SFC, HKMA Offer Clarity on Product Disclosure, Suitability Obligations

The SFC and HKMA say firms may adopt a risk-based approach to streamline the provision of product disclosures for sophisticated or experienced investors.

Hong Kong’s SFC (Securities and Futures Commission) and HKMA (Hong Kong Monetary Authority) have issued guidance on compliance with suitability and investor protection obligations when providing services to sophisticated customers.

In its guidance, the SFC says suitability assessments, concentration risk assessments, product due diligence, and product explanations can be “varied” for high net worth clients who exhibit financial expertise in relevant products (e.g. high levels of knowledge or experience) and higher levels of risk tolerance – so long as this is done in a “proportionate and risk-based manner”.

“A suitability assessment is not a mechanical risk matching process. Rather, it is a dynamic process which may vary depending on the client’s circumstances, the type of investment product (including its complexity and risks) and the services provided by the licensed or registered person,” the SFC says.

“Products explanations may be less intensive for clients who are financially sophisticated with demonstrable and relevant expertise in investing in the same products or products of the same category,” it adds.

The guidance also applies to complex investment products, where licensed or registered persons can reduce the provision of detailed product explanations or disclosures (including warning statements) for clients with the requisite level of knowledge or experience. However, licensed or registered persons should maintain proper records of their assessment of sophistication in these circumstances, the SFC says.

The HKMA’s guidance addresses frequently asked questions arising a September 2019 circular in which it refined the investor protection measures governing the sale of investment, insurance and MPF products by authorised institutions.

Source: https://www.regulationasia.com/sfc-hkma-offer-clarity-on-product-disclosure-suitability-obligations/

SFC imposes $6.4 million fine for product due diligence and suitability assessment failures

Hong Kong’s Securities and Futures Commission (SFC) has reprimanded and fined an intermediary $6.4 million for control failures over a two year period in solicitation and recommendation of bonds to clients for execution on a third party platform.

In recommending bonds to clients, the intermediary failed to:

• conduct proper and adequate product due diligence on the bonds;

• have an effective system in place to ensure that the recommendation or solicitation of the bonds was suitable;

• maintain proper documentary records of the investment advice or recommendation given to its clients and provide each of them with a copy of the written advice; and

• have adequate and effective monitoring systems to supervise the sale of bonds through the third party platform and to ensure its compliance with applicable regulatory requirements.

The SFC’s report mentions that the size of the fine reflects the fact that the intermediary failed to put in place an effective system to ensure product suitability despite the SFC’s repeated reminders to licensed corporations on the importance of compliance with the suitability obligations and the specific guidance regarding the selling of fixed income products, complex and high-yield bonds.

The SFC found that the intermediary did not have product approval or due diligence procedures for the products in question, but relied on its individual consultants to conduct due diligence and assess product risk.

Source: https://www.lexology.com/library/detail.aspx?g=ded85773-18e2-46ad-b871-f48c6ca7e667

Global Funds Still Cautious on China Bonds, Despite Opening Up

CHINA - For all the efforts to make China’s bonds more accessible to foreigners this year, some global funds are reluctant to own them.

Active money managers like Amundi and BlueBay are cautious on China’s government debt amid concern over liquidity, capital controls and hedging. While foreigners own just a fraction of the world’s second largest bond market, their opinion may soon hold a little more weight as FTSE Russell is expected to include the bonds in its flagship index.

China recently scrapped investment limits for foreigners as it seeks to encourage more inflows into its capital markets and increase the yuan’s global use. Bloomberg Barclays started a phased inclusion of some Chinese sovereign debt into its benchmark indexes in April, while JPMorgan Chase & Co. said it will do so from February. FTSE Russell will announce its decision Friday morning Hong Kong time.

Thin liquidity -- commercial banks that dominate China’s fixed-income market tend to buy and hold bonds rather than trade -- and a shortage of hedging choices are deterrents. Controls on outflows also mean foreigners face difficulty withdrawing cash. Even as the central bank has signaled a preference for a steady yuan, concerns about potential outsized moves in the currency linger.

