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SFC Announces Changes to Position Limit Regime

3 mins
Posted on Dec 21 2023 by Samuel Banks

The first changes to the SFC Position Limit Regime since 2017 take effect on 22 December 2023, altering four major requirements for investment managers.

Following its announcement back in June, the following changes will become effective almost immediately on 22 December.

The main changes include:

  1. Clarifying the requirements for reporting proprietary holdings
  2. Introducing reporting requirements for contracts traded on holidays
  3. Clarifying the existing statutory requirements for the application of prescribed position limits and reporting levels for unit trusts and sub-funds of umbrella funds on an aggregated or separated basis
  4. Addition of contracts with position limits and reporting levels and the removal of for certain HKEX products

The SFC regularly reviews the regime requirements and makes changes to ensure the regime remains appropriate and relevant to the Hong Kong financial market. However, these are the first changes made since the amendments made in 2017

Here is a brief summary of the changes coming into effect:

Requirements for reporting of proprietary holdings

The updates to the regulation clarify the treatment of contracts that are controlled by a firm for its own account and on behalf of funds. The limits should be applied to both the aggregate of all holdings and the aggregate of the proprietary holdings (so excluding funds). Since the limits are generally calculated on a net basis, it is possible to cross a limit on a proprietary basis and not on an all-holdings basis.

Contracts traded during holidays

The HKEX introduced holiday trading in May 2022 to provide trading of certain derivatives contracts during public holidays in Hong Kong that fall on a weekday (ie. Holiday trading day). Previously, the Rules only required reporting of reportable positions on Hong Kong business days. With the most recent amendments, the SFC has introduced section 6(1A), which clarifies that the prescribed limits and reporting levels are applicable during Hong Kong holidays. 

Requirements of Unit Trusts and Sub-funds of Umbrella Funds

The SFC has clarified in Section 7 that the prescribed limits and reporting levels are to be applied to unit trusts and sub-funds under an umbrella fund. Specifically, the prescribed limits and reporting levels should apply to each individual fund and each individual sub-fund of an umbrella fund. In cases where a fund manager has discretion over the positions in more than one fund, the prescribed limits and reporting levels should be applied at the below two levels:

  1. Aggregately to his own position and the positions he holds or controls for each fund or each sub-fund
  2. Separately to his own position and to the positions he holds or controls for each fund or each sub-fund. 

Given that the prescribed limits and reporting levels apply to any person who “holds or controls” positions, trustees are still subject to the requirements of the Rules. If a trustee has measures in place to ensure that an asset manager managing its unit trusts is in compliance with the Rules, the SFC will consider that the trustee has discharged its obligations under the Rules. 

Addition/Removal of Position Limits and Reporting Levels

The SFC has added several contracts to the definition of a “specified contract”. “Specified contracts” are contracts in which the SFC allows market participants to hold or control excess positions with respect to certain futures and options contracts. 

In addition, the SFC is expanding Schedule 1 of the Rules to include new contracts that will be subject to the prescribed limits and reporting levels. 

Conclusion

The rapid implementation of these amendments means it is crucial for fund managers to take proactive steps to ensure they are compliant. Find out more about our Position Limits monitoring service.