Hong Kong SFC Urges Fund Managers to Review Liquidity Risk

Hong Kong's securities regulator has asked fund managers in the territory to ensure they manage their liquidity risk in line with international expectations and local best practices, amid concerns that mass redemptions during a crisis could trigger liquidity shortages. 

The Securities and Futures Commission ("SFC") on Monday issued a circular with guidance to the industry, setting out a range of local best practices that it said reflected well on previously issued guidance by the International Organization of Securities Commissions ("IOSCO"). The SFC said fund managers in the territory were expected to enhance their internal liquidity risk management process in view of its latest guidance by 1 January 2017.

The regulator's circular was based on the results of a recent review of the liquidity risk management practices of a number of fund managers, which helped it identify some good practices for managing liquidity risk. 

"Based on the review results and the international regulatory principles and good practices, the SFC has formulated this guidance to assist managers to ensure effective liquidity risk management of their funds," the regulator said. "Accordingly, this guidance contains a set of principles with which Managers are expected to comply."

The guidance includes examples of good practices which, whilst not binding, should assist managers when applying the principles to the specific circumstances of the funds under their management, the SFC said.

All fund managers registered with the SFC should ensure that the offering documents of existing SFC-authorised funds are up-to-date and provide all information necessary for investors to make informed investment decisions, the regulator added. 

It said managers should review their fund offering documents in view of its circular, and make any necessary updates and revisions as soon as practicable. It said that if updates or revisions fall under 11.1 of the Code on Unit Trust and Mutual Funds, prior approval from the SFC is most likely required.

International Developments

The SFC said its guidance was based on international standards published by IOSCO in recent years, including the Principles on the Suspension of Redemptions (2012), Principles on Liquidity Risk Management (2013), and Principles on the Valuation of Collective Investment Schemes (2013). 

It said these three sets of principles set out an overall framework for managing the liquidity risk of open-ended funds, with fund managers expected to take them into account and comply with them when managing their funds. Additionally, the SFC also issued a circular to management companies and trustees or custodians of SFC-authorised funds on fair valuation of fund assets in 2015.

The regulator it would keep track of international regulatory developments in respect of liquidity risk management of open-ended funds and that it may provide further guidance or impose additional requirements at a later stage, if necessary.


North Asia editor for Thomson Reuters Regulatory Intelligence. He is based in Hong Kong.