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SFC Consultation on Fund Manager Code of Conduct (FMCC): 10 key points

Updated: Sep 7, 2021

The Securities and Futures Commission (SFC) of Hong Kong published the conclusion to proposed changes in its Fund Manager Code of Conduct last November, helping to clarify a few remaining areas of contention following its original consultation paper.

With the updated rules due to be implemented in seven months’ time, we have produced a quick summary of the ten key points you need to know from the consultation conclusions on Asset Management regulation having had time to consider the potential implications.

Liquidity and Benchmarking

  • There was some doubt whether new liquidity and benchmarking rules would apply to discretionary account managers. This is no longer the case. Even though the SFC recognises there are operational differences between the management of funds and discretionary accounts, they note that the investment management functions “are largely similar”. As such, liquidity and benchmarking rules will apply to discretionary account managers. With regards liquidity, discretionary account managers need to understand their clients’ liquidity requirements while also regularly assessing the liquidity of client assets and integrating “liquidity management in investment decisions”.

  • The SFC has also clarified that liquidity risk management principles should be applied to closed-ended funds, even though they recognise that the risk is greatest for open-ended ones. All funds are encouraged to match liquidity requirements against portfolio profiles and carry out ongoing assessment of liquidity risk, for example, by carrying out liquidity stress tests that gauge the impact of severe adverse changes in market conditions.

Operational Control

  • Many FMCC requirements are only applicable to managers who have control of a fund’s operations, which has raised some question marks over what constitutes operational control. In this respect, the SFC has clearly stated that fund managers cannot avoid their obligations simply by hiding behind a governing body or any other corporate structure. Even though it has decided to omit its reference to “de facto” control (in order to avoid legal confusion), this concept seems to remain in spirit.

Securities Lending, Repo and Reverse Repo Markets

  • The SFC has clarified that any fund manager engaged in lending client assets needs to have effective oversight of any third party (for example a prime broker or custodian) that facilitates those activities – in particular when the fund manager has been involved in selecting those parties. This may translate into a simple reporting process that firms will need to adhere to.

  • Equally, adequate and frequent disclosure to investors of a fund manager’s securities lending or repo activity has been deemed important. This should not only be included as part of a fund manager’s mandate, but also disclosed on a frequent basis to make any potential risks more transparent to investors.

Leverage Operational Risk

  • Regarding the use of leverage, the SFC has made it clear that fund managers need to clearly communicate the “expected maximum” leverage they intend to use. Although they have stopped short of mandating a particular calculation methodology, they have stipulated that managers need to clearly explain the methodology that they have used and ensure it is easy for investors to understand.

Portfolio Valuation

  • The SFC has clarified that the requirement to validate portfolio valuations independently does not rule out an internal audit or controls specialists from performing this function. However, whoever carries out the process needs to be sufficiently qualified to do the work (although does not necessarily have to be an accountant).


  • With regards to non-compliance matters, the SFC noted that the requirement is for firms to identify, report and remedy “material” non-compliance with any laws, not just SFC codes and regulations.

  • The SFC also made it clear that managers who decide to set up side pockets to manage illiquid investments must remain responsible for those investments. “Managing of side pockets apply to any fund manager that is responsible for that activity” irrespective of whether or not they maintain operational control of the fund.


  • Fund managers have been given some breathing room with six months before they have to implement the new code of conduct. However, given the breadth of the changes, a reasonable amount of work will be required before November 2018. It will be important for firms to review existing risk management policies and procedures to identify potential gaps and resolve any resourcing requirements as quickly as possible.

The looming FMCC may not necessarily mean a radical change to your current risk management process. It’s more likely to require you to retool, retrain and update your internal support framework ahead of the changes to make sure the change feels like a bump in the road rather than an unnecessary detour.


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