FAQs – Publicly offered investment products: Guide on the Use of Financial Derivative Instruments for Unit Trusts and Mutual Funds

The Securities and Futures Commission, SFC, has published updated guidelines in connection with the use of financial derivative instruments by Unit Trusts and Mutual Funds. The guide primarily outlines the principles to determine net derivatives exposure and corresponding disclosure requirements. It also sets forth circumstances where such calculation isn’t needed (provisions for omitting the determination).
This most recent update includes revisions to Annex 2, paragraph 2(a) which presents a non-exhaustive list of examples illustrating situations which will not qualify as netting, hedging, or risk mitigation arrangements in the calculation of net derivative exposures. Specifically, the new paragraph reads as follows – as quoted:
Using options to achieve a structured return profile
(a) An investment strategy that uses options to achieve a return profile similar to those of structured products (e.g., by adding upside cap, downside buffer and/or
downside floor to a delta-one equity index exposure) will not qualify as a netting, hedging or risk mitigation arrangement. However, if a scheme adopts a covered call
investment strategy without other structured return features, this can be qualified as a netting arrangement to the scheme’s exposure to the underlying asset of the
covered call.
The updated guidelines also include some editorial changes, e.g. to remove double wording or incorrect spelling.