While international investors have increased their holdings to 2 trillion yuan ($284 billion) as of August, that’s just 2% of China’s 94 trillion yuan market. Foreigners bought around 100 million yuan of Chinese bonds last month, compared with 62 billion yuan in July. The amount was the least since February when they were net sellers.

China’s 10-year government bond yield has traded near 3.1% over the past month as the central bank refrained from aggressive stimulus despite slowing economic growth. Worries about credit risks and increasing supply of special government notes have also weighed on sentiment. The yield was little changed at 3.12% on Wednesday.

To be sure, as more global bond yields turn negative, China’s roughly 3% returns may attract more overseas interest. Ten-year sovereign notes still offer about 1.4 percentage points more yield than their U.S. counterparts. China’s slowing economic growth, “contained inflation,” and aging population will boost demand for its bonds in the long run, said Cary Yeung, head of greater China debt at Pictet Asset Management.

Source: https://www.bloomberg.com/news/articles/2019-09-24/the-bond-boom-that-wasn-t-china-s-opening-meets-caution-abroad

Asia’s Worst-Performing Bonds Draw Biggest Inflows in a Decade

KOREA - South Korean bonds are the poorest performers in Asia this year -- but they are set to attract the biggest foreign inflows in more than a decade. What gives?

The nation’s debt is benefiting from the same phenomenon that can make investments profitable for overseas investors in Japanese and European negative-yielding debt -- the magic of cross currency basis.

While Korea’s three-year bonds only yield around 1.3%, dollar-based investors who hedge their purchases in currency markets for three months can earn an extra 1.1% on top of that. The combined return of 2.4% easily exceeds that on similar-maturity Treasuries or hedged investments in either French or Japanese government debt.

The attraction of its currency-adjusted yields has seen overseas investors snap up $16.4 billion of Korea bonds in the first seven months of the year, according to the most recent balance-of-payments data. Should these inflows be maintained, this year will see the biggest purchases of local debt since they reached a record in 2007.

Even with surging inflows, Korea’s government bonds have been anything but stellar performers this year.

The securities have handed investors a loss of 1.9% in dollar terms, the worst in Asia and the fourth-poorest performance among the 46 global markets ranked by Bloomberg. The reason for the underperformance has been entirely due to the weakening won, which has tumbled almost 7% this year as the U.S.-China trade war pummeled the nation’s exports.

The outlook for further inflows remains bright with central banks boosting purchases in recent years. Their share of the total foreign holdings of the nation’s debt jumped to 52.5% at the end of last year, from 11% in 2009, according to a report from the Ministry of Economy and Finance released earlier this year.

The Reserve Bank of Australia made the Korean currency the fourth-largest holding in its foreign-exchange reserves on a gross basis in 2018, according to its annual report. The won and Chinese yuan were the only two emerging-market currencies held by the Swiss National Bank at the end of last year.

Although the won isn’t a typical reserve currency, the country’s AA credit rating puts Korean bonds on par with French and U.K. securities, and above Japanese ones.

China Factor

On the downside, some of the inflows that have recently been going to Korea could start being diverted to China after Bloomberg Barclays and JPMorgan Chase & Co. have both moved to include the larger country in their benchmark bond indexes.

“The Korean bond market benefited as a proxy to China when the Chinese bond market was closed,” said Kiyong Seong, an Asia rates strategist at Societe Generale SA in Hong Kong. Demand from global funds and central banks may now stagnate as China’s bond market opens up much faster than anticipated, he said.

Source: https://www.bloomberg.com/news/articles/2019-09-24/asia-s-worst-performing-bonds-draw-biggest-inflows-in-a-decade

Banks worth $47 trillion adopt new U.N.-backed climate principles

UNITED NATIONS - Banks with more than $47 trillion in assets, or a third of the global industry, adopted new U.N.-backed “responsible banking” principles to fight climate change on Sunday that would shift their loan books away from fossil fuels.

