Cross-border offering of funds under the HK-TH MRF Framework

Under the supervision of the Securities and Exchange Commission (SEC) and in accordance with the Thai Securities and Exchange Act B.E. 2535 (1992) and the regulations issued thereunder (collectively, “SEC regulations”), Thailand allows the outbound offering of units of funds established under Thai SEC regulations as well as the inbound offering of units of cross border funds established under the laws of other countries under the following frameworks:

              - ASEAN Collective Investment Schemes (ASEAN CIS) initiated in accordance with the ASEAN Capital Markets Forum comprising 10 ASEAN jurisdictions, namely Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

              - Asia Region Funds Passport (ARFP) in accordance with the Memorandum of Cooperation on the Establishment and Implementation of the Asia Region Funds Passport (“MOC"), which was implemented in 2018. There are currently five participating jurisdictions, namely Australia, Japan, the Republic of Korea, New Zealand and Thailand.

              - Foreign Exchange-Traded Fund (Foreign ETF) in accordance with SEC regulations allowing the inbound offering of units of Foreign ETF that are established under another jurisdiction but meet the criteria to be listed on the Thai stock exchange and offered to investors in Thailand.

           - Mutual Recognition of Funds between Hong Kong and Thailand (HK-TH MRF) in accordance with the bilateral framework under Mutual Recognition of Covered Funds and Covered Management Companies and related Cooperation (“HK-TH MRF MOU"), as signed between the Securities and Futures Commission (SFC) of Hong Kong Special Administration Region of the People’s Republic of China (Hong Kong) and the SEC of Thailand on 20 January 2021.

This article will discuss the criteria to qualify as an eligible Covered Fund for the collective investment scheme (“CIS”) (i.e. the CIS managed by a Covered Management Company which is licensed by the jurisdiction of domicile); the criteria for the inbound offering of units of the Hong Kong Covered Fund in Thailand; and the criteria for the outbound offering of units of the Thai Covered Fund in Hong Kong under the HK-TH MRF framework.

 A. Inbound: How can a Hong Kong Covered Fund get the SEC’s approval for offering for sale units of a Hong Kong CIS to the public in Thailand under the HK-TH MRF?

The Hong Kong Covered Fund (Hong Kong CIS managed by Hong Kong Covered Management Company that is licensed by or registered with the SFC for the Type 9 regulated activity (asset management) and authorised to manage the Covered Fund) applying for SEC approval must meet the eligibility requirements set out by the SEC, among which include the following:

              - The Hong Kong Covered Fund is legally established under the laws of Hong Kong and it must fall within one or more of the eligible types of fund, which are: (a) general equity fund; bond fund and mixed fund; (b) feeder fund; (c) unlisted index fund; or (d) passively managed index tracking exchange-traded fund (ETFs), including physical gold ETFs. It must not be a money market fund, hedge fund, fund of a hedge fund, structured fund, listed open-ended fund (also known as active ETFs) and closed-ended fund.

              - Hong Kong Covered Management Company is not currently under suspension or revocation of its licence, and the Hong Kong Covered Fund is offered for sale to the public in Hong Kong and is not currently under trading suspension.

              - Hong Kong Covered Fund’s net derivative exposure must not exceed 100% of the fund’s net asset value (NAV).

              - Management of investment in funds and operation of the Hong Kong Covered Fund is subject to certain investment restrictions, such as: (i) the underlying funds must be Hong Kong-domiciled funds (including ETFs) that are authorised by the SFC and comply with the SEC requirements or funds  under the  Undertakings for Collective Investment in Transferable Securities (UCITS) schemes (including ETFs) domiciled in Luxembourg and Ireland, and with the CIS domiciled in the UK; (ii) it may invest up to 10% of its NAV in unlisted funds under the supervision of a regulator who is a member of the International Organisation of Securities Commissions (IOSCO); (iii) it may have indirect exposure to Restricted Assets via its investment in underlying funds not exceeding 20% of its NAV; (iv) its investment in any single listed real estate investment trusts must not exceed 10% of its NAV; (v) its investment in any single ETF other than those set out in (i) above must not exceed 10% of its NAV; (vi) it must not directly invest in the Restricted Assets listed by the SEC, which include loan participation, loan assignment, writing of credit default swap protection and writing of credit derivative, virtual assets (i.e. digital tokens, such as digital currencies, utility tokens, investment tokens, or security or asset-backed tokens, and any other virtual commodities, crypto assets and other assets of essentially the same nature); (vii) it must not engage in a physical short sale transaction; and (viii) it is subject to an aggregate limit of 10% of its NAV in respect of borrowings or engaging in repurchase transactions on a temporary basis for the purpose of liquidity management.

              - Hong Kong Covered Management Company must appoint a Thai securities company who is licensed under Thai law to undertake a securities business in the category of securities brokerage, securities dealing or underwriting of investment units, to be its local intermediary for the sale of the Hong Kong Covered Fund units in Thailand.

