Hong Kong Regulator (SFC) Releases Criteria for Crypto Futures ETFs

After much pondering on the need to allow retail investors to trade crypto and finally floating a public consultation in preparation for legalizing its retail crypto trading, the Hong Kong regulator Securities and Futures Commission (SFC) has outlined guidelines and criteria for entities that wish to offer initial public offering (IPO) of an exchange-traded fund (ETF) linked with digital assets futures. 

To begin with, such entities are expected to have a good track record of regulatory compliance. Any such management company will also be expected to possess at least three years of experience managing ETFs or similar products in the group of companies to which the management firm belongs. 

This is in addition to meeting the requirement in the “Overarching Principles Section (Overarching Principles Section) and the Code on Unit Trusts and Mutual Funds (UT Code) in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (SFC Handbook).”

Hong Kong ETF Futures Limited to BTC And ETH

The management companies are expected to utilize active investment strategies for flexibility in portfolio composition, rolling strategy, and handling any market disruption events. Following in Chicago Mercantile Exchanges’s footsteps, the Hong Kong regulator says it will only allow listings of ETFs linked to Bitcoin (BTC) and Ethereum (ETH) futures. 

“Only [virtual asset, or VA,] futures traded on conventional regulated futures exchanges are allowed, subject to the management company demonstrating that the relevant VA futures have adequate liquidity for the operation of the VA Futures ETF and the roll costs of the relevant VA futures contracts are manageable and how such roll costs will be managed,” the regulator said.

At the appropriate time, the SFC will expand the scope of eligible crypto futures markets. SFC also explained that the net derivative exposure of a crypto asset Futures ETF shall not exceed 100% of the ETF’s total net asset value. On the part of the ETF issuers, extensive investor education would need to be carried out before any crypto investment entity is launched in the region.

In the future, the Hong Kong government plans to introduce a series of pilot projects including those focused on Non-fungible tokens, green bond tokenization, and a Central Bank Digital Currency dubbed the digital Hong Kong dollar.