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HK’s new structured products regime similar to MiFID II

HK’s new structured products regime similar to MiFID II

Market participants have said that Hong Kong’s new disclosure requirements for the sale of structured products are in line with guidelines under the revamp version of the Markets in Financial Instruments Directive or MiFID II.

On 5 January, the Hong Kong Monetary Authority released enhanced disclosure rules for distributors, such as private banks, for any monetary benefits received when selling structured products that are not regulated by the Securities and Futures Ordinance.

Andrew Au, CEO of fintech firm AGDelta said: ‘Similar to MiFID II, the focus is on making more robust the advisory and product due diligence processes on the product distributor side.’

Under MiFID II, a European regulation that came into effect on 3 January, investment banks are required to provide key identification documents for structured products to distributors.

The document will have to include the risk profile of the product, information on the underlying securities and costs, among other disclosures.

In fact, some investment banks are preparing to create such documents for products that Asia-based distributors are selling to European clients, a source told Citywire Asia.

The new disclosure requirements will have to be implemented before the end of 2018, with the senior management of authorised institutions required to put in place adequate controls and practices, which will include new processes and documentation.

‘The knee-jerk response is going to be tapering back the risk profile [of these products],’ said Frank Troise, managing member for US investment firm SoHo Capital.

‘The other thing with structured products is that you can whip them around quite quickly, but now they [intermediaries] are going to dramatically slow it [sales] down,’ he said, adding that the number of ways a private bank can get paid on the products will also significantly decrease.

Structured products in Asia are mostly sold through private placement, rather than on exchanges, and most of them are currency-or interest rate- linked products.

The new rules require that the existence and nature of monetary benefits and the maximum percentage of such benefits receivable per year be disclosed either before or at the point-of-sale.

HKMA has also asked authorised institutions to disclose the dollar equivalent of the fees payable to the intermediary by the product issuer.

For non-explicit monetary benefits, it has asked intermediaries to provide a one-off generic disclosure.

‘There are so many ways that someone can be paid on a structure. It is infinite because they are so subjective to a specifics of a situation.

'Unlike mutual funds, where there is a specific disclosure document and there are only certain ways you can get paid on, on structured products it’s probably infinite,’ Troise concluded.

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