Investment Funds Update - Asia: Legal and regulatory updates for the funds industry from the key jurisdictions in Asia: Hong Kong

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Hong Kong – China Mutual Recognition Scheme (the “Scheme”)

An opportunity to market HK-domiciled and authorized funds to Mainland retail investors is starting to take shape. There is keen expectation that this Scheme will finally go “live” in the second half of 2015. The Securities and Futures Commission (“SFC”) in Hong Kong has indicated that approximately 600 funds will likely qualify for participation in the Scheme: 500 being Mainland-domiciled and approved by the China Securities Regulatory Commission (“CSRC”), and 100 being Hong Kong-domiciled and SFC-authorised.

Hedge funds or funds that use derivatives will not be able to participate in the Scheme; which will only be available to plain vanilla bond and equities funds.

There will be a total quota will be assigned to the entire Scheme, with each participating fund in Hong Kong and the Mainland receiving individual quotas based on their respective assets under management. The Scheme is said to currently be awaiting approval from the State Council of the People’s Republic of China before the SFC and CSRC can sign a Memorandum of Understanding to implement the Scheme.

At this stage, no further details on the actual rules implementing the Scheme (e.g. eligibility, track record or AUM requirements) are available.

Hong Kong - Shenzhen Stock Connect

The Shenzhen Stock Exchange (“SSE”) may soon open up to global investors. Some details of the Hong Kong-Shenzhen Stock Connect (the “Programme”) were released in an interview with the Chief Executive of the SSE, Ms. Song Liping, during the annual session of the National People’s Congress. According to the interview, it is expected that the Programme will be approved in the first half of 2015, to be implemented in the second half of 2015. The daily quota for the Programme and minimum capital requirements are expected to be the same