Oversight – SFC Consults on Proposed Regulation of Custodians

Protection of fund assets has become a regulatory priority in the aftermath of the global financial crisis. The International Organisation of Securities Commission (IOSCO) has called on regulators to protect the integrity of assets of collective investment schemes (CIS), by promoting record-keeping and asset segregation, and practising proper supervision and monitoring of trustees and custodians of CIS. The current regulatory regime in Hong Kong, under which the provision of trustee or custodial services for CIS is generally not a regulated activity, differs in approach to that of major overseas regulators that oversee trustee, custodial or depositary services for public and private funds. In Europe, the Undertakings for the Collective Investment in Transferable Securities (UCITS) regime requires a single depositary to be appointed for each fund, which must be:

• a national central bank;
• a credit institution authorised by its national competent authority; or
• a legal entity authorised by its national competent authority to carry on depositary activities.

There are similar requirements in Europe for private funds under the Alternative Investment Fund Managers Directive (AIFMD).

After a period of soft consultation the Securities and Futures Commission (SFC) published a consultation paper (Consultation Paper) on 27 September 2019, setting out its proposed new regulatory activity under the Securities and Futures Ordinance (SFO) to be called Type 13 (acting as a depositary) regulated activity (RA13).

This Oversight provides a summary of the proposals. The Consultation Paper is available on the SFC’s website. There is a three-month public consultation and the SFC has invited comments on the issues raised in the Consultation Paper, or comments on the relevant matters that may have a significant impact on such issues.