A joint consultation paper ("Consultation Paper") on the rules and operation of the Asia Region Funds Passport (“Passport”) has been issued by Singapore, Australia, South Korea, New Zealand, Philippines and Thailand on April 16, 2014. The consultation closes on July 11, 2014.
Member economies of the Asia-Pacific Economic Cooperation (“APEC”) have been working towards developing the Passport with a view to facilitating cross-border offers of funds in the APEC region. On September 20, 2013, finance ministers from Singapore, Australia, New Zealand and South Korea signed a statement of intent to conduct joint public consultations on the detailed rules necessary to implement the Passport. Two more APEC economies, Philippines and Thailand, have since joined the Passport working group for the Consultation Paper.
The Consultation Paper sets out the proposals for the substantive rules that will apply to participating fund managers and Passport collective investment schemes (“CISs”). The primary objective of the Passport is to allow CISs established and regulated in one Passport member economy (the “home economy”) to be offered to retail and other investors in other Passport member economies (“host economies”) under a clearly defined framework which seeks to ensure that the laws and regulations of the participating economies are applied in a sound and coherent manner. The Passport framework adopts a partial approach to mutual recognition, with a mix of home economy and host economy regulations, as well as specific Passport rules, as set out in the summary table below:
Application of home economy regulations, host economy regulations and Passport rules
Types of CIS √
Location of CIS √
Offer in host economy √
Licensing of the Passport fund
Operational requirements √*
Experience requirements √
Capital adequacy √
Good standing √
Funds under management √
Operation of the passport fund
Custody arrangements √
Independent oversight √
Risk management √#
Investment restrictions √
Valuation basis for pricing √
Financial reporting and auditing √
Related party transactions √
Duties of operators √
Record keeping √
Dealing with investors
Disclosure (including annual and periodic
Distribution and licensing of distributors √
* Home economy operational requirements will be subject to compliance audit required by the Passport rules
# Governed by home economy rules with the additional compliance audit requirement in the Passport rules
Following this consultation, APEC economies who decide that they wish to be Passport member economies will
finalize the Passport arrangements in late 2014 to early 2015. It will then be up to Passport member economies
to implement the arrangements domestically. It is envisaged that these arrangements should be in place by 2016
when the Passport will commence operation.
Highlights from the Consultation Paper
We set out below a summary of the key proposals from the Consultation Paper:
(A) Basic Eligibility
1. Types of CIS • The rules will not restrict the legal structure of Passport funds other than to
require that they are regulated as a CIS by the home regulator in a manner
which is consistent with IOSCO principles and assessment methodology
• Passport CISs should be authorized for public offer (i.e. retail offer) in its
2. Money market funds
• A Passport fund must not be called a MMF or otherwise promoted as a MMF
in a host economy unless it complies with any specific additional
requirements for a MMF in the host economy.
3. Exchange - traded funds
• A passport fund must not be called an ETF in a host economy unless it
complies with any specific additional requirements for an ETF in the
• An ETF seeking to be listed in a host economy will have to comply with any
additional listing requirements applicable under the host
• If an ETF is not traded in the host economy and there is no provision for
ongoing redemption, this will be a key point for disclosure to investors.
4. Location of CIS • A Passport fund:
(a) must be constituted or established, and authorized in a Passport member
(b) its manager must be licensed or authorized, and have a principal place of
business in that same economy.
5. Home economy public
• Subject to the home economy regulations, interests in a Passport fund may
be offered in a host economy only if:
(a) there is an ongoing offer of the interests in the home economy;
(b) the offer attracts the offering and disclosure requirements of the home
economy that would apply to a public offer;
(c) the interests may be acquired by any member of the public in the
(d) information about the offer is made available to (host) intermediaries in
an equivalent manner in which information for the manager’s other
regulated CISs is made available;
(e) if commissions are paid by the manager to intermediaries for most of its
other regulated CISs, equivalent commissions are payable for the
Passport fund; and
(f) if the manager enters into contracts with intermediaries for distribution
of its other regulated CISs, substantially equivalent intermediary
contracts are entered into for the Passport fund.
(B) Manager of the Passport fund
6. Licensing of the manager • The manager of a Passport fund must be licensed or authorized under the
home economy regulations for managing or operating CISs.
7. Passport operational
• Compliance with home economy regulations applicable to the manager on
operational areas such as internal controls, risk management, compliance
framework and conflicts of interest will be subject to a new compliance audit
required by the Passport rules.
8. Track record of manager
• The manager of a Passport fund or its related party must have at least five
years experience as the manager of retail CISs that invest predominantly in
transferable securities or money market instruments.