              - Hong Kong Covered Management Company must appoint a Hong Kong Covered Management Company’s local representative to be its local representative in Thailand, in order to coordinate matters such as information disclosure, filing the application and delivery of documents to the SEC.

              - Hong Kong Covered Fund must have a trustee/custodian that qualifies to act as a mutual fund supervisor for a Hong Kong CIS approved for public offering.

B. Outbound: How can a Thai Covered Fund get the SEC approval prior to applying for the SFC’s approval for offering units for sale to the public in Hong Kong under the HK-TH MRF?

To be established as a Thai Covered Fund under the HK-TH MRF, a Thai asset management company (AMC) shall submit an application for establishment of a Covered Fund to the SEC.

Thai Covered Fund must meet the eligibility requirements set out by the SFC, which include the following:

              - Thai Covered Fund is legally established, domiciled and managed in accordance with Thai laws and regulations. It must be a mutual fund with its establishment approved by the SEC, and it must fall within one or more of the eligible types of the following funds: (a) general equity fund, bond fund and mixed fund; (b) feeder fund; (c) unlisted index fund; or (d) passively managed index tracking exchange-traded fund (ETFs), including physical gold ETFs. It must not be a money market fund, hedge fund, fund of a hedge fund, structured fund, listed open-ended fund (also known as active ETFs) and a closed-ended fund,

              - Thai Covered Management Company (AMC who manages the Thai Covered Fund) must not have been the subject of any major regulatory or enforcement actions (i.e. the suspension of its licence by the SEC) in the past three years or, if it has been established for less than three years, since the date of its establishment.

              - Thai Covered Fund’s net derivative exposure must not exceed 100% of the fund’s net asset value (NAV).

              - Investment in funds and operation of the Thai Covered Fund is subject to certain investment restrictions, such as: (i) the underlying funds may be the Thai-domiciled funds (including ETFs) that are approved by the SEC and comply with the SFC requirements, or funds under the  Undertakings for Collective Investment in Transferable Securities (UCITS) Schemes (including ETFs) domiciled in Luxembourg and Ireland, with the CIS domiciled in the UK and authorised as UK UCITS; (ii) it may invest up to 10% of its NAV in unlisted funds under the supervision of a regulator who is a member of the International Organisation of Securities Commissions (IOSCO); (iii) it may have indirect exposure to Restricted Assets via its investment in underlying funds not exceeding 20% of its NAV; (iv) its investment in any single listed real estate investment trusts must not exceed 10% of its NAV; (v) its investment in any single ETF other than those set out in (i) above must not exceed 10% of its NAV; (vi) it must not directly invest in the Restricted Assets listed by the SEC, which include loan participation, loan assignment, writing of credit default swap protection and writing of credit derivatives, digital assets in any form (such as  cryptocurrencies, utility tokens, investment tokens and certificates representing the assets referred to as digital assets, and other assets of essentially the same nature); (vii) it must not engage in a physical short sale transaction; (viii) it is subject to an aggregate limit of 10% of its NAV in respect of borrowings or engaging in repurchase transactions on a temporary basis for the purpose of liquidity management.

              - The Thai Covered Management Company may delegate the investment management functions to any entity, provided that such delegation is made in accordance with Thai SEC laws and regulations, where the Thai Covered Management Company remains responsible for any action of its delegate(s), and such delegate operates in one of the acceptable inspection regimes recognised under clause 5.1 of the Code on Unit Trusts and Mutual Funds (“UT Code”) of Hong Kong, which currently provides that: “Thailand is regarded as an acceptable inspection regime in respect of: (a) management companies and delegates of Thailand with domiciled mutual funds are recognised under the Memorandum of Understanding on Thailand-Hong Kong Mutual Recognition of Funds and Management Companies entered into between the SFC and the Thai SEC on 20 January 2021 (as may be amended from time to time); and (b) delegates of management companies of SFC-authorised Hong Kong domiciled collective investment schemes and recognised jurisdiction schemes”.  

              - Thai Covered Fund must have a trustee/custodian that qualifies to act as a mutual fund supervisor for the Thai CIS approved for public offering.

To protect the investors, after receiving approval of the competent agency of the host jurisdiction, the participating Management Company under the HK-TH MRF framework is required to operate and manage the Covered Fund in accordance with the laws of the domicile jurisdiction, and to comply with the HK-TH MRF MOU and the applicable laws of the host jurisdiction in offering, marketing and distribution of the Covered Fund, reporting on the sale of units and performing the ongoing disclosure of financial position and performance information.

This is intended merely to provide a regulatory overview and not to be comprehensive, nor to provide legal advice. Should you have any questions on this or on other areas of law, please do not hesitate to contact:

Nuttaros Tangprasitti
Partner

Thiti Homjabok
Attorney-at-Law

Malinee Kriengkrailipikorn
Attorney-at-Law