Are you ready for the new requirements under the Hong Kong Fund Manager Code of Conduct?

The new requirements for Hong Kong fund managers under the Fund Manager Code of Conduct (FMCC) apply from November 17, 2018. For further information regarding these requirements, please refer to Hong Kong’s New Asset Management Regulations.

In order to facilitate fund managers’ compliance, the following is a summary of the new FMCC requirements. Note that the tables focus only on requirements applicable to fund managers that are responsible for the overall operation of a fund.

Managers should review their internal policies, as well as their investor offering and communication documents, to consider whether any changes are necessary. We can work with your team on reviewing and amending the fund documents and/or the internal policies to meet the requirements of the revised FMCC. If you require any assistance or have any questions regarding these requirements, please do not hesitate to reach out to us. 

Requirements on Internal Policies by Topic

Conflicts of Interest

Requirement

• Maintain and operate effective organizational and administrative arrangements to identify, prevent, manage and monitor any actual or potential conflicts of interests (FMCC Section 1.5)
  
  Note: Fund managers have a duty to act in good faith and in the best interests of the fund.

Risk Management

Requirements

• Establish and maintain policies and procedures relating to risk management (to identify risks, financial or otherwise) (FMCC Section  1.7.1 and Appendix 2)
  
  
• For each fund, implement risk management procedures to identify, measure, manage and monitor all risks relevant to each investment strategy (e.g., market, liquidity, counterparty, operational and other risks) (FMCC Section 3.11 and Appendix 2)
  

Delegation

Requirement

• Exercise due skill, care and diligence in the selection and appointment of third-party delegates (FMCC Section 1.10)

Leverage

Requirement

• Formulate policy to calculate leverage (FMCC Section 3.12)
  

Securities Lending and Repos 

Requirements

• Select third-party service providers (subject to the standard to act with due skill, care and diligence) (FMCC Section 1.10)
  
  Note: Policies and procedures with regards to appointment of third-party service providers must be consistent with the FMCC requirements.
  
  
• Establish a collateral valuation and management policy and a cash collateral reinvestment policyEstablish a collateral valuation and management policy and a cash collateral reinvestment policy (FMCC Sections 3.13.1, 3.13.2 and 3.13.5)
  
  
• Establish an eligible collateral and haircut policy to manage counterparty risk (consistent with Financial Stability Board’s recommendations) (FMCC Section 3.13.3)
  
  Note: If third-party agents are engaged, the agents’ policies must be consistent with the FMCC requirements.
  
  
• Stress test the ability of cash collateral reinvestment portfolio to measure foreseeable and unexpected calls for the return of cash collateral on an ongoing basis (FMCC Section 3.13.6)
  

Liquidity Risk Management

Requirements

• Establish, implement and maintain liquidity risk management policies and procedures (FMCC Section 3.14.1)
  
  
• Perform liquidity stress testing on an ongoing basis (FMCC Section 3.14.1)
  
  
• Conduct periodic reviews of the effectiveness of the liquidity management policies and procedures (FMCC Section 3.14.2)
  

Custodian / Safe Custody of Fund Assets

Requirements

• Exercise due skill, care and diligence in the selection, appointment and ongoing monitoring of the custodian (FMCC Sections 1.10 and 4.2.1)
  
  
• Ensure custodian is functionally independent (FMCC Section 4.1.2)
  
  Note: Custodian may be within the same group, but in such cases, there should be policies, procedures and internal controls in place to ensure that the persons performing the custody function are not the same as the persons performing the investment management function. 
  
  
• Have in place a formal custody agreement (FMCC Section 4.3.1)
  
  
• Ensure safety of fund assets:
  
  (a) Fund assets should be segregated from the assets of the fund manager, its affiliates and other clients; and
  
  (b) Fund managers should ensure that adequate safeguards are in place to appropriately record fund assets belonging to each client (with frequent and appropriate reconciliations being performed) (FMCC Section 4.1.1)
  

Valuation

Requirements

• Ensure the same valuation methodologies apply to valuation of similar types of fund assets, having regard to applicable generally accepted accounting principles as well as best industry standards (FMCC Section 5.3.1)
  
  
• Value fund assets on a regular basis, having regard to the type of assets and dealing frequency (FMCC Section 5.3.4)
  
  
• Appoint functionally independent party (e.g., internal or external auditor) to review the valuation policies, procedures and process (FMCC Section 5.3.7)
  
  
• Exercise due skill, care and due diligence in the selection, appointment and ongoing monitoring of the valuation agent (if applicable) (FMCC Sections 1.10 and 5.3.4)

House Orders 

Requirement

• Give priority to client orders if orders cannot be filled when dealing for a house account and client orders are aggregated. (FMCC Section 3.10)
  
  Note: Where a client is an institutional professional investor, such allocation can be effected on the terms specified by the client. 

Disclosure Requirements in Offering Documents and Investor Communication Materials by Section

Conflicts of Interest 

Requirement

• Actual or potential conflicts of interest (FMCC Section 1.5)
  

Leverage 

Requirement

• Leverage exposure and calculation of such exposure (FMCC Section 3.12)
  

Securities Lending and Repos 

Requirement

• Summary of the securities lending, repo and reverse repo transactions policy and the risk management policy (FMCC Section 3.13.8)
  
  Note: It is not a mandatory requirement to disclose this information in the offering documents. This can be disclosed in the offering documents or separately to the investors. 

Liquidity Risk Management 

Requirements

• Liquidity management policies (including an explanation of tools or exceptional measures that affect redemption rights), and liquidity risks (FMCC Section 3.14.1)
  
  
• Side letter arrangements relating to preferential redemption arrangements (FMCC Section 3.14.2)
  
  Note: It is not a mandatory requirement to disclose this information in the offering documents. This can be disclosed in the offering documents or separately to the investors. 

Custody of Fund Assets 

Requirement

• Custody arrangements and custody risks (FMCC Sections 4.4.1 and 4.4.2) 
  
  Note: Where the fund manager retains custody of fund assets, it should specifically disclose the existence of such an arrangement and the additional safeguards that have been put in place to mitigate any potential conflicts of interest. 
  

Audit

Requirement

• Fund audit arrangements including the appointment of an independent auditor and disclosure that the audit report shall be made available to investors upon request and the audit shall be prepared in accordance with generally accepted accounting principles and accounting rules (FMCC Sections 5.2.2 and 5.2.3)

Valuation

Requirement

• Valuation frequency and basis of valuation (FMCC Section 5.3.5)

NAV Calculation 

Requirement

• Net asset calculation for separate classes (particularly if the calculation methodology differs for the classes) (FMCC Section 5.5.1)

Side Pocket 

Requirement

• Extensive disclosure relating to side pocket language (FMCC Section 5.4.1)
  
  Note: Fund managers are separately required to disclose to all investors each time a side pocket is created. 

Fund Manager Information 

Requirement

• Information relating to fund manager (e.g., business address, relevant conditions or restrictions under which business is conducted) (FMCC Section 6.1(a))
  
  Note: Fund managers are required to separately disclose to fund investors, upon request, financial information relating to the fund.