Structurers call on SFC to keep safe-harbour rules

Structured product issuers, distributors, private bankers and industry associations have called on Hong Kong's Securities and Futures Commission (SFC) to reconsider its proposal to remove the so-called safe harbour rules that they have long relied on to distribute structured products. 

While the Hong Kong securities regulator has closed its consultation on transferring regulation of all structured products from the Companies Ordinance prospectus regime to the offers-of-investments regime under the Securities and Futures Ordinance (SFO), bankers and lawyers are hoping the HK$500,000-minimum safe-harbour rule will stay.

In its October consultation, the SFC proposed to align regulation on all structured products under the SFO's offers-of-investments regime – a shift in policy that would probably trigger a removal of the various safe-harbour exemptions linked to the Companies Ordinance. These safe harbours have been in place since 2004.

"If Hong Kong wants to fulfil its role as an international financial centre, it needs to give investors access to a variety of issuers and different products. If over the long term [such diversity of product and issuer mix] is constrained, investors might look elsewhere," says Wendy Yuen, head of the structured product department at Hang Seng Bank in Hong Kong.

A much-used safe harbour is that a product can be offered as long as it has a minimum denomination of HK$500,000 – in which case no SFC-authorised prospectus needs to be issued. Other safe harbours include an offer being to less than 50 persons or an offer made solely to professional investors.

Aligning regulation of all structured products under the SFO means the HK$500,000 minimum requirement becomes inapplicable, the SFC said in its consultation paper.

"The SFC is concerned some distributors are aggregating small investors' orders and grossing them up to HK$500,000," said the Hong Kong-based head of equity derivatives at a European bank. "But removing such safe harbours because of this small minority is unfair to banks and distributors who comply with this rule, as they obviously chose the right investors to market their products."

The industry also fears it might be difficult or impossible to apply SFO rules to over-the-counter structured products.

"For example, under the Securities and Futures (contract notes, statements of account and receipts) Rules, the bank must prepare a contract note no later than two days after entering into the trade; but for OTC products they might need longer time for settlement, so these products might not be able to follow the same T+2 settlement requirement," says Yuen.

To the banks' relief, however, the SFC has proposed to keep its exemption on regulating currency-linked and money market instruments, as they are generally regarded as banking transactions or treasury instruments of banks.