In view of the current volatility in local and international markets caused by the COVID-19 outbreak, the Securities and Futures Commission (the SFC) has issued a circular aimed at management companies (Managers) and trustees and custodians of SFC-authorized funds (funds) reiterating best practices with which they are expected to comply, in order to look after the interests of their clients.
Responsibilities of Managers
Managers are reminded of their obligations to properly manage the liquidity of funds and ensure that investors are treated fairly in the current rapidly changing market conditions. To this end, Managers should ensure that they:
- closely monitor the dealing and trading of the funds under their management, with particular scrutiny of the continuous trading of any ETFs under their management;
- keep investors informed at all times of, and immediately report to the SFC, any untoward circumstances relating to the funds under their management, and consult the relevant trustee or custodian before using liquidity risk management tools including any intention to increase or apply any swing factor (or anti-dilution levy) that exceeds the one disclosed in the offering document. Investors and the SFC should also be informed of: (i) any decision to defer redemption; and (ii) any decision to suspend creation and/or redemption, in primary or secondary market trading and its potential impact on the fund.
- ensure that all fund assets are fairly and accurately valued, in good faith and in the best interests of investors, and in accordance with the constitutive and offering documents as well as applicable laws and regulations;
- consider the need for any fair value adjustment (this applies particularly in respect of less liquid or suspended securities) and constantly review fair value adjustment policies and procedures to ensure they remain appropriate and are effectively implemented. The trustee or custodian of the fund should be consulted in the process and conduct of fair value adjustment.
- exercise due care, skill and diligence in managing liquidity of funds. In particular, any actions taken in meeting redemption obligations should not have any material adverse impact on the fund and its remaining investors e.g. using the fund’s cash or selling the fund’s most liquid assets to meet redemption requests may have an adverse impact.
- use appropriate liquidity risk management tools (e.g. swing pricing or anti-dilution levies) to properly allocate the costs of redemption (e.g. transaction costs for liquidating assets) to the redeeming investors and ensuring fair treatment of the investors who remain in the funds.
In addition, Managers are expected to fully cooperate with the SFC’s heightened reporting requirements as part of the SFC’s increased monitoring of SFC-authorized funds.
Responsibilities of trustees and custodians
The SFC reminds trustees and custodians of their duty to safeguard fund assets and provide independent oversight of the management of funds. For example, this includes overseeing the valuation of the funds and the use of liquidity risk management tools.
Shared responsibilities between Managers and trustees and custodians
Managers and trustees and custodians should give the SFC early warning of any material issues affecting their funds, including:
- any intention to increase or apply any swing factor (or anti-dilution levy) which exceeds the one disclosed in offering documents;
- any serious contemplation of suspension of dealings; and
- any significant decrease in the value of the fund.
The SFC encourages Managers and trustees and custodians to consult the SFC if they have any doubts in relation to material issues impacting funds.
 Set out in paragraph 29 of SFC’s Circular to management companies of SFC-authorized funds on liquidity risk management dated 4 July 2016 (as amended from time to time).
 Managers are allowed to increase the swing factor (or anti-dilution levy) beyond the maximum level that has been set out in the funds’ offering documents as a temporary measure without SFC’s prior approval subject to certain conditions. For details, please refer to FAQ 1 and 2 under Section 3 of the Frequently Asked Questions on Post Authorization Compliance Issues of SFC-authorized Unit Trusts and Mutual Funds.
 ‘Significant’ here means a drop of 10% or more in a fund’s net asset value in a single day.