Amendments to Hong Kong Code on Unit Trusts and Mutual Funds Effective 1 January 2019

Amendments to the regime for SFC-authorised funds under the Code on Unit Trusts and Mutual Funds took effect on 1 January 2019.


  1. The minimum capital requirement for management companies of SFC-authorised funds has increased to HK$10 million (from HK$1 million), but does not apply to entities to whom the investment function is delegated.
  2. The key personnel requirement has been relaxed so that multinational management companies managing public funds no longer require two key personnel for each public fund as dedicated full-time staff with five years’ experience of managing public funds with reputable institutions. These companies need only belong to a well-established fund management group and demonstrate the requisite experience and resources and an appropriate oversight system for public fund administration, on a group-wide basis,.
  3. Eligibility requirements for trustees and custodians have been revised to require them to be part of a banking group or otherwise subject to prudential regulation and supervision. Their general obligations were revised to meet the standards on the custody of fund assets set by the International Organisation of Securities Commissions. The scope and level of internal control reviews performed by independent auditors appointed by trustees and custodians.


Amendments to Chapter 7 of the Code on Unit Trusts modernised the core investment requirements for SFC-authorised funds to include provisions on securities lending, repo (i.e. sale and purchase) and reverse repo transactions, and provide greater flexibility for investing in derivatives.

Key changes are:

  1. a group limit where the aggregate value of a fund’s investment in, or exposure to, entities within the same group may not exceed 20% of the fund’s net asset value (“NAV”);
  2. a separate diversification limit on cash deposits where the value of a fund’s cash deposits made with the same entity or entities within the same group may not exceed 20% of the fund’s NAV;
  3. cash deposits may exceed the 20% limit in specific circumstances including: (i) before launching the fund; (ii) after launch and before the fund is fully invested; (iii) cash proceeds from the liquidation of investments before the merger or termination of the fund; (iv) upon receipt of subscription proceeds pending investment; and (v) when cash is held for settlement of redemption and other payment obligations;
  4. A general principle requiring a fund’s investments to be liquid has been included. A fund’s investments in illiquid assets (i.e. securities and other financial products or instruments that are not listed, quoted or dealt in on an organised market) are now subject to a maximum limit of 15% of the fund’s NAV;
  5. Funds’ ability to lend, guarantee or otherwise become liable for a third party’s indebtedness with the consent of the trustee or custodian has been removed. The prohibition on funds lending is now absolute. Funds’ borrowing limit has been reduced to 10% of NAV (from 25% previously) - but borrowing restrictions do not apply to back-to-back loans, securities lending transactions, and repo transactions complying with 7.32 to 7.35 of the Code;
  6. An overall limit of 50% of a fund’s net asset value has been imposed on plain vanilla funds’ use of derivatives for investment purposes (but not hedging purposes). The revised calculation method for the overall 50% limit excludes the use of derivatives which would not result in incremental leverage at the fund portfolio level. The use of derivatives in (i) netting, hedging and risk mitigation; (ii) cash flow management; (iii) market access or exposure replication (without incremental leverage at the fund portfolio level); and (iv) investment in conventional convertible bonds may be excluded from the calculation of the funds’ net derivative exposures;
  7. SFC-authorised funds with derivative investments exceeding 50% of NAV will be regarded as derivative funds subject to enhanced distribution requirements under 5.1A and 5.3 of the Code on Unit Trusts;
  8. The management company of a fund using derivatives for hedging or risk mitigation purposes must comply with the hedging principles under 7.25 of the Code on Unit Trusts;

SFC-authorised funds must now disclose in the product’s Key Facts Statement the purpose of, and expected maximum leverage arising from, derivative investments based on the Commitment Approach (i.e. where derivative positions acquired for investment purposes are converted into their equivalent prevailing market values in their underlying assets).


Unlisted index funds and index tracking exchange traded funds (“Passive ETFs”) must comply with Chapters 8.6 and 8.8 of the Code on Unit Trusts if their derivative investments exceed 50% of their NAV based on the commitment approach.  Amendments made include:

  1. For an index to be acceptable it must be “broadly based”. It will generally be too concentrated if it has a single constituent security weighting at more than 20%, but the weighting limit for the largest single component may be 35% in exceptional conditions, e.g. in markets where certain securities are highly dominant,. An index with few constituent securities (e.g. five) will not be broadly based even if it technically meets the 20% or 35% requirement.
  2. A manager of an SFC-authorised Passive ETF must put arrangements in place so that there is at least one market maker for each trading counter of the ETF who will give at least three months’ notice prior to terminating market making arrangements. If a Passive ETF’s net derivative exposure exceeds 50% of its total NAV, it must disclose to investors information about the financial derivative instruments acquired, e.g. counterparty exposure and collateral information. Where a Passive ETF undertakes securities financing transactions exceeding 50% of total NAV, it must also disclose information on those transactions on an ongoing basis.


New Chapter 8.10 governs active ETFs which are new to Hong Kong’s market. Active ETFs are funds listed and traded on HKEx which are actively managed and do not track the performance of an index or benchmark. Active ETFs are subject to the investment restrictions under the Core Investment Requirements in Chapter 7 of the Code on Unit Trusts and must update and publish indicative NAV per unit or share every 15 seconds during trading hours. Active ETFs must publish full portfolio information to the public monthly with a one-month time lag.


New Chapter 8.11 of the Code on Unit Trusts codifies the requirements for closed-ended funds seeking SFC authorisation. It includes the following:

  1. Funds must be widely held;
  2. Closed-ended funds must have procedure(s) and mechanism(s) to be widely held;
  3. They must have a broad base of holders having regard to the Listing Rules’ adequate shareholder spread requirement for investment companies listings;
  4. Closed-ended funds must put in place measures and mechanisms to address any prolonged significant discount of its trading price on HKEx to its NAV. These measures must be fair and properly disclosed;
  5. Any form of redemption, takeover or merger undertaken by a closed-ended fund must be carried out in a manner that is fair and equitable to all holders. The SFC must be consulted as early as possible.

Solicitor, Charltons Law, Hong Kong

With a background in banking and debt capital markets in London and Hong Kong, Kim joined boutique corporate law firm, Charltons, in 2003 and focuses on Hong Kong corporate finance regulation, including IPOs, listed company regulatory compliance, SFC licensing, funds, and debt capital markets.  Her main interest is the development of Hong Kong regulation to facilitate Hong Kong’s continued growth as Asia’s premier international finance centre.  Key areas of interest currently include continued broadening of access to Hong Kong’s stock exchange, crypto assets, crowd-funding, fintech, virtual banking and green banks.