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Hong Kong Open-Ended Fund Company (OFC) - regulation memo
Hong Kong Open-Ended Fund Company (OFC) - regulation memo
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Hong Kong Open-Ended Fund Company (OFC) - regulation memo

06/03/2019

Hong Kong has launched a series of local market infrastructure enhancements to further develop the city as a full-service international asset management centre and a preferred fund domicile. The Securities and Futures Commission (SFC) implemented the Open-ended Fund Company (OFC) structure in July 2018.

About Hong Kong open-ended fund company (OFC)

The Securities and Futures Commission (SFC) introduced the Open-ended Fund Company (OFC) structure in July 2018. The structure enables investment funds to be established in corporate form in Hong Kong, in addition to the current unit trust form. 

The Companies Ordinance prohibits the increase or reduction in capital or payment of dividends without approval of the shareholders of the company, therefore investment funds in Hong Kong usually use a unit trust structure which is more flexible in terms of capital management, however, this unit trust structure requires a trustee that would act for and on behalf of the unit trust. The OFC is established as a legal entity, therefore, is able to act for and on behalf of itself without the need to appoint a trustee. It also allows variable capital structure which is not allowed for a company established under the Companies Ordinance.

Key features of the OFC regulations

An OFC is established and incorporated under the Securities and Futures Ordinance. It is not subject to the restrictions of the Companies Ordinance unless otherwise provided in the new OFC Code and rules. For winding-up and disqualification orders, the “Companies (Winding Up and Miscellaneous Provisions) Ordinance” is to be applied to OFCs as well. This approach is to align Hong Kong’s legislation for similar corporate fund vehicles with overseas jurisdictions such as the UK and Ireland.

  • An OFC must be registered with the SFC and incorporated by the Companies Registry
  • OFCs can be public or non-public. A public OFC will have to comply with the detailed requirements as set out in applicable SFC’s product handbooks
  • An OFC must have a board of directors with at least two individual directors
  • An OFC must appoint a custodian to whom all scheme property must be entrusted for safekeeping, a fund manager and an external auditor
  • Private OFCs are also eligible for tax exemption under certain conditions

Reference: Code on Open-ended Fund Companies

Scope

  • Local and global asset managers

The Hong Kong OFC will support umbrella and sub-funds structures and cross-investment of sub-funds.

Industry implications

This OFC regime provides an attractive alternative for funds domiciled in Hong Kong with its flexible features that are currently not available under Companies Ordinance. In addition to encouraging new funds to set up in Hong Kong in competition with other fund domiciles, the new structure should encourage greater fund passporting with Hong Kong as a home country.

Along with the Mutual Recognition of Fund schemes signed between Hong Kong and several jurisdictions including Switzerland, France, the UK and Luxembourg, the OFC framework should facilitate the distribution of Hong Kong-domiciled funds to Europe, with a choice of structure that is internationally recognisable, particularly in Europe.

Passportability of OFC with China is to be confirmed by the SFC.

BNP Paribas Securities Services’ view

The OFC regime increases the competitiveness of Hong Kong-domiciled funds and their marketability across the globe.

With the launch of similar new company structures in Australia and Singapore however, competition between fund jurisdictions in the Asia-Pacific region is getting more intense. Australia is due to launch its new Corporate Collective Investment Vehicles (CCIV) scheme, and Singapore plans the launch of the Variable Capital Company (VCC) in 2019.

Fund managers domiciling funds under the OFC in Hong Kong benefit from the territory’s long-established fund management industry and its access to China. The profit tax exemption for onshore private Open-ended Fund Companies will be a key driver in the success of the OFC scheme.

Leveraging its broad expertise in depobank from about eight thousand funds in about ten European countries, BNP Paribas Securities Services has the experience and track record to assist you in Hong Kong in every aspect, from setup, trustee, custody and transfer agency services, to fund administration and portfolio valuation. Services for the OFCs are at a validation stage targeting going live in Q1 2019. In addition, as the leading European bank, with deep and comprehensive cross-border distribution services, we are ideally positioned to support broader international distribution of Hong Kong funds in the region and beyond.

Key dates

June 2015 - Consultation conclusion

July 2017 - Proposed legislation to offer profit tax exemption to onshore private OFC

August 2017 - Closing of the formal consultation paper on the OFC code and rules

July 2018 – OFC go live

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