Amid concerns about extreme market conditions caused by volatility in the crude oil futures markets, the Securities and Futures Commission (SFC) has issued a circular directed at management companies of SFC-authorized exchange traded funds (ETFs) and intermediaries, reminding them of their regulatory obligations, particularly in relation to activities involving futures-based ETFs. A separate circular directed at commodities futures brokers was also issued in parallel (read our blog on this here).
To ensure that the ETFs are managed in the best interests of investors, management companies of ETFs should:
- ensure that relevant margin obligations are fulfilled in a timely fashion for ETFs that invest in futures (in particular, futures-based ETFs);
- closely monitor market movements of the underlying investments of the ETFs and ensure effective contingency plans are in place to respond to extreme movements in the market;
- ensure any proposed actions are permitted under the ETF’s constitutive documents and are in compliance with applicable laws. The relevant trustee or custodian of the ETF should also be consulted prior to such actions being taken;
- promptly and efficiently update ETF investors on any proposed actions; and
- provide the SFC with advance notice of any adverse circumstances relating to the ETFs under management e.g. matters adversely impacting the underlying investments, secondary market trading, liquidity or the operations of the ETFs.
In addition, the SFC has also emphasised the need for intermediaries to ensure that they comply with the requirements relating to derivative products under paragraphs 5.1A and 5.3 of the Code of Conduct for Persons Licensed by or Registered with the SFC (the Code of Conduct) when providing trading services to clients that involve futures-based ETFs. When making a recommendation or solicitation, intermediaries should also comply with the suitability obligations under the Code of Conduct.
A copy of the circular can be found here.
 Pursuant to paragraph 5.2 of the Code of Conduct and supplemented by FAQs on Triggering of Suitability Obligations and FAQs on Compliance with Suitability Obligations issued in December 2016.