• Any period(s) when the manager or related party was under the control of a
different person or entity cannot count towards the five year period unless:
(a) the new controller may itself enable the manager to meet the track
record requirement (as a related party); or
(b) the manager meets the track record requirement, and most of the
persons responsible for making discretionary investment decisions are
retained by the new controller, and the decision-making process of the
manager, under the new controller, remains substantially intact and
• The rationale for this requirement is to restrict a person or entity that does
not have the required level of operational experience from meeting the
requirement through the acquisition of a manager that does.
9. Qualifications of officers
of the manager
• The chief executive officer (“CEO”) of the manager must have a minimum of
10 years experience as an officer or employee of an entity that carries on
business in financial or capital markets (a “financial institution”).
• The manager must have at least two executive directors with a minimum of
five years experience as an officer or employee of a financial institution.
• Individuals responsible for making discretionary investment decisions for
the Passport fund must have:
(a) at least a bachelor’s degree in a relevant discipline, and a minimum of
three years (in the past five years) experience in financial or
(b) a minimum of five years (in the past seven years) experience in financial
or capital markets.
• There must be at least one person responsible for making discretionary
investment decisions for the Passport fund who is an officer or employee of
10. Capital adequacy • The manager must maintain shareholders’ equity of at least US$1 million.
• Where the manager has assets under management (“AUM”) exceeding
US$500 million, it must maintain additional capital equivalent to 0.1% of the
AUM in excess of US$500 million, up to a maximum of US$20 million of
11. Minimum AUM • At the time the manager seeks to have a CIS authorized as a Passport fund,
the manager and its related parties must have AUM of at least
• Only funds that invest at least 50% of their assets in Passport permissible
investments may be counted towards the US$500 million AUM requirement.
(C) Operation of the Passport Fund
12. Compliance audit • There must be an auditor appointed to conduct an annual compliance audit
in relation to the Passport rules and Passport fund operational requirements.
• The auditor must be independent. The individual who is in charge of the
audit of the Passport fund’s financial statements may not also be the auditor
for this Passport compliance audit (though the same audit firm may be used).
• As an exception, where the Passport fund is subject to oversight by a separate
and independent entity, for example a trustee, the trustee may conduct a
compliance audit on obligations applicable to the manager (but not on the
trustee’s own obligations).
• The auditor must carry out on an annual basis an audit of the Passport fund’s
compliance with the Passport rules and a defined set of obligations under
home economy regulations that help ensure the Passport fund operational
requirements are in place.
• Within three months following the end of the audit period, the auditor must
give the manager, trustee, home regulator and host regulator, a report that
states whether, in the auditor’s opinion, the Passport fund was operated in
compliance with the Passport rules and defined set of obligations for that
period, and if not in which respects this was not the case.
(D1) Investment Restrictions – Asset Classes
13. Permissible asset classes • A Passport fund will only be allowed to invest in:
(a) regulated CISs
(e) transferable securities;
(f) money market instruments; and
(g) depository receipts over gold,
subject to certain additional criteria.
14. Deposits • Deposits must:
(a) be with deposit taking institutions that are regulated broadly under the
guidelines of the Basel Committee on Banking Supervision (“BCBS”);
(b) be repayable on demand or have the right to be withdrawn on no more
than 31 days notice; and
(c) not be subject to loss of interest or penalty if repaid at the request of the
holder at a time that is more than 12 months after the date of deposit.
15. Derivatives • The underlying of a derivative must be:
(a) an investment that the Passport fund is entitled to hold other than a
(b) a rate of interest including a rate of inflation on the basis of which a rate
of interest is calculated;
(c) a currency of any jurisdiction; or
A “regulated CIS” is defined as a collective investment scheme that is constituted and authorized in a Passport member economy under regulatory
arrangements of that economy agreed by the Passport member economies, and the manager of which is authorized and has a principal place of
business in that economy.
(d) an index.
• The delivery of an asset under the derivative can only relate to an asset that
the Passport fund is permitted to hold, other than a derivative.
• If the underlying is an index, such index must:
(a) predominantly relate to financial assets or commodities (i.e. fungible
physical assets such as silver) that are regularly traded;
(b) have a clearly defined objective, or the market or sector which it aims to
represent is clearly defined;
(c) represent a reasonable benchmark for a market or sector for which it is
(d) not have an index provider that is a related party of the manager (or
where the two are related parties, there are effective arrangements in
place for the management of conflicts related to the index);
(e) have 100% of its constituents (excepting those related to commodity
prices) being investments that the Passport fund would be permitted to
(f) have no constituent exceeding 25% of the index; and
(g) information about the index (including index composition and
methodology) is freely accessible.
