Irish authorised UCITS and alternative investment funds ("AIFs") are now permitted to acquire Chinese shares through the Shanghai-Hong Kong Stock-Connect programme ("Stock Connect"). This follows the publication of updated versions of the UCITS and AIFMD questions and answers ("Q&As"), by the Central Bank of Ireland ("Central Bank") on 15 July 2015. The updated Q&As also set out a number of conditions which must be satisfied before an Irish authorised UCITS/AIF is permitted to acquire shares through Stock Connect.
Stock Connect was launched on 17 November 2014 with the aim of relaxing restrictions which, among other things, inhibited international investors from buying Chinese A shares listed in Shanghai. The Stock Connect infrastructure involves two central securities depositaries - Hong Kong Securities Clearing Company Limited ("HKSCC") and China Securities Depository & Clearing Corporation Limited ("ChinaClear"). Following its launch, the Central Bank entered into discussions with the Irish funds industry regarding the ability of Irish authorised investment funds to acquire shares through Stock Connect.
The updated Q&As set out the regulatory framework applicable to Irish-domiciled funds seeking to purchase Chinese A shares through Stock Connect. According to that framework, before an Irish authorised UCITS or AIF purchases such shares:
- the depository must be satisfied that the manner in which the shares are to be held allows it to meet its legal obligations under UCITS/AIFMD rules and any conditions imposed by the Central Bank;
- the depositary or an entity within its custodial network (ie, a sub-custodian) must ensure that it retains control over the shares at all times and must participate in HKSCC at a level which is in line with its legal obligations as a depository; and
- the depository must review and keep under review its Stock Connect arrangements to ensure that its legal obligations can be met.
The publication of the new regulatory framework for the acquisition of shares through Stock Connect is an exciting development which should greatly facilitate access of investment managers to the Chinese market.
Any investment manager intending to use Stock Connect to acquire shares should contact its depositary as early as possible to ensure that it meets the Central Bank requirements.