Hong Kong SFC Publishes Consultation Paper On Proposed Index Fund Provisions

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

01 August 2001

The Hong Kong Securities and Futures Commission (SFC) has published for public consultation its proposed new provisions on index funds for incorporation into the Code on Unit Trusts and Mutual Funds. According to the SFC, there has been a significant increase in interest from the market in offering index funds to the public in Hong Kong. This has prompted the Commission to provide clearer guidance to the industry on the authorisation of such funds in order to promote market development and further protect investors.

Under the new code provisions the Commission has proposed that an index fund be flexible in that it can invest in other 'instruments' such as derivatives. It is also requested that the index be broadly based and transparent. 'The proposed weighting caps at 40 per cent for a single constituent and 75 per cent for the top five constituents should reasonably exclude indices that are highly concentrated,' stated the SFC. In addition the review rules and procedures of the index should be well documented and consistent.

However, the SFC has stated that as long as the objective of an index is fully disclosed it may not need to diversify and if an index is heavily weighted in a security it may be accurately representative. 'The setting of an artificial cap may defeat the fund's objective of tracking a particular index,' explained the Commission.

Interested parties are invited to lodge their comments by 20 August, 2001. The full text of the Proposed Code Provisions for Index Funds can be found at: http://www.hksfc.org.hk

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