20 February 2019
HKIFA chief executive Sally Wong and chairman Bruno Lee said authorities are working hard to resolve the issues confronting Stock Connect. Photo: EJ Insight
HKIFA chief executive Sally Wong and chairman Bruno Lee said authorities are working hard to resolve the issues confronting Stock Connect. Photo: EJ Insight

Stock Connect facing technical, legal hurdles: HKIFA

Technical and legal hurdles are preventing many global institutional investors from entering the A-share market following the launch of the Shanghai-Hong Kong Stock Connect, according to a survey by the Hong Kong Investment Funds Association (HKIFA).

Only 31 percent of the firms that responded to the survey have bought mainland-listed shares through the cross-border stock trading scheme, although nearly half of the respondents plan to buy shares through the Stock Connect in the next six months.

About 7.4 percent of the firms surveyed plan to use the scheme within 12 months, while the rest said they are interested in joining.

A total of 41 firms, primarily global asset management companies, participated in the survey from November to December last year. The respondents managed combined assets of nearly US$20 trillion globally as of the end of last October.

HKIFA chairman Bruno Lee said he believes the use of Stock Connect will grow steadily and robustly once legal and technical issues are resolved. He noted that authorities are working hard to resolve the issues.

That half of the survey respondents plan to join the scheme in six months indicates that they expect to see solutions to these issues in the first half, Lee said.

The HKIFA said one of the key concerns of funds is beneficial ownership.  

In the Undertakings for Collective Investment in Transferable Securities (UCITS), for example, shares and bonds bought by mutual funds are typically held by custodians on behalf of the actual investors.

However, many investors think that they are not assured of legal entitlement to Shanghai shares held on their behalf by the clearing house of Hong Kong Exchanges and Clearing Ltd. (HKEx).

The UCITS, the main European framework covering collective investment schemes that are suitable for retail investors, have very strict requirements with regard to ownership and segregation, the HKIFA added.

In a statement issued on Tuesday, the HKEx sought to assure funds of the safety of their investments via the Stock Connect.

“It is now accepted by investors that they do have beneficial ownership under both Hong Kong law and mainland law,” the statement said.

This means that investors will retain their proprietary rights in A shares even if the [Hong Kong Securities Clearing Co. Ltd.] were to become insolvent — the most important hallmark of beneficial ownership.”

The HKEx also stressed that “[foreign regulators] do not have particular concerns on funds investing in A shares via the Stock Connect”.

Pre-trade checking, disclosure of interest and the short-swing profit rules are also key concerns.

HKIFA’s Lee said the scheme’s pre-checking rules may lead to information leaks ahead of the deals and may restrict the fund manager’s flexibility in case investors change their mind at the last minute.

Sally Wong, the association’s chief executive, said it’s important to solve the problems in both directions, meaning overseas participants should try to understand the scheme better while regulators should fine-tune the Stock Connect rules.

She said it is also important to enhance communication with overseas regulators and market participants.

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EJ Insight reporter

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