Circular to Licensed Corporations and Registered Institutions - Selling of Fixed Income Products

19 Nov 2012



In the current low interest rate environment, investors strive to achieve higher yield. Within this context, it is noted that fixed income products being marketed and sold to clients include high-yield corporate bonds (which are generally below investment grade or are unrated), bonds with special features and funds investing in high-yield bonds. Such products carry additional risks of which investors should be aware.

Key risks of investing in bonds

Intermediaries are reminded that they should not market or treat all bonds as risk free products that are suitable for all investors. Holders of bonds, including plain-vanilla bonds, are subject to various risks, including but not limited to:

Key risks of investing in high-yield bonds

In addition to the generic risks listed above, investments in high-yield bonds are subject to risks such as:

Bonds with special features

Furthermore, some bonds may contain special features and risks that warrant special attention. These include bonds:

Funds investing in high-yield bonds

Intermediaries should also pay particular attention to those funds that invest primarily in high-yield bonds as (i) they will be subject to the risks associated with investments in bonds as described above; and (ii) the net asset value of a fund that invests in high-yield bonds may decline or be negatively affected if there is a default of any of the high yield bonds that it invests in or if interest rates change. The special features and risks of high-yield bond funds may also include the following:

Distributors’ obligations

Intermediaries should observe the selling practice requirements, including the suitability obligations, set out in the Code of Conduct1, Internal Control Guidelines2, Suitability FAQ3 and other circulars.

The potential risks highlighted in this circular are non-exhaustive. Given the potential wide scope of features and risks of fixed income products, intermediaries should put in place appropriate measures, systems and controls to ensure that their staff (i) have a thorough understanding of such products, (ii) are able to explain to the client prior to or at the point of sale the key features and risks of the products and the implications thereof, and (iii) are familiar with the selling practice requirements.

Intermediaries are also reminded of their obligations to: 

Finally, senior management of intermediaries are reminded to diligently supervise the selling practices of sales staff and put in place proper systems and controls to ensure full compliance with the relevant regulatory requirements.   

Should you have any queries regarding the contents of this circular, please contact Ms Lorraine Chan on 2842-7751.

Intermediaries Supervision Department
Securities and Futures Commission

End

SFO/IS/025/2012

Notes:

  1. Code of Conduct for Persons Licensed by or Registered with the SFC
  2. Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC
  3. Questions and Answers on Suitability Obligations issued by the SFC on 8 May 2007

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Page last updated : 19 Nov 2012