Circular on SFC-authorised funds with exposure to virtual assets

This Circular on SFC-authorised funds with exposure to virtual assets (VA-funds) was published by the Securities and Futures Commission of Hong Kong (SFC) on December 22, 2023. It updates and replaces a similar circular issued in October 2022 in which the Commission informed of its permission to offer „exchange traded funds (ETFs) that obtain exposure to virtual assets (VAs) primarily through futures contracts“ in Hong Kong. This decision followed an earlier one in January in which the SFC already permitted „SFC-licensed and registered intermediaries to offer trading of eligible VA Future ETFs to retail investors in Hong Kong“.
In this circular now, the SFC specifies the requirements of investment funds to be authorized as a VA fund either via direct exposures to virtual assets or indirect exposures via derivatives of such where such investments exceed 10% of a fund’s NAV. The key requirements are briefly listed below:
– The management company of a VA-fund must have a clean track record and must have at least one competent staff member experienced in managing VA or related products.
– Investments are restricted to VA tokens accessible to the Hong Kong public via SFC-licensed Virtual Asset Trading Platforms (VATPs).
– Permissible investments include direct or indirect investments in eligible VA tokens with specific conditions for VA futures and limitations on leveraged exposures. Thereafter, VA futures must be traded on regulated futures exchanges with adequate liquidity and manageable roll costs (expenses associated with rolling over futures contracts). The management of roll costs must be demonstrated. Additionally, SFC-authorized VA Funds should not have leveraged exposures to VAs at the fund level.
– Futures-based VA-funds should be actively managed to allow for the necessary flexibility in portfolio composition.
– Any transactions of VA-funds should be conducted through SFC-licensed VATPs or authorized financial institutions (AIs) in compliance with HKMA regulatory requirements depending upon the type of subscription (cash or in-kind).
– The trustee/custodian can only delegate VA custody to an SFC-licensed VATP or an AI or its subsidiary meeting the HKMA’s VA custody standards. Custodians must follow stringent requirements as to the segregation, storage (cold wallet preference), and security of private keys.
– The management company must ensure that „all necessary service providers (such as fund administrators, PDs, market makers and index providers) are competent, available and ready to support the SFC-authorised VA Funds“.
– VA-funds must ensure to disclose the investment strategy of the fund and the risks related to VA exposures in the offering documents (e.g. price risks, custody risks).
– The valuation of a VA-fund should follow an indexing approach based on trade volume across major VA trading platforms.
—
Finally, the SFC reminds VA-fund managers that any VA-fund whose VA exposure exceeds 10% of its NAV must seek prior consultation and approval by the SFC.