Market timing problems rare in Hong Kong

Jul 8, 2004

The SFC will work to standardize an industry response, but finds no sign of systematic failings as occurred in the US.

Hong Kong's Securities and Futures Commission, reacting to the market-timing and other mutual fund scandals in the United States, surveyed 48 firms with portfolios containing global securities in the first quarter of 2004. It has found isolated problems but, industry-wide, believes Hong Kong has not been subject to major problems of this nature.

Few firms reported unusual frequent trading spikes although two firms said market timers had approached them recently asking to be allowed to market time the funds. The SFC believes market timing is not severe here because most of these funds invest in Asian securities and the time difference for market closings between various Asian markets is low, creating less incentives for time arbitrage.

Although most big houses have put in place a monitoring system, there is no single set of standardized measures to prevent frequent trading by investors.

Several respondents reported being requested to disclose non-public information about a fund's portfolio, and two of them did so for institutional clients, subject to confidentiality agreements. Again, while most houses have policies to prevent the abuse of leaking confidential information, there is no standard.

"Thus," says the SFC, "there might be an area of concern if some investors... were provided with non-public fund information but others were not."

Late trading was not found to be a problem in Hong Kong.

The SFC is aware that market timing is not illegal but can be detrimental to a fund's long-term investors, particularly when combined with late trading or trading on non-public information.

Says the regulator: "The survey is the first wide-scale survey with licensed fund management companies on their trading practices. There are areas that the SFC believes should be followed up to enhance understanding of the market practice. The Commission will perform further review of the fund trading practices and will also discuss the issues covered in the survey with the industry to work out possible means to guard against abusive trading practices."

It also intends to coordinate this effort with regulators in neighbouring countries.