The Central Bank of Ireland (the "CBI") has announced it will permit Irish funds to access Shanghai-Hong Kong Stock Connect ("Stock Connect"). This opens up a substantive facility for Irish funds to invest directly in China domestic-listed equities and thus represents a significant milestone for the Irish funds industry and a welcome step in enhancing economic links between Ireland and China from a funds perspective.
Shanghai-Hong Kong Stock Connect
Stock Connect is a securities trading and clearing linked program developed by the Hong Kong Exchanges and Clearing Limited ("HKEx"), the Shanghai Stock Exchange ("SSE") and the China Securities Depository and Clearing Corporation Limited ("ChinaClear") with the aim of achieving mutual stock market access between the People's Republic of China ("PRC") and Hong Kong. Stock Connect operates as a mutual order-routing connectivity and related technical infrastructure to enable investors in the respective markets to trade designated equity securities listed in the other's market.
Stock Connect comprises a Northbound Trading Link and a Southbound Trading Link. Under the Northbound Trading Link, Hong Kong and overseas investors (including Irish funds) may trade eligible A Shares listed on the SSE by routing orders to the SSE. Such eligible A Shares include all constituent stocks from time to time of the SSE 180 Index and SSE 380 Index and all SSE-listed A Shares that are not included as constituent stocks of the SSE 180 Index and SSE 380 Index but which have corresponding H Shares listed on the SEHK (except certain stocks as may be prescribed from time to time).
CBI UCITS Q&A
Since Stock Connect launched in November 2014, the CBI has been actively reviewing the legal regime supporting Stock Connect and the market infrastructure through which the SSE-listed A Shares are acquired and held.
On 15 July 2015, the CBI published the sixth edition of its UCITS Q&A which includes guidance1 on the regulatory conditions that Irish UCITS need to fulfil when seeking to access Stock Connect.
The key points to note are:
- Where an Irish UCITS invests in SSE-listed A shares via Stock Connect, its depositary (i.e. custodian) or a duly appointed sub-custodian must ensure that it retains control over those shares at all times;
- The depositary or its sub-custodian must be a participant of the Hong Kong Securities Clearing Company Limited ("HKSCC") (one of the two central securities depositaries of Stock Connect);
- The depositary or sub-custodian must identify which category of HKSCC participant (namely General Clearing Participant, Direct Clearing Participant or Custodian Participant) is appropriate and would be in line with its legal obligations as a depositary; and
- The depositary must review continually the Stock Connect infrastructure arrangements to ensure that its legal obligations can be met.
The CBI also published the fourteenth edition of its AIFMD Q&A on 15 July 2015, to include guidance2 on the regulatory conditions that Irish alternative investment funds ("AIFs") need to fulfil in order to similarly be permitted to acquire SSE-listed A Shares through Stock Connect. These are in line with those set out above for UCITS.
Irish funds that wish to access SSE-listed A Shares through Stock Connect should:
Immediately engage with their depositaries to assess whether their current sub-custody infrastructure meets the conditions outlined in the CBI's Q&A or whether they will need to take additional measures to comply in order to obtain CBI clearance; and
Depending on the materiality of the level of investment proposed, funds may consider reflecting references to Stock Connect in their prospectus as appropriate, for example, in relation to adjustments to investment policy (noting also the potential requirement to obtain shareholder approval/notification) and additional risk factor disclosure.
China access strategies have gained huge momentum over the past number of years and, in particular, with the broadening of the RQFII rules in 2013, the granting of RQFII quota outside of Hong Kong and the introduction of Stock Connect last year. These initiatives have progressed the internationalisation of the Renminbi and are paving the way for the opening up of the PRC's capital account. Ireland is keen to remain at the forefront of these and future developments and this announcement reflects the Irish fund industry's commitment to the Chinese financial markets.