Oversight: Streamlined requirements for master-feeder ETFs

Funds offered on a public basis in Hong Kong must be authorised by the Securities and Futures Commission (SFC) under the Securities and Futures Ordinance (SFO). This requirement applies not only to unlisted mutual funds but also to exchange traded funds (ETFs) listed on The Stock Exchange of Hong Kong Limited (SEHK). The detailed rules governing such funds are set out in the SFC's Code on Unit Trusts and Mutual Funds (UT Code). It should be noted that in Hong Kong, the primary regulator for ETFs in general is the SFC not the SEHK.

Currently, under Chapter 7.12 of the UT Code, the SFC will authorise a fund as a feeder fund if the relevant fund invests 90% or more of its total net asset value in a single collective investment scheme (master fund). The UT Code permits an index tracking ETF to adopt a master-feeder structure provided that both the feeder ETF and the underlying scheme (i.e. the master ETF) are authorised by the SFC. This poses issues where the master ETF is listed in another jurisdiction and has not been authorised by the SFC. The relevant master ETF may have already been established for a number of years and be subject to detailed home jurisdiction requirements. Accordingly submitting the proposed master ETF to a further application to the SFC as well as compliance with the UT Code will likely be burdensome and expensive, nullifying the advantage of the feeder ETF.

The SFC has consistently tried to allow more flexibility in a master-feeder ETF structure so that an SFC-authorised feeder ETF may invest its assets in an overseas-listed master ETF which is not authorised by the SFC or listed on the SEHK. The intent is to facilitate the development of the available types of ETF listed on the SEHK and to provide, in a more cost-effective manner, greater investment choices for Hong Kong investors.

Accordingly the SFC first issued a circular in late December 2019 (the Circular) to do so and has subsequently issued a supplemental circular in February 2022 (the Supplemental Circular) which, together with the Circular, set out the requirements under which the SFC will consider authorising feeder ETFs where the master ETF is not authorised by the SFC.