Circular to management companies of SFC-authorised money market funds

1. This circular highlights the Securities and Futures Commission’s (SFC) requirements and expectations for management companies (Managers) of SFC-authorised money market funds (MMFs)¹, and sets out good practices for managing the liquidity risk of such funds in the Appendix.
2. Managers are required to maintain and implement effective liquidity risk management policies and procedures to monitor the liquidity risk of the MMFs under their management, taking into account factors including the funds’ investment strategy and objectives, investor base, liquidity profile, underlying obligations and redemption policy². Managers should refer to the SFC’s guidance on liquidity risk management of SFC-authorised funds set out in the Circular to management companies of SFC-authorized funds on liquidity risk management dated 4 July 2016.
3. The SFC regularly engages with the fund industry and monitors SFC-authorised funds (including MMFs) via data reported by Managers. Early this year, the SFC conducted a thematic review on Hong Kong domiciled MMFs, including their investment portfolios as at the end of 2023. The SFC has also engaged with several Managers recently to understand their liquidity risk management practices, particularly the measures they put in place to meet large redemption requests by investors in view of prevailing market conditions such as changes in interest rate cycles.
4. The overall number and asset under management of Hong Kong domiciled MMFs have increased in the last five years. However, in 2023, MMFs started to report more outflows than previous years following the commencement of downward interest rate cycle and relocation of assets by MMF investors. Hong Kong domiciled MMFs reported holding of liquid fund portfolios and no liquidity problems in meeting redemptions. While there are no major deficiencies, there is room for improvement of liquidity risk management including assessment of underlying investments and use of liquidity risk management tools (LMTs) to further enhance the resilience of MMFs.
5. Managers are reminded that MMFs are required to invest in high-quality money market instruments. They must take into account both the credit quality and liquidity profile in determining the quality of a money market instrument. Managers should have a prudent internal procedure for assessing whether or not a money market instrument invested by their MMFs is of high quality, having regard to multiple factors, including but without over-reliance on external credit ratings. MMFs are generally not expected to invest in unrated or low-investment-grade money market instruments.
6. Managers are reminded to exercise due care, skill and diligence in managing the liquidity of their MMFs at all times, taking into account prevailing market conditions (such as interest rate changes and their potential impact on MMFs), and to ensure fair treatment of both redeeming and remaining investors in meeting redemption requests.
7. It is important to have in place an effective liquidity risk management framework to provide for reasonable liquidity cost, mitigate material dilution and protect the interests of remaining investors upon others’ redemption. As such, in the case of an early termination of fixed-term deposits held by the MMFs, redeeming investors should bear any penalties imposed by the depositing entities, and Managers are required to properly allocate to redeeming investors an appropriate share of loss of accrued income resulting from the downward adjustments of interest rates receivable by the MMFs.
8. Managers should review their current policies and procedures to assess the adequacy of their action plans and availability of LMTs, including the ability to use anti-dilution LMTs, and implement necessary enhancements such as revisions of the funds’ offering documents to ensure such tools are available for use when needed.
9. The SFC has identified some good practices as set out in the Appendix. Whilst not binding, these examples should assist Managers in managing the liquidity risk of MMFs under their management.
10. Should you wish to clarify any aspects of this circular, please contact the relevant case officers in charge.

Investment Products Division
Securities and Futures Commission

End