16. Transferable securities • A Passport fund can only hold transferable securities that are issued and
offered in a jurisdiction whose securities regulator is an ordinary or associate
member of IOSCO and where no liability arises from holding the security.
17. Money market
• A Passport fund must reasonably expect that each money market instrument
it holds will be able to be:
(a) closed out or sold for its market value on each business day in the place
where it was acquired; and
(b) reliably valued at its market value on each business day in the place
where it was acquired.
(D2) Investment Restrictions – Portfolio Allocation Limits
18. Single entity limits • Subject to certain exceptions, a Passport fund may not acquire an asset or
enter into a derivative or securities lending transaction if it will result in the
(a) more than 5% of its asset value in transferable securities and money
market instruments issued by the same entity, together with any
derivatives that have securities of that entity as the underlying
(b) derivatives or securities lending transactions with a single counterparty
that could expose the fund to a maximum potential loss of more than 5%
of its asset value should the counterparty default; or
(c) more than 20% of its asset value in deposits with, or depository receipts
issued by, the same entity.
• Exceptions include:
(a) the single entity limit may be raised to 10% if the manager has conducted
an assessment of the creditworthiness of the issuer, documented its
assessment and satisfied itself that the increased investments do not
impose a disproportionate increase in risk for investors given the
creditworthiness of the issuer;
(b) the single entity limit may be raised to 35% for transferable securities and
money market instruments issued or guaranteed by a government,
central bank or supranational organization (note the credit risk check
mentioned in (a) above is still required); and
(c) for index or benchmark funds, the single entity limit may be raised to the
percentage of the index constituent (as a proportion of the value of the
index) plus 2%, subject to a maximum of 25%.
19. Group limit • Subject to certain exceptions, a Passport fund may not invest more than 20%
of its asset value in:
(a) deposits, transferable securities or money market instruments issued by
entities controlled by the same entity, together with;
(b) any derivatives with counterparties controlled by that entity (the value of
the derivative here being the maximum potential loss the fund could
suffer in a counterparty default).
20.Underlying CIS limits • A Passport fund may not invest:
(a) more than 10% of its asset value in a single regulated CIS; and
(b) more than 30% of its asset value in regulated CISs in total.
• An exception to the above limits is available for feeder funds with a disclosed
investment strategy of investing at least 85% of its asset value in another
Passport fund (which itself cannot be a feeder fund).
21. Limit on unlisted
shares and interests in
• A Passport fund may not invest more than 10% of its asset value in unlisted
shares/stock and unlisted investment schemes (excluding regulated CISs).
22. Limit on investments
• A Passport fund (other than a feeder fund) must not acquired any securities
carrying voting rights that would enable it to exercise significant influence
(more than 25%) over the management of an entity (including a regulated
23. Limits on share of
securities or money
market interests on
• A Passport fund must not acquire more than:
(a) 10% of the non-voting securities of an entity other than a regulated CIS;
(b) 10% of the debt securities of an entity; or
(c) 10% of the money market instruments for which an entity is or may be
24. Depository receipts over
• A Passport fund must not invest more than 25% of its asset value in
depository receipts over gold.
(D3) Investment Restrictions – Derivatives
25. Derivative exposure limit
and counterparty criteria
• The global exposure limit of a Passport fund to derivatives and securities
lending is 20% of the value of its gross assets.
• Global exposure should be calculated based on the commitment approach.
• Netting and hedging arrangements may be taken into account to reduce the
exposure to derivatives when calculating the global exposure limit, subject to
• Where the acquisition of a derivative gives rise, or may give rise, to a future
commitment of the Passport fund, the exposure must be covered in
accordance with the Passport rules.
• The counterparty of a non-centrally cleared derivative should:
(a) be subject to prudential supervision by a financial supervisory authority
in its home jurisdiction broadly under the guidelines of the BCBS; or
(b) be authorized by a regulatory authority which is a member or associate
member of IOSCO to be a party to derivatives and subject to obligations
in relation to holding financial resources and having adequate
arrangements to manage risk.
(D4) Investment Restrictions – Securities Lending
26. Securities lending • A Passport fund may engage in securities lending, subject to certain
conditions, including conditions on collateral and minimum criteria for
• A Passport fund may not engage in securities lending to generate leverage
and the collateral obtained may not be reinvested (except in the case of
• A Passport fund may not lend/transfer more than 50% of its asset value.
(D5) Investment Restrictions – Lending, Guarantees, Underlying, Borrowing and Short-Selling
27. Lending, guarantees and
• A Passport fund may not engage in money lending, the provision of
guarantees or underwriting.
