On 21 March 2017, the Securities and Futures Commission (SFC) published its consultation conclusions on proposed changes to the position limit regime in Hong Kong. Expected to come into force on 1 June 2017, the changes include relaxing the existing stock options contracts position limit, raising the ceiling for the existing client facilitation excess position limit six-fold, and more importantly introducing three new excess positions for ETF market makers, index arbitrage activity, and asset managers. This bulletin focuses on the new excess position for asset managers.
The position limits regime in Hong Kong was originally established as a protective measure following the Asian financial crisis to prevent and discourage the build-up of large positions that may pose a danger to the orderly functioning and stability of Hong Kong's financial markets.
In September 2016, the SFC consulted in relation to the regime for Hang Seng Index (HSI) and Hang Seng China Enterprises Index (HHI) futures and options contracts and stock options contracts with a view to enhancing Hong Kong’s position as a major international financial centre, while at the same time being in line with international moves to encourage on-exchange trading to improve transparency in the options and futures markets.
The consultation paper proposed that the SFC would be empowered under the Securities and Futures (Contracts Limits and Reportable Positions) Rules (Cap. 571Y, Laws of Hong Kong) (Rules) to authorise an asset manager to hold or control HSI and HHI futures and options contracts up to 300% of the statutory position limit (Asset Manager Excess Position) subject to, among other things, the asset manager having assets under management (AUM) of at least HK$100 billion.
On 21 March 2017, the SFC published its consultation conclusions on the proposed changes, and confirmed that it would adopt all of its proposals, including the proposed Asset Manager Excess Position.
Importantly, the SFC also lowered the minimum AUM for asset managers from HK$100 billion to HK$80 billion.
The introduction of the Asset Manager Excess Position and the lowering of the minimum AUM should be welcomed by asset managers; these relaxations will provide increased flexibility for a larger number of asset managers to use HSI and HHI futures and options.
Nevertheless, it needs to be borne in mind that there are a number of hoops, beyond the minimum AUM, through which asset managers must jump before they may apply for an excess position: (a) they must be licensed by or registered with the SFC for Type 9 (asset management) regulated activity (overseas managers without the relevant SFC licence or registration are not eligible for the relaxation); (b) a prescribed application process will need to be followed, including satisfying the SFC as to the asset manager’s genuine business need and the adequacy of its internal controls and risk management; and (c) the SFC must be satisfied that any authorised excess would not be “prejudicial to the interest of the investing public having regard to the prescribed limit and the liquidity of the futures contract or stock options contract in question”.
Not surprisingly, the SFC has made it clear that it will keep the revised limits under review and make further changes in the future if felt appropriate.
The amendments to the position limits regime for Hong Kong asset managers are part of the broader on-going stated intention on the part of the SFC to promote Hong Kong as a strong international asset management centre. Asset managers in Hong Kong should assess the extent to which the incoming changes may be applicable to them and may allow for increased use of exchange-traded futures and options as part of their business.
The SFC intends to submit the proposed amendments to the Rules to the Legislative Council before the end of March 2017. Subject to the negative vetting legislative process, the amended Rules are expected to come into effect on 1 June 2017.