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The Ucits code for investment trusts, launched in Europe in 2002 and revamped most recently in March last year (to ôUcits-3ö), allows funds domiciled in Dublin, Luxembourg and the United Kingdom and marketed across Europe to expand their investment resources, including the use of derivatives.
The SFC has found that for many products, the Ucits-3 code is very close to its own, and it is willing to authorise these without separate vetting.
But this will not extend to all funds registered for pan-European sale under Ucits-3. Luxembourg-domiciled Sicavs registered under Ucits-3 have the most liberal regime and can invest in real-estate investment trusts, long/short funds, other open-ended hedge funds, funds of funds and gold bullion securities û which will still be required to prove full compliance with SFC rules.
The advent of Ucits-3 has posed a problem for jurisdictions such as Hong Kong where the great majority of mutual funds are Sicavs. Global fund managers wish to market their Sicavs throughout Europe under the Ucits-3 regime and were unwilling to launch a separate fund just for the Hong Kong market.
As a result the Hong Kong SFC raced to approve on an ad-hoc basis most existing funds to avoid a wave of delistings. Other regulators in Singapore, Taiwan and South Korea faced a similar issue, if to a lesser degree, and these markets have experienced some de-listings as a result.
This new decision goes part way and makes the SFC the first regulator to accept parts of Ucits-3 without requiring its own approvals. It will be a relief to fund managers looking to market their Sicavs into Hong Kong in a cost-affordable way, and allow Hong Kong, a wealthy but small marketplace, to retain its attractiveness to global fund managers.
The SFC has already authorised over 1,300 funds under the European code but will now be able to accept some Ucits-3 products under chapter 8 of its code on unit trusts and mutual funds, not on a case-by-case basis.
The SFC notes, however, that its easing of the registration process will not yet be applied to warrant funds, leveraged funds, futures and options or hedge funds. Nor does it apply to funds listed in other European jurisdictions such as Germany, Italy and Spain.
The SFC found chapter 8 of its code hewed closely to Ucits-3 rules for certain products, which made it easy to accept them. For example, under both rules, a fund of funds cannot invest more than 10% in warrants, leveraged funds or futures-and-options funds unless that is the primary objective of the fund. Similarly in both regimes, money-market funds are subject to the 10% limit in terms of holding instruments from a single issuer.
The situation gets a little murkier regarding capital-guaranteed funds and index funds. Ucits-3 funds will be ædeemedÆ to comply with certain SFC rules but required to prove compliance with others.
Ucits-3 index funds will be deemed to comply with SFC rules on six fronts, including investment restrictions, but will have to prove compliance with existing rules in seven others including reporting requirements. The SFC has retained its right to deem an underlying index ineligible.
More information can be found at the SFCÆs website: http://www.sfc.hk/sfcRegulatoryHandbook/EN/sfcRegulatoryHandbookTBServlet
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