FSC’s Enhanced Supervision Measures on High-yield Bond Funds

The Financial Supervisory Commission (FSC) announced enhanced supervision measures on high-yield bond funds on 4 November 2021 (Mandate) which we summarize below. The industry is required to proceed with the relevant name changes within 6 months.

1.To amend the Chinese name of “High Yield Bond Fund” to “Non-Investment Grade Bond Fund”: Although the name of the “High Yield Bond Fund” is translated directly from its English name, the nature of the bonds invested by such fund is indeed a non-investment grade bond. To respond to the proposal of the SITCA, the FSC announced the change to “Non-Investment Grade Bond Fund” to avoid any misunderstanding by investors. Note that the Mandate applies to both onshore and offshore funds registered in Taiwan, and the industry must proceed with the relevant name changes within 6 months after the announcement of the Mandate (namely, by mid-May 2022).

2.To enhance fund risk disclosure and provide more risk assessment reference information (The SITCA has therefore issued new classification standards and template of disclosure on 8 November 2021 in response to the Mandate):

(1)Where the “Fund Risk-return Rating Classification” (RR) is used as a risk reference, elaboration shall be given on: (i) the RR system calculates by standard deviation of the Fund’s net worth volatility over the past 5 years and classifies by the standard difference range, and (ii) the reasons and possible limitations of the RR rating of the fund. The SITCA will also adjust the RR of certain type of funds based on its recent review, among which, high yield bond fund will fall within RR3 to RR4.

(2)The risk warning or disclosure notice signed by an investor for subscription of a fund investing in “non-investment grade bonds” as an appeal shall include a warning of exchange rate risk for the investors to invest in a foreign currency denominated fund in NT dollar.

(3)RR classification shall not be the only reference of evaluation of risk of funds, as such, the SITCA established a “Fund Performance and Evaluation Indicators Inquiry” section on its website to provide relevant indicators such as annualized standard deviation, Beta, Sharpe, etc. for investors to refer to.

3.Suitability operations by sales agent:

(1)While the suitability assessment by sales agents includes “know your customer (KYC)” and “know your product (KYP)”, KYP by the sales agents shall cover a comprehensive assessment on relevant risks to be involved in investment strategy, investment area and portfolio, risk of which shall not be determined only by a single assessment indicator (e.g. RR rating).

(2)The sales agents shall incorporate the suitability assessment of the customers to funds and mis-selling conduct into the remuneration review of the sales personnel, and establish a punishment mechanism for misconduct. Sales personnel shall not guide or imply the investor to provide any false information for KYC exercise, resulting the investor to invest in the fund not comparable to his/her risk tolerance level.

Mike Lu/Jeffrey Liu

Scroll to Top