ComplianceOne Newsletter - April 2024
The topics discussed in this monthly newsletter are as follows:
1. China considers to limit investment of offshore Chinese municipal bonds by QDLP
2. Asia’s First Spot Virtual Assets ETFs are launched in Hong Kong
3. HKEX announces the development of ORION Derivatives Platform
4. Hong Kong Government extends the subsidiary scheme for OFC and REIT
5. The joint SFC-HKMA thematic review of the distribution of non-exchange traded investment products
6. Climate-Related Disclosure requirements extended to listed companies
7. OSL as the first to be granted the AMLO license
MARKET NEWS
1.China considers to limit investment of offshore Chinese municipal bonds by QDLP
On 24 Apr 2024, a report from Reuters revealed the incidence of Mainland China to curb the lavish issuances of offshore bonds through the mechanism of Qualified Domestic Limited Partnership (QDLP) from local municipal governments which were already burdened by the huge local debts.
The loosely regulated quota-based QDLP had been launched since 2012, and it has recently come to the attention of the central government that the use of such mechanism for local government offshore debts issuances would attenuate the Beijing government’s efforts to tackle the local debt risks.
The China Securities Regulatory Commission (CSRC) made queries to asset managers holding the QDLP licenses of their exposure to offshore debts of “local government financing vehicles (LGFVs, also known as 地方政府融資平台 or 城投平台), and how the QDLP quotas were used. It was noticed that the total local government bond issuances reached a new high in January 2024 compared to the highest volume in Nov 2022.
SIGNIFICANCE:
For reason that the process of obtaining QDLP licenses and raising QDLP funds were handled by around 10 local governments (some examples like Tianjin, Liaoning, Guangxi, Chaongqing etc.) rather than the central government which subsequently made the mechanism one of the loose and flexible investment channels to be taken advantage with. The LGFVs were originally introduced to raise funds for infrastructure projects which recently turned out to be over-invested and aggravated by the plummeting property markets. The Beijing government has pushed forward remedial measures to contain the debt risks, and to halt some ongoing state-owned infrastructures projects as imminent solutions.
2.Asia’s First Spot Virtual Assets ETFs are launched in Hong Kong
On 30 Apr 2024, HKEX was pleased to announce the listing of Asia’s first Spot Virtual Asset (VA) (namely, Bitcoins and Ethereums) ETFs, increasing the diversity of products tradeable in the Hong Kong’s markets and further manifesting Hong Kong as the leading ETF marketplace in the region nearby.
A snapshot of the Spot VA ETFs is as below:
The three ETF issuers are China Asset Management (Hong Kong) Limited, Harvest Global Investments Co., Ltd, and Bosera Asset Management (International) Co., Limited.
Following the successful launch of the VA Futures ETF in late 2022, turnover of the total three VA Future ETFs increased a few folds from HKD$8.9 million to HKD$51.3 million in the first quarter of 2024. The parallel launches of spot VAs and VA futures ETFs enhance the liquidity in the ETFs markets and provide more flexibilities to accommodate investors with variegated risk profiles and investment horizons.
SIGNIFICANCE:
The accesses to spot VAs through exposures in ETF channels provide an alternative to traditional investors, both professional investors and retail investors who are still sceptical and conservative to the new crypto exchanges, by directly participating through the conventional HKEX they are familiar with.
Yet, brokers providing accesses to retail clientele should still be mindful of providing sufficient risk disclosure and assessment of the clients' knowledge in the products in a compliant manner as a matter of suitability requirements.
Some interesting product features of these Spot VA ETFs from their futures ETF counterparts are that in-kind subscriptions and in-kind redemptions are available which facilitate investors who have already invested in spot VAs to shift to their corresponding proxy, i.e. the ETFs.
3.HKEX announces the development of ORION Derivatives Platform
On 18 April 2024, the HKEX announced the development of the Orion Derivatives Platform (ODP), offering enhanced trading, clearing and risk management capabilities.
This new in-house developed platform is expected to be launched in 2028, which will help elevate the competitiveness of the HKEX in the global derivative marketplace. The HKEx is dedicated to building “future-ready” technology platforms and operations as its priority to advocate the market participants in delivering long-term, sustainable growth and development.
The ODP platform will be built on a modular architecture, making it easier to introduce new products, enhance microstructure and add new capabilities to the market. ODP will offer enhanced trading and clearing capabilities to clients, including the potential of near 24-hour trading, additional order types, an industry-standard interface, as well as an enhanced testing and onboarding experience. The launch of ODP demonstrates HKEX’s ongoing strategic commitment to driving innovations in our financial markets through the development of best-in-class technology platforms.
SIGNIFICANCE:
As the new HKEX Chief Executive Officer, Bonnie Y Chan, has said: “Developing an in-house platform that is adaptable, efficient, and scalable, and would give us a unique competitive advantage in the global derivatives space. The launch of ODP will strengthen HKEX’s capability to support the needs of global investors, and cement Hong Kong’s leading position as Asia’s risk management centre and an international financial centre.”