28. Borrowing • A Passport fund may borrow an amount up to 10% of its net assets provided
certain conditions are met, including:
(a) the purpose of the borrowing is for making redemption payments and
enabling the payment of expenses (other than expenses for making an
(b) the borrowed amount will be repaid in less than 31 days.
29. Short selling • A Passport fund may not engage in short selling.
30.Delegation of function • A manager may delegate any function allowed under its home economy
regulations subject to certain conditions.
• Where the portfolio management function is to be delegated:
(a) the delegate must be subject to regulation which, to the satisfaction of the
home regulator (following consultation with other Passport economy
regulators), provides substantially equivalent regulatory outcomes to that
applying in the Passport economies;
(b) the delegate is regulated by an organization that to the satisfaction of the
home regulator (following consultation with other Passport economy
regulators), has co-operation arrangements in place with the home
regulator which are comparable to those in place between the Passport
economy regulators; and
(c) the delegate meets the requirements for the eligibility for managers of
Passport funds under the Passport framework relating to capital,
experience, AUM and good standing.
31. Redemption currency • Redemptions may be paid in the currency of the Passport economy in which
the investor’s registered address is located, or if that address is not in a
Passport economy, the currency of any economy.
• If the redemption price is paid in a currency other than the currency of the
home economy, the amount paid in the relevant other currency must be:
(a) determined fairly and in accordance with a reasonable and documented
policy disclosed on the Passport fund’s website;
(b) based on a reasonable estimate of the market exchange rate applied to
the redemption price and any fees payable; and
(c) reduced to take account of the costs of the currency conversion.
(G) Financial Statements and Audit Report
32. Financial statements and
• A Passport fund must publish on an annual basis financial statements and an
audit report on the financial statements (together, the “report”), including
any translations required, within three months of the end of the
• For each host economy in which the Passport fund is offered:
(a) the report must also include (as a wrapper or otherwise) any other
information that is required in the host economy to be published or
provided to investors with the financial statements; and
(b) if so required by the host regulator, the report must be translated into
one or more of the official languages of the host economy, and such
translations must be certified in accordance with any requirements for
certified translations as determined by the host regulator.
(H) Dealing with Investors, Distribution, Disclosure, Marketing and Complaints
33. Host economy rules for
dealing with investors
• In general, the host economy regulations will apply to a Passport fund’s
interaction with investors in the host economy.
• A host economy may impose additional rules on Passport funds in relation to
their dealing with investors, though such rules are not meant to be unduly
burdensome. For example, a host economy may require the manager to
appoint a local representative to interface with the investors in the host
economy and to perform certain administrative functions.
34. Distribution and
• A Passport fund may only be distributed in a host economy in accordance
with the host economy’s regulations, including any regulations relating to the
use of local intermediaries (the distribution of a Passport fund will be treated
the same as the distribution of a local regulated CIS in the host economy).
35. Disclosure • Host economy regulations will apply to the disclosures required to be given
to investors in the host economy, including prospectus disclosures.
36. Marketing • Host economy rules will apply to the marketing of a Passport fund in the host
economy, including advertising rules
37. Complaints • Host economy regulations will apply to complaints handling including
(I) Process for Passporting a Fund
38. Application process • The first step would be to make an application to the home regulator for a
fund to be authorized as a Passport fund. The home regulator will then
assess whether such fund meets:
(a) the home economy’s eligibility and registration requirements to be a
regulated CIS; and
(b) the requirements applicable to Passport funds (including whether the
fund has the capacity to meet the requirements of the Passport rules).
• If the home regulator decides to authorize the fund as a Passport fund,
certain general information about the fund and its manager will be published
on the home regulator’s website.
• Once a Passport fund has been authorized by its home regulator, it may apply
for entry into each host economy that it wishes to be offered (a host economy
may also require certified translations of the application and documents).
• There are two possible processes for the host regulator assessment (to be
elected by each Passport member economy). Entry into a host economy will
(a) subject to the authorization of the host regulator, pursuant to a
streamlined process (in which case the Passport fund can be offered in
the host economy only after authorization by the host regulator, the
proposed assessment period being 21 days subject to usual assumptions
such as all requirements are met and responses to any queries from the
host regulator are given in a timely manner); or
(b) by way of a notification process (in which case the Passport fund can be
offered in the host economy after 21 days have passed from the
notification, and assuming the host regulator has not notified the fund
that it may not do so),
and in some economies, the host regulator will also need to assess the
compliance with disclosure requirements.
• The host regulator will focus on assessing the documents lodged with the
application by the host economy regulations (e.g. disclosure documents), and
will not generally reassess the Passport fund’s compliance with the home
economy regulations or the Passport rules.