Deutsche Bank (DBKGn.DE), Citigroup (C.N) and Barclays (BARC.L) were among 130 banks to join the new framework on the eve of a United Nations summit in New York aimed at pushing companies and governments to act quickly to avert catastrophic global warming.

“These principles mean banks have to consider the impact of their loans on society – not just on their portfolio,” Simone Dettling, banking team lead for the Geneva-based United Nations Environment Finance Initiative, told Reuters.

Under pressure from investors, regulators and climate activists, some big banks have acknowledged the role lenders will need to play in a rapid transition to a low-carbon economy.

Financing for oil, gas and coal projects has come under particular scrutiny as climate scientists step up calls to change the global economy’s deep reliance on fossil-fuels to avert disastrous warming.

The principles, drawn up jointly by U.N. officials and banks, require lenders to:

- Align their strategies with the 2015 Paris Agreement to curb global warming and U.N.-backed targets to fight poverty called the Sustainable Development Goals

- Set targets to increase “positive impacts” and reduce “negative impacts” on people and the environment

- Work with clients and customers to encourage sustainable practices

- Be transparent and accountable about their progress.

The principles’ main backers say the norms will encourage banks to pivot their loan portfolios away from carbon-intensive assets and redirect capital to greener industries.

Critics argue that banks should go much further by explicitly committing to phasing out financing for fossil fuel projects and agribusiness that drive deforestation in the Amazon, Southeast Asia and other regions.

However, the new standards could also force participating banks to choose between foregoing business from clients in high-carbon sectors and the risk of being accused of backsliding on the principles if they continue to finance such firms.

Although the initiative is voluntary, Dettling, who played a central role during 18 months of negotiations with a core group of 30 founding banks, said lenders would be reluctant to accept the reputational risk of losing their signatory status.

Banks in Europe, in particular, also face growing regulatory pressure to disclose their exposure to the potential impact of climate-related disasters and a low-carbon energy transition on their asset base.

Other banks to join the “Principles for Responsible Banking” initiative included Danske Bank (DANSKE.CO), ABN Amro (ABNd.AS), BNP Paribas (BNPP.PA), Commerzbank (CBKG.DE), Lloyds Banking Group (LLOY.L) and Societe Generale (SOGN.PA), according to a statement.

Source: https://www.reuters.com/article/us-climate-change-un-banks/banks-worth-47-trillion-adopt-new-u-n-backed-climate-principles-idUSKBN1W70QO

Hong Kong follows US Fed’s 25 basis point rate cut, just in time for city’s stalling economy and kickoff of Budweiser’s mega IPO

HONG KONG - Hong Kong’s monetary authority cut its base lending rate for the second time this year in lockstep with the US Federal Reserve’s widely expected move overnight, reducing the cost of money just as a slowing local economy teeters on the brink of a technical recession.

The city’s de facto central bank reduced the base lending rate by 25 basis points to 2.25 per cent effective immediately, matching a similar cut by the US Fed. Commercial banks in the city are likely to keep their prime rate unchanged at between 5.125 per cent and 5.375 per cent.

“The interest rate cut will benefit the capital markets and economic activities in Hong Kong, “ Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, said in a media briefing after the rate cut.

“The global economy is on a downward trend as a result of the trade war between China and the US. The local social unrest has hit hard tourism, retail and restaurant businesses. The HKMA and banks will work together with the government to help (small and medium enterprises) cope with the challenging time,” he said, referring to earlier announced measures to ensure businesses have funds to stay afloat.

Banks may not immediately follow the rate cut, he said, adding the current interest rate level remains low, with a typical mortgage rate at around 2 per cent.

Chan also said the US Fed has a mixed view on the future interest rate trend as seven members expect more rate cuts, five expect a rate rise while five unchanged.

