This follows the earlier consultation paper on the proposed arrangements for the Passport, which was issued on April 16, 2014. Our last briefing that sets out highlights from the earlier consultation paper can be found here.
The Working Group has issued a feedback statement summarizing the key submissions received for the earlier consultation paper and setting out its responses to the submissions as well as the outcomes that have been determined (Feedback Statement). The proposed Passport arrangements have been refined after taking the submissions into account and are now reflected in a draft memorandum of understanding (MOU). The MOU, when signed, will reflect that member economy’s commitment to participate in the Passport and to implement the Passport arrangements.
We set out highlights below from the Feedback Statement and annexes to the draft MOU1:
HIGHLIGHTS OF THE OUTCOMES FROM THE FEEDBACK STATEMENT
|1. Fund Structure||
|2. Fund Labeling||
|3. Location of the Manager||
|4. Home Economy Public Offer||
|5. Operational Requirements||
|6. Qualifications of the Officers of the Manager||
|7. Capital Adequacy||
|8. Minimum Funds under Management||
|10. Compliance Audit||
|12. Investment Restrictions–Permitted Assets||
|13. Investment Restrictions–Portfolio Allocation Restrictions||
|14. Investment Restrictions–Derivatives and Securities Lending||
HIGHLIGHTS OF THE ANNEXES TO THE DRAFT MOU
- Annex 1–Host Economy Laws and Regulations
Annex 1 sets out the obligations that may be imposed by a Host Economy on a Passport fund or its manager. These include:
- restrictions on the labeling of a Passport fund as an exchange-traded fund, index fund, capital-guaranteed fund or money market fund;
- disclosure and annual and periodic reporting (other than financial statements) to investors;
- distribution and licensing of distributors operating in the Host Economy;
- handling of investor complaints; and
- appointment of a local representative or agent in the Host Economy.
- Annex 2–Common Regulatory Arrangements
Annex 2 contains the regulatory arrangements for Passport funds which are to be given effect by a participant economy. The topics covered include:
- the application process for registration of a regulated CIS as a Passport fund, and the conditions and authorizations/notification process for offering a Passport fund in a Host Economy;
- guidance on the supervisory, investigative and administrative powers of the Passport fund regulators; and
- deregistration and winding-up process for a Passport fund.
- Annex 3–Passport Rules
Annex 3 sets out the Passport rules which would apply to a participant economy. These broadly include rules in relation to:
- the constituent document for a regulated CIS;
- requirements to be fulfilled by the manager of a Passport fund (including officer qualifications, financial resources and track record);
- limits on delegation of functions by the manager;
- reporting requirements, custody, compliance review, financial reporting and auditing requirements;
- requirements for the Passport fund to be offered in the Home Economy;
- permitted Passport fund investments and investment restrictions;
- redemptions and valuation of assets; and
- the effect of deregistration of a Passport fund.
Approximate Implementation Timeline
- April 2015: Consultation on the MOU annexes concludes.
- May 2015: Working Group considers public submissions.
- August 2015: Working Group finalizes MOU and annexes.
- September 2015: Willing and ready economies become party to the MOU.
- 12 months from economies becoming party to the MOU: Economies party to the MOU will endeavour to implement changes to legislation where necessary to give effect to the Passport arrangements.
SINGLE ENTITY LIMIT
Option 1 (Summary of Section 30 of Annex 3 of MOU)
- No more than 5 percent after considering any reduction in risk due to offsetting exposures or the value disregarding the offsetting effects of derivatives, if higher, of the adjusted value of the assets of a Passport fund may be held in assets or arrangements that:
- relate to the same entity, that is not an entity that is an assessed central clearing party or subject to prudential supervision broadly under the guidelines of the Basel Committee on Banking Supervision by a financial supervisory authority in a principal place of business of the counterparty; and
- are of any one or more of the following types:
(i) transferable securities other than:
A. interests in financial asset regulated CISs or UCITS; and
B. risk-assessed government securities;
(ii) money market instruments other than risk-assessed government securities; or
(iii) securities lending arrangements.
