Hong Kong's SFC puts structured product approvals on ice

Hong Kong’s Securities and Futures Commission (SFC) has delayed approvals of structured product issues for retail distribution following protests from Hong Kong investors that have lost money from the blow-up of so-called minibond structured credit investments.

Industry sources say the SFC has introduced delaying measures ahead of a report it – along with the Hong Kong Monetary Authority – is conducting regarding the sale of structured products in the territory. The report is due to be reviewed by Hong Kong financial secretary John Tsang by the end of the year.

Thousands of investors in Hong Kong and elsewhere in Asia have lost millions of dollars from their investments in minibonds. These structured credit investments blew up after credit spreads widened sharply and default levels rose dramatically in September.

Industry participants say the SFC is asking for additional information regarding approvals but the apparent delay is not yet causing any additional problems for their businesses, as the retail market in Hong Kong is “non-existent” following sharp stock declines and the minibond losses.

An SFC spokesman says it has not halted approvals but had “asked issuers to provide more information”. He adds that approvals have no formal set timeframe. “In general we have seen fewer applications,” the spokesman adds.

The SFC is looking at two changes to its rules, according to industry sources.

The first centres on the pros and cons of having a 30-day cooling-off period following the sale of retail instruments that would allow investors to exit their positions in a public offering without facing any penalty.

The second area focuses on the adequacy of the disclosure regime – particularly for structures that do not have a capital guarantee. One new rule change could involve the use of more realistic worse-case scenarios – for example, cases where the entire investment is lost, as compared with scenarios where the investors receives 80% of their money back, which was prevalent in most sales documents prior to the current review.

The SFC confirmed it is looking at a cooling off period and reviewing disclosure policies regarding the sale of structured products at a retail level, but declined to provide further details.