12 Dec 2022



On 31 October 2022, the Securities and Futures Commission of Hong Kong (“SFC”) issued a circular regarding virtual assets (“VA”) 1futures exchange traded funds (the “Circular”). The Circular sets out the requirements under which the SFC may consider authorising exchange-traded funds (“ETFs”) that obtain exposure to VAs primarily through futures contracts (“VA Futures ETFs”) for public offering in Hong Kong under sections 104 and 105 of the Securities and Futures Ordinance (“SFO”).
As noted in the Circular, the SFC is prepared to accept applications for authorisation of VA Futures ETFs. The SFC will keep in view and closely monitor the development of the VA market and its regulatory landscape regarding the appropriateness of authorisation of ETFs that invest directly in spot VAs.
The Circular was published soon after the Hong Kong government issued a policy statement on the development of VA (the “Policy Statement”) relating to, among others, non-fungible token issuance, green bond tokenisation, and e-HKD (see our news update on the Policy Statement here).

Key Authorisation Requirements for VA Futures ETFs

General Requirements
VA Futures ETFs seeking SFC authorisation to enable the public offering of interests in Hong Kong should meet the applicable requirements in the Overarching Principles Section and the Code on Unit Trusts and Mutual Funds in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products.

Additional Requirements
VA Futures ETFs which seek SFC authorisation for public offering in Hong Kong shall meet additional requirements set ou the Circular as summarised below:

Management Companies
The management company of a VA Futures ETF must have (i) a good track record of regulatory compliance; and (ii) demonstrate at least three years of proven track record in managing ETFs. The SFC will also consider relevant experience in managing the same or similar type of products from the group of companies to which the management company belongs. The SFC may also consider accepting delegation or co-management of a VA Futures ETF, provided that the management company in the case of delegation or at least one of the management companies in the case of co-management complies with the relevant requirements.

Eligible Futures
Only VA futures traded on conventional regulated futures exchanges are allowed, subject to the relevant management company demonstrating (i) the relevant VA futures have adequate liquidity for the operation of the VA Futures ETF; and (ii) the roll costs of the relevant VA futures contracts are manageable which includes how roll costs will be managed. Initially, only Bitcoin futures and Ether futures traded on the Chicago Mercantile Exchange will be permitted. The SFC shall consider expanding the scope of eligible VA futures markets in the future as appropriate.

Investment Strategy
The management company of a VA Futures ETF is expected to adopt an active investment strategy to allow flexibility in portfolio composition (such as diversification of futures positions with multiple expiry dates), rolling strategy and handling of any market disruption events. The net derivative exposure of a VA Futures ETF shall not exceed 100% of the total net asset value of the relevant ETF.

The product key facts statement of a VA Futures ETF should contain upfront disclosure of the investment objective and key risks associated with investment in VA futures contracts, including (1) risks concerning potentially large roll costs of VA futures; and (2) operational risks, such as margin risk and risk associated with mandatory measures imposed by relevant parties.

Since VA Futures ETFs are derivative products and VA-related products, intermediaries are subject to the applicable requirements under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code of Conduct”) and related guidelines including the Joint Circular on Intermediaries’ Virtual Asset-Related Activities (the “Joint Circular”) issued by the SFC and the Hong Kong Monetary Authority in January 2022 (see our news update on the Joint Circular here). In particular, intermediaries shall comply with the existing conduct requirements for derivative products as set out under paragraphs 5.1A and 5.3 of the Code of Conduct, as well as the VA-knowledge test requirement.

Investor Education
The management company of a VA Futures ETF should carry out extensive investor education before launching the VA Futures ETF in Hong Kong.

Please contact our Partner Mr. Rodney Teoh and associate Mr. Calvin KW Lo for any enquiries or further information. Rodney would like to thank Ms. Adrienne Leung (Intern) for her contribution to this news update.

This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.

1 VA refers to digital representations of value, which may be in the form of digital tokens, such as utility tokens, stablecoins, security-backed tokens or asset-backed tokens, or any other virtual commodities, crypto assets or other assets of the same nature, irrespective of whether or not they amount to “securities” or “futures contracts” as defined under the SFO but excludes digital representations of fiat currencies issued by central banks.