- No more than 15 percent, after considering any reduction in risk due to offsetting exposures or the value disregarding the offsetting effects of derivatives, if higher, of the adjusted value of the assets of a Passport fund may be held in assets or arrangements that:
- relate to the same entity that is subject to prudential supervision broadly under the guidelines of the Basel Committee on Banking Supervision by a financial supervisory authority in that counterparty’s principal place of business; and
- are of any one or more of the types mentioned in paragraph (1)(b):
- No more than 20 percent, after considering any reduction in risk due to offsetting exposures of the adjusted value of the assets of a Passport fund may be held in assets that:
- relate to the same entity; and
- are of any one or more of the following types:
(i) the types mentioned in paragraph (1)(b); or
- No more than 35 percent, after considering any reduction in risk due to offsetting exposures the value disregarding the offsetting effects of derivatives, if higher, of the adjusted value of the assets of a Passport fund may be held in assets that are risk-assessed government securities relating to the same government entity.
- The maximum holding of assets or arrangements set out in subsection (1) is 10 percent of the adjusted value of the assets of Passport fund, after considering any reduction in risk due to offsetting exposure or the amount disregarding the offsetting effects of derivatives if higher, for the relevant assets or arrangements if:
- the relevant assets or arrangements have been assessed as having an acceptable risk within a period of no more than one month before the last acquisition of the asset in holding by the manager; or
- the total value of the assets and arrangements held or entered into by the Passport fund which exceeds the 5 percent single entity limit, other than where the assets or arrangements that have been assessed as having an acceptable risk within the last month previous by the manager, does not exceed 40 percent of the adjusted value of the assets of the Passport fund.
A Passport fund would be restricted to exposures of no more than 10 percent of the adjusted value of the assets in a single entity rather than 5 percent, as provided in Option 1. This option is without a requirement for being assessed as having acceptable risk or an aggregate restriction of 40 percent of the adjusted value of the assets for arrangements in single entity holdings exceeding 5 percent of the adjusted value of the assets that have not been assessed as having acceptable risk.
A Passport fund can have exposures of no more than 5 percent of the adjusted value of assets to a single entity, as provided in Option 1. However, the limit increases to 10 percent for an asset holding that meets the acceptable risk provision below.
Acceptable risk. A holding of assets by a Passport fund that relates to a single entity has been assessed by the manager as having acceptable risk if the manager, within the period of 1 month before the last acquisition of an asset in the holding:
- assessed the creditworthiness of the issuers, guarantors or counterparties of the assets in accordance with written policies and procedures which include having regard to independent sources of information; and
- assessed the risk for members of the Passport fund of holding the proposed concentration of the assets given the creditworthiness of the issuers, guarantors or counterparties; and
- concluded there was no disproportionate risk relative to the risks associated with the Passport fund’s investment strategy; and
- documented the assessments and the reasons for the conclusion.
Invitation for Comments
The Consultation is available at the following website: http://fundspassport.apec.org/consultation-on-rules/. Please refer to the Consultation for the complete set of proposals as well as the list of consultation questions. The deadline for comments and feedback to be submitted to the relevant authorities is April 10, 2015.
We are collating comments from clients, industry participants and interested respondents based in Singapore for submission to the Monetary Authority of Singapore. If you have any comments on the proposals that you would like us to submit on your behalf, please contact Han Ming Ho (+65.6230.3966, email@example.com) or Josephine Law (+65.6230.3916, firstname.lastname@example.org).
1The draft MOU itself has not been made public; only Annexes 1, 2 and 3 of the draft MOU are available for consultation.
2“Home Economy” refers to the original economy in which the Passport fund is established and regulated.
3“Host Economy” refers to the economy (other than Home Economy) in which a Passport fund is offered or will be offered to the public in that economy.
4“financial asset CIS” means a CIS that predominantly holds assets that a Passport fund is permitted to hold.
If you have any questions regarding this update, please contact the Sidley lawyer with whom you usually work.
|Han Ming Ho
| Effie Vasilopoulos
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