For the stock market, the HKMA’s rate cut comes just after Budweiser dusted off the IPO it had shelved weeks earlier in the midst of protests that have threatened the city’s reputation as an international financial centre. At US$4.8 billion, Budweiser’s IPO is half its original size but still the biggest in Hong Kong this year.

Source: https://www.scmp.com/business/banking-finance/article/3027997/hong-kong-follows-us-feds-25-basis-point-rate-cut-just

Fed Intervenes to Curb Soaring Short-Term Borrowing Costs

UNITED STATES - For the first time in more than a decade, the Federal Reserve injected cash into money markets Tuesday to pull down interest rates and said it would do so again Wednesday after technical factors led to a sudden shortfall of cash.

The pressures relate to shortages of funds banks face resulting from an increase in federal borrowing and the central bank’s decision to shrink the size of its securities holdings in recent years. It reduced these holdings by not buying new ones when they matured, effectively taking money out of the financial system.

Separately, the Fed’s rate-setting committee began a two-day policy meeting Tuesday at which officials are likely to lower the federal-funds range by a quarter-percentage point to cushion the economy from a global slowdown, a decision unrelated to the funding-market strains.

The federal-funds rate, a benchmark that influences borrowing costs throughout the financial system, rose to 2.25% on Monday, from 2.14% Friday. The Fed seeks to keep the rate in a target range between 2% and 2.25%. Bids in the fed-funds market reached as high as 5% early Tuesday, according to traders, well above the band.

The New York Fed moved Tuesday morning to inject $53 billion into the banking system through transactions known as repurchase agreements, or repos. The bank said Tuesday afternoon it would inject up to $75 billion more on Wednesday morning, but many in the market were looking beyond that decision. “The market will be waiting to see if the Fed makes this a more permanent part of the playbook,” said Beth Hammack, the Goldman Sachs Group Inc. treasurer.

Fed policy makers set their target range to influence a suite of short-term rates at which banks lend to each other in overnight markets—but those rates are ultimately determined by the markets. If various operations in the markets fail, the fed-funds rate can deviate significantly from the target.

In the short run this likely affects only market participants who borrow in the overnight markets, but if the strains last long enough it can affect the rates other businesses and consumers pay.

Such deviations also undercut the Fed’s ability to keep the economic expansion on track through monetary policy, such as by lowering rates to provide a boost and raising them to prevent the economy from overheating.

The New York Fed hasn’t had to intervene in money markets since 2008 because during and after the financial crisis, the Fed flooded the financial system with reserves—the money banks hold at the Fed. It did this by buying hundreds of billions of dollars of Treasurys and mortgage-backed securities to spur growth after cutting interest rates to nearly zero.

Reserves over the last five years have been declining, after the Fed stopped increasing its securities holdings and later, in 2017, after the Fed began shrinking the holdings. Reserves have fallen to less than $1.5 trillion last week from a peak of $2.8 trillion.

The Fed stopped shrinking its asset holdings last month, but because other Fed liabilities such as currency in circulation and the Treasury’s general financing account are rising, reserves are likely to grind lower in the weeks and months ahead.

In addition, brokers who buy and sell Treasurys have more securities on their balance sheets due to increased government-bond sales to finance rising government deficits.

Source: https://www.wsj.com/articles/fed-to-conduct-first-overnight-repo-transactions-in-several-years-11568729757

Moody's changes outlook on Hong Kong's Aa2 rating to negative from stable; affirms rating

SINGAPORE - Moody's Investors Service has today changed the outlook on the Aa2 issuer rating of the Government of Hong Kong to negative from stable, and affirmed the Aa2 long-term issuer and senior unsecured ratings.

The change in outlook to negative reflects the rising risk that the ongoing protests reveal an erosion in the strength of Hong Kong's institutions, with lower government and policy effectiveness than Moody's had previously assessed, and undermine Hong Kong's credit fundamentals by damaging its attractiveness as a trade and financial hub.

