The Securities & Futures Commission (
UBS submitted its offshore funds application to the SFC in March. It included funds invested in stocks, bonds, the money market, and strategic portfolios. All 20 funds were rejected by the SFC on Tuesday.
For hedging purposes, every one of UBS's offshore funds is involved in derivative investments. In its fund prospectus UBS says the premium ceiling for its derivatives investments is limited to 15 percent of the fund's net asset value.
The SFC currently has five requirements for offshore funds: (1) the fund company should have at least US$1 billion in total assets under its management; (2) the fund company should be more than two years old; (3) the applying fund should be more than two years old; (4) the fund company should not have a reprimand record in its home country; and (5) the applying fund should have no more than 15 percent of its net assets invested in derivatives.
SFC officials said that UBS's offshore mutual funds do not comply with the fifth rule.
Although UBS has put a ceiling on the total premium of derivatives investment at 15 percent of its fund's net assets, it is possible that the total contract value of the derivatives exceeds the ceiling through leverage. SFC officials said the funds might generate a high risk since the 15 percent margin could be leveraged to a contract value of six or seven times that of the margin.
"There is a difference between the definition of `premium' (保證金) by the SFC and the general practice of Luxembourg, which is the largest offshore fund center in the world," said Glendy Chu, associate director of UBS Hong Kong. "We have not yet decided whether to submit the application to the SFC again. It's pending a management decision."
Currently there are more than 12 other offshore fund companies with over one hundred funds pending SFC approval. Some of them have been waiting for more than a year, sources said.
"Most of the fund applications are unlikely to be approved before next March," said a senior executive of an offshore fund company's Taipei branch who declined to be named.
"The government has been trying to block the offshore fund industry's development since the Asian financial crisis, but it has worsened after `the special state-to-state relations' (
"Authorities are afraid that a massive outflow of capital might take place through offshore funds if local investors panic over China's military threat. The UBS case is just another victim of the blockade policy," the executive said.
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