On 21 March 2017, the Securities and Futures Commission (SFC) released its Consultation Conclusions on Proposed Enhancements to the Position Limit Regime and Associated Amendments to the Securities and Futures (Contracts Limits and Reportable Positions) Rules and the Guidance Note on Position Limits and Large Open Position Reporting Requirements. The revised Securities and Futures (Contracts Limits and Reportable Positions) Rules (the Rules), reflecting the Consultation Conclusions, were gazetted on 24 March 2017 and are expected to come into effect on 1 June 2017.
What the Rules do
The Rules prescribe position limits for holding or controlling futures contracts and options contracts traded on the Hong Kong Futures Exchange and the Stock Exchange of Hong Kong. The Rules also prescribe reporting requirements for large open positions in such futures contracts and options contracts. The reporting requirements are triggered at a lower threshold than the position limits.
Changes that will be made
The revised Rules raise the statutory position limit for stock options from 50,000 contracts to 150,000 contracts. The revised Rules also permit certain entities to exceed the position limits provided certain conditions and approvals are met. Relevant for asset managers, the revised Rules introduce a new provision that allows asset managers that meet certain requirements to seek authorisation from the SFC to hold or control Hang Seng Index and Hang Seng China Enterprises Index futures and options contracts in excess of the prescribed limit for fund management purposes (referred to as the Asset Manager Excess Position Limit).
For the purposes of the Asset Manager Excess Position Limit, the SFC may only grant an authorisation:
- to an intermediary that is (i) licensed or registered for Type 9 regulated activity under the Securities and Futures Ordinance (asset manager); and (ii) manages assets having a total value of not less than HK$ 80 billion;
- where such asset manager needs excess positions to facilitate its asset management activity; and
- the asset manager has effective internal control procedures and risk management systems to manage the potential risks arising from the excess.
The SFC will also need to be satisfied that granting the authorisation would not be prejudicial to the interest of the investing public having regard to the prescribed limit and the liquidity of the relevant futures or options contract.
Recent enforcement cases highlight importance of complying with the Rules
All licensed corporations need to be aware of the position limits and reporting thresholds under the Rules, and need to have procedures in place to ensure compliance with the Rules. The SFC has brought a number of enforcement actions relating to failures of internal controls and procedures that include failures to comply with the position limits and/or to report as required under the Rules. In the past year, the SFC has imposed fines of HK$2.5 million, HK$15 million and HK$18.5 million on licensed corporations for such failures.