Chan Extols Hong Kong's Hedge Fund Regulation

by Mary Swire, LawAndTax-News.com, Hong Kong

16 May 2011

In the Legislative Council, the Secretary for Financial Services and the Treasury, Professor K C Chan, has been able to reassure a questioner that Hong Kong’s regulatory regime for hedge funds, private equity funds and other alternative investments more than conforms to international standards.

It has been calculated by the Securities and Futures Commission (SFC) that there were 538 hedge funds operating in Hong Kong as at end-September 2010, with USD63.2bn of assets under management (AUM). Of that total AUM, only USD9.3bn was invested in Hong Kong and USD7.6bn in China. The remaining 73% of total hedge fund AUM in Hong Kong was invested overseas.

For comparative purposes, global hedge fund AUM are estimated at USD1.7 trillion. Around USD1.29 trillion of those are managed in the United States, USD270bn in the United Kingdom, USD15.6bn in Japan and USD42bn in Singapore.

Chan confirmed that Hong Kong participates in the G20 as part of the China delegation, is an active member of the Financial Stability Board, and fully supports the implementation of the G20's initiatives on financial regulatory reforms. While international discussions are still on-going, Hong Kong’s government, in collaboration with its financial regulators, have been taking part in relevant information collection exercises and/or taking action to implement some of the key G20 financial regulatory reforms, such as those relating to the regulation of credit rating agencies, over-the-counter derivatives and hedge funds.

He added that, by way of the Securities and Futures Ordinance, Hong Kong was among the first jurisdictions to have in place a licensing regime for hedge fund managers, in line with the recommendations of the G20. Hedge funds, if offered to the public, are authorized and regulated. Hedge fund managers, as with other market participants, trading in Hong Kong’s markets are also subject to the relevant regulations of that market.

The G20 has agreed that hedge funds or their managers should be required to disclose appropriate information on a regular basis to supervisors or regulators necessary for assessment of the systemic risk that they pose individually or collectively. The SFC periodically conducts surveys on hedge fund managers, and, according to the SFC's own assessment, it currently holds more information on the funds managed by SFC-licensed hedge fund managers than most other overseas regulators do in respect of the hedge funds managed in their jurisdictions.

Chan further disclosed that, in consultation with financial regulators including the SFC, the government is now considering whether there would be a need to develop criteria to identify systemically important intermediaries; and whether further regulatory requirements would be necessary, having regard to the discussions internationally and local market conditions.

In addition, he pointed out that hedge funds or private equity funds making investments on the Mainland are also subject to relevant regulations. At present, China's capital account has yet to be fully liberalized, and overseas financial institutions, including hedge funds, are required to apply and obtain permission for the remittances of funds into the Mainland and for accessing investments on the Mainland.

Meanwhile, as the Mainland's financial market is segregated from that of Hong Kong, the activities of those financial institutions in the Hong Kong’s renminbi (RMB) market are insulated from the Mainland. He likened Hong Kong’s regulatory activities as to, in effect, providing a firewall between the onshore and offshore RMB markets.

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