The affirmation of the Aa2 rating reflects, among other things, Hong Kong's strong fiscal and external buffers, with a minimal government debt burden, large fiscal reserves and ample foreign exchange reserves, all of which offer resilience to shocks and negative long-term trends.

Moody's has also affirmed the Aa2 senior unsecured foreign currency ratings of the Trust Certificates issued by Hong Kong Sukuk 2014 Limited and Hong Kong Sukuk 2015 Limited, special purpose vehicles established by the Government of Hong Kong. The payment obligations associated with these certificates are direct obligations of the government and rank pari passu with other senior unsecured debt of the government.

Hong Kong's long-term foreign-currency bond ceiling and the local currency bond and deposits ceilings remain at Aaa, and the long-term foreign currency deposits ceiling remains at Aa2. Hong Kong's short-term foreign currency bond and bank deposits ceilings remain unchanged at P-1.

Source: https://www.moodys.com/research/Moodys-changes-outlook-on-Hong-Kongs-Aa2-rating-to-negative--PR_409149

Oil surges, stock futures slip after attack on Saudi facility

ASIA - Oil prices surged to six-month highs on Monday while Wall Street futures fell and safe-haven bets returned after weekend attacks on Saudi Arabia’s crude facilities knocked out more than 5% of global oil supply.

U.S. crude futures were last up 11% at $61.10 a barrel, coming off highs on expectations other global oil suppliers would step in to lift output. Brent crude soared 13% at $68.06 after earlier rising to $71.95.

Those fears powered safe-haven assets, with prices for gold climbing 1% in early Asian trade to $1,503.09.

Moves in Asian share markets were small, however, with Japan shut for a public holiday.

MSCI’s broadest index of Asia-Pacific shares outside Japan was a tick lower at 515.4. Australian shares were down 0.1% while South Korea’s KOSPI was a tad higher.

“One immediate question this (attack) poses for bond markets is whether a further rise in the inflation expectations component of bond yields - which have proved historically sensitive to oil prices - will give this month’s sharp bond market sell-off fresh impetus,” said NAB analyst Ray Attrill.

“Or will safe haven considerations dominate to drive yields lower?  Watch this space.”

In early Asian trading, futures for U.S. 10-year Treasury notes rose 0.3%, indicating yields may slip when cash trading begins.

Global bonds were sold off last week, sending yields higher, led by a broader risk rally on hopes the United States and China would soon end their long trade war. Better-than-expected U.S. retail sales data also boosted sentiment.

Chinese data for industrial production, retail sales and fixed asset investment will be released later on Monday, which could help set the tone for this week.

Investors also await the outcome of the U.S. Federal Reserve’s policy meeting on Wednesday at which it is widely expected to ease interest rates and signal its future policy path.

Source: https://www.reuters.com/article/us-global-markets/oil-surges-stock-futures-slip-after-attack-on-saudi-facility-idUSKBN1W00WB

Euroclear plans bond investment link with China

CHINA - Euroclear plans to open a link for international investors to access the Chinese bond market, which will allow RMB-denominated debt to be used as collateral anywhere in the world.

The move from Euroclear, one of the world’s biggest securities depositories, is the latest step in China’s efforts to attract foreign investment into the country’s financial markets while promoting the global use of its currency. Euroclear plans to partner with China Central Depository and Clearing, a state-owned financial market infrastructure provider, to create the link. 

The recent addition of some Chinese equities in MSCI’s flagship emerging markets index, as well as the planned inclusion of Chinese government debt in Bloomberg and JPMorgan Chase indices, are expected to usher a windfall of more than $2 trillion in foreign investments into the country over the next two years, reported the FT.

China has gradually launched a number of schemes that allow limited access for foreign investors to China’s domestic market. Bond Connect, launched in 2017, allows foreign fund managers to trade in China’s government and corporate debt markets without setting up an onshore trading entity.

Source: https://www.ft.com/content/5109f9f2-d2d7-11e9-8367-807ebd53ab77