4.Hong Kong Government extends the subsidiary scheme for OFC and REIT
On 26 Apr 2024, the SFC announced the details of the three-year extension of the Government’s grant scheme to subsidise the setting up of open-ended fund companies (OFCs) and real estate investment trusts (REITs) in Hong Kong.
To further attract the set-up of OFCs to be incorporated in or re-domiciled to Hong Kong and the SFC-authorized REITs, the extended scheme covers up to 70% of eligible expenses, subject to a cap of HKD$1 million per publicly offered OFC, HKD$500,000 per privately offered OFC and $8 million per REIT.
The grant scheme has been well-received since its inception in May 2021. and the extension by the Government for another three years will definitely help boost Hong Kong’s competitiveness and development as a preferred fund domicile for such a diversified industry regime. Up to end of Apr 2024, there were 86 public OFCs and 877 private OFCs registered under the SFC.
The extended scheme will be available for applications from 10 May 2024 to 9 May 2027 on a first-come-first-served basis. Detailed eligibility criteria of the scheme are enclosed in SFC Eligibility criteria of the grant scheme for OFCs and REITs for OFCs opting for it.
5.The joint SFC-HKMA thematic review of the distribution of non-exchange traded investment products
On 18 Apr 2024, a thematic review conducted by HKMA and SFC jointly had identified some issues on intermediaries’ practices in performing product due diligence (“PDD”) and suitability requirement (“SBR”); remedial measures by intermediaries are required to address the issues accordingly.
Some key findings of the review are as follows:
(1) The assignments of risk rating to investment products as part of PDD do not incorporate crucial factors like the leverage deployed, credit events relating to the product issuers, heightened market risks, adverse political environments and the like.
(2) Intermediaries were exposed to the risks of making inappropriate recommendations to clients if the risk return profiles of the products were not adequately assessed and accurately reflected in the product risk ratings used for the suitability assessment.
(3) Structured products were the most prevalent type of non-exchange traded investment products sold by intermediaries; the risks inherent in the format the products were structured could be unlimited or far beyond what the investors have expected to bear.
(4) Some salespersons may not have the required knowledge to explain to the investors the characteristics and risks of the structured products; and it is imperative for the intermediaries to provide adequate training to the relevant staff.
(5) Intermediaries are reminded to exercise due skill, care and diligence in selecting investment products for different risk categories of clients and reach an assessment of the products commensurate with the client’s profile.
(6) All intermediaries are reminded of their obligations to: (i) give due consideration to all the relevant circumstances specific to a client; (ii) disclose all the relevant information to a client in order that informed investment decisions can be made.
6.Climate-Related Disclosure requirements extended to listed companies
On 19 Apr 2024, The Stock Exchange of Hong Kong (SEHK) published its consultation conclusions on the enhancement of climate-related disclosure (“CRD”) requirements for listed companies in HK.
The new CRD requirements, effective from 1 January 2025, is the first step to align local sustainability disclosure requirements with the IFRS Sustainability Disclosure Standards. To facilitate the launch, SEHK has also published an Implementation Guidance to assist listed companies to kick off the new regime which will be implemented on a balanced and phased approach.
SIGNIFICANCE:
As Ms Julia Leung, SFC’s Chief Executive Officer, has said: “The new regime on climate-related disclosures will give listed companies in Hong Kong a head-start in speaking the common international language of the International Sustainability Standards Board (ISSB) to the investing public and capital markets.”
The vogue for green finance has been sweeping over financial markets across various regions, the SFC has played the pioneer role in formulating guidelines for licensed corporations engaged in funds management to comply with the Climate-Related Risk Disclosure Requirements by the end of Nov 2022.
7.OSL as the first to be granted the AMLO license
OSL Digital Securities Limited (“OSL”) is the first service provider to be granted a license under the AML and CTF Ordinances (“AMLO”) by the SFC on 19 April 2024.
Up to now, only OSL is the first to be granted two licenses under the new dual licensing regime with both the SFO license (for security tokens) and AMLO license (for non-security tokens) at the same time.
SIGNIFICANCE:
To facilitate and ensure a seamless regulatory transition, a “dual licensing regime” had been introduced where existing services providers had to submit an application during the transition period from 1 Jun 2023 to 31 May 2024 with deadline for application submission on 29 Feb 2024. Those applicants which could meet the regulatory requirements were deemed to be licensed to operate on or after 1 Jun 2024 until a final decision has been made by the SFC on their license applications. If the SFC considers that some existing service providers (the applicants) cannot meet the relevant requirements of the transitional arrangement, a “No-deeming notice” will be issued to these applicants, together with those services providers which did not submit any applications before the deadline, will have to cease operation by 31 May this year.
For more details, please click on the title of the topic above.
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