Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – Investments In Securities Of A Single Sovereign Issuer Rated Non-Investment Grade.

23 January, 2013


Legal News & Analysis – Asia Pacific – Hong Kong – Investment Funds


As a result of the European debt crisis and increasing global concern over the credit rating of sovereign issuers, Hong Kong's Securities and Futures Commission (SFC) has imposed additional disclosure requirements on any SFC-authorised fund which invests more than 10% of its net asset value (NAV) in securities issued and/or guaranteed by a single sovereign issuer which is below investment grade.


After discussions with fund managers, the SFC issued a circular on 28 December 2012. The SFC's requirements are set out below.


Justifications – Managers of new funds seeking the SFC's authorisation and managers of existing SFC-authorised funds have to confirm to the SFC with "cogent reasons" that, in their professional judgment, having due regard to their fiduciary duties, it is in the best interests of investors for the fund to invest more than 10% of its NAV in non-investment grade securities of a single sovereign issuer in light of the prevailing market conditions. These justifications should take into account specific circumstances of the fund, such as its investment objective and policies, the identity of the relevant sovereign, the expected or potential extent of investment, the reasons for the concentration of the investments and the need to make reference to a benchmark.


Disclosures – The fund's offering documents (including the product key facts statement (KFS)) should clearly and prominently disclose the following:


  1. the extent (i.e. the maximum percentage) of the potential concentration of investments in non-investment grade securities of a single sovereign issuer, the reasons for such concentration and the associated risks and potential impact on investors in the "Objective and Investment Strategy" section of the KFS;
  2. the identities of the relevant single sovereign issuer(s) rated below investment grade and, if applicable, a description of the benchmark together with the relevant benchmark constituents. If the reason for the investment is to reflect a benchmark, such benchmark should be disclosed under the section headed "Objective and Investment Strategy" of the KFS; and
  3. the risk of high concentration (including specific names of potential sovereigns involved) and the impact on the risk profile of the fund, as well as the risk of default of the sovereign issuer(s) resulting in significant losses to investors: such risks should be prominently disclosed in the "Key Risks" section of the KFS and in the risk disclosure box in the marketing materials of the relevant fund.


The SFC clarified in the Circular that "securities issued and/or guaranteed by [a] single sovereign" means securities issued and/or guaranteed by a government, public or local authority but does not include "quasi-government" securities.


Fund managers are reminded to review their existing SFC-authorised funds in light of the SFC's new requirements, and where appropriate, promptly include the additional disclosures in their offering documents and marketing materials.




For further information, please contact:


Alwyn Li, Partner, Deacons

[email protected]


Vincci Ip, Deacons

[email protected]



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