Hong Kong SFC Official Examines Investor Protection Proposals and Outlines Renminbi-Denominated Derivatives
The Hong Kong Securities and Futures Commission has received broad support for its proposed rulemaking to enhance disclosure to investors about derivatives and other unlisted structured financial products. In the keynote address at the recent ISDA Equity Derivatives conference, SFC Deputy CEO Alexia Lam said that commenters endorsed a proposed requirement for Key Facts Statements, which are designed to be user-friendly summaries of the key features and risks of investment products, while a proposed cooling-off period after buying a financial product has provoked strong opposition. The proposals are nothing less than a Code intended to cover all unlisted structured products commonly offered to the public in Hong Kong, including equity, credit, and commodity-linked notes, equity-linked investments and equity-linked deposits
According to Ms. Lam, the intent of the Key Facts Statement, which will be part of the offering documents, is to provide investors with clear, succinct and useful disclosure and enable easier reading and comparison among investment products. She noted that many different jurisdictions and supranational organizations have in recent months come out with their own versions of a summary document for one or more types of investment products. Indeed, the Key Facts Statement is a concept akin to the proposal by the Committee of European Securities Regulators (CESR) with respect to the key information document.
The prospect of a cooling-off or unwind period, which would begin after an investor has placed an order for a product, has generated much controversy and comment in the market. The senior official emphasized that the cooling-off mandate cannot be a “one-size-fits-all” requirement and that for the most part investors would not receive a refund of the full principal amount invested.
The Commission asks whether stakeholders feel that this sort of exit could be of benefit to investors and when the benefit of a cooling-off period would be outweighed by the cost. She noted that there are different ways in which a cooling-off mechanism could be implemented. The Commission has received many detailed suggestions about how and when these sorts of exits could or should be provided, for which products and to whom.
The SFC has suggested that the cooling-off period would apply only to longer-term products with no ready secondary market. This is because these are the types of products where a cooling-off period might be of most benefit as an investor protection measure. Where products already have an active and liquid secondary market, such as mutual funds, investors could exit the investment if they subsequently change their minds
On a separate point, Ms. Lam said that the SFC would facilitate the Hong Kong offering of Renminbi-based equity, debt and derivatives products. As a start, RMB-denominated and traded equity products such as collective investment schemes and exchange traded funds could be considered. Also, for the RMB to become a currency that is widely held and used for trade and settlement purposes, she observed, financial products need to be available for hedging interest rate and currency risks.
But having RMB-denominated products is not sufficient in itself, said the official. To create a dynamic market, on the demand side, it is important to have a complementary expansion of the investor base for these products. Currently, only individuals are able to open RMB accounts in Hong Kong and invest in RMB-denominated products. Thus, the Deputy CEO emphasized the need to allow institutions to invest in RMB-denominated financial products.
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