The Security and Futures Commission (SFC) signed a Memorandum of Regulatory Cooperation concerning Mutual Recognition of Funds between the Mainland and Hong Kong (the “scheme”) on May 22, 2015. The scheme allows mutual access to investment funds between the PRC and Hong Kong.
This platform will now allow offshore funds to be open to investors in the PRC and in return open up greater access for retail and institutional investors to invest in the PRC funds market. PRC fund managers will also gain from the scheme, as access to Hong Kong investors will expose them to an international platform, helping them develop their capability to manage assets and serve customers abroad and to compete globally.
Currently, 100 Hong Kong funds and 850 PRC funds are eligible to trade mutually. In total, the accessible Hong Kong funds will have around RMB300 billion in assets, while the total accessible Mainland funds will have roughly RMB2 trillion in assets.
The scheme, however, has its limitations which will take time to refine:
Criteria for Recognition
- In order to qualify under the scheme for Hong Kong funds, such funds must be domiciled in Hong Kong and operated by a management vehicle with a Type 9 license issued by the SFC. This limits overseas asset managers that have set up sales offices in Hong Kong with a Type 1 license.
- For PRC funds to qualify under the scheme, the fund will need to have a minimum of a one year track record with assets under management of approximately RMB200 million.
- The fund manager must be staffed by two key full-time portfolio managers with five years or more in retail funds experience and two responsible officers for licensing purposes with at least one who resides in Hong Kong.
Distribution of Retail Funds
- Fund managers in PRC and Hong Kong differs in their practice of selling funds to investors. In Hong Kong, funds are usually offered by commercial banks by way of a nominee arrangement, while in PRC, fund managers deal directly with investors. As such, this would imply the need for a mainland sales force to market Hong Kong funds in the PRC.
Application Process and Required Documents
- China currently offers fast-track authorization for “plain vanilla” onshore China funds (approximately 20 working days). However, many funds cannot use the fast-track procedure, including cross-market ETFs, leveraged funds, short-term wealth management funds and other “innovative products” (those without market precedent). For such fund, application approval would take around six months. As such, Hong Kong funds under the scheme may not be able to take advantage of the fast-track route at this initial stage.
The SFC has now begun accepting applications, and Hong Kong may see the first approved Mainland fund start selling as soon as the third quarter of this year.
In the meantime, regulators will be working with the industry to prepare them for the scheme.
Please see link here for more details on the scheme.