Hong Kong's SFC set for bank-like liquidity guidelines for funds

Hong Kong's SFC set for bank-like liquidity guidelines for funds

Hong Kong’s Securities and Futures Commission is set to introduce liquidity guidelines for authorised investment funds, similar to those used by the banking industry, according to sources close to the regulator.

The changes will be introduced “within days” and without public consultation, according to industry sources quoted in a report published in the South China Morning Post on Tuesday. The move comes as the SFC bids to rein in fund leverage levels and reduce the possibilities of so-called fire sales in investment funds, as their accumulated asset size becomes a source of potential systemic financial risk.

The industry and regulatory sources said that the SFC has already conducted a “soft consultation” with industry associations and some of the funds in the marketplace and are now set to release the guidelines within a matter of days.

Phased-in introduction

The sources also told SCMP that new rules aimed at capping the leverage level that funds will be able to attain, are also set to be added, and will follow after the phased-in introduction of the liquidity rules in the market.

The new rules are understood to aim to classify fund assets into different liquidity categories, against which funds will be asked to hold “internal liquidity targets” or “preferred liquidity targets”, that will essentially be recommended cash buffers and reserves that could be used to meet potential liquidity events.

Regulatory expectations

It also sets out regulatory expectations for the composition of fund balance sheets, fair valuation, stress testing requirements, and governance requirements creating escalation channels to dedicated, independent risk management staff in the case of market liquidity events.

The regulator also wants fund-invested assets and investment strategies to be in line with their liquidity and redemption policies promised to investors to prevent fire sale events in the future, the sources said.


According to the SFC’s last available statistics, US$2.27trn worth of assets are managed by the funds industry in the city.

Speaking at the Asia Securities Industry & Financial Markets Association (ASIFMA) market liquidity conference on Tuesday, Julia Leung, SFC executive director in charge of investment products, explained that some markets, such as emerging market fixed income securities, are “known to be illiquid and investors are alert to this,” said Leung.

“Equities markets are generally seen as liquid”

“But equities markets are generally seen as liquid,” she said. “Events in the past 12 months have challenged this accepted wisdom. First there was the A-share market correction last summer.

“More than half of the listed stocks suspended trading after hitting price fall limits or citing various reasons to voluntarily suspend trading,” she said.

Leung pointed to a “short-lived circuit breaker”, which, she says brought the whole market to a standstill on multiple occasions during the first week of 2016.

“During these episodes, fund managers were rudely awakened to the fact that, actually, equities could be illiquid too,” she said.

Leung indicated the regulator was still wrangling over whether the capital buffers should be “preferred” versus “internal” in the coding of the new rules with the final wording set to be finalised.