request.
In response, Deacons said: “While we appreciate the concern of regulators globally to be kept informed regarding repos and similar transactions in light of concerns over the potential impact of the ‘shadow banking system’ on financial stability, we believe that the disclosure and reporting requirements proposed in paragraphs 32 and 33 [of the SFC’s consultation paper] are disproportionate.”
“In the context of authorised funds, the investment products department of the SFC can and does require extensive disclosure regarding such transactions in offering documents.”
“In the private fund arena, we believe it is a matter for the manager to make a judgement as to the extent of the disclosure required. Investors in private funds are in a position to raise questions regarding such investments if they cause them concern.”
The SFC has also proposed that fund managers that engage in securities lending, repo and similar over-the-counter transactions should put in place a cash collateral reinvestment policy that seeks to ensure that assets “are sufficiently liquid with transparent pricing and low risk to meet reasonably foreseeable recalls of cash collateral”.
They would also be required to “stress test the ability of a cash collateral reinvestment portfolio to meet foreseeable and unexpected calls for the return of cash collateral on an ongoing basis”.
The proposed changes will be made to two SFC codes of conduct. In November, SFC CEO Ashley Alder said: “A robust and responsive regulatory regime is fundamental to the development and growth of an international asset management centre. As part of the SFC’s broader initiative to enhance Hong Kong’s position as a major international asset management centre, it is important to ensure that our regulations are properly benchmarked to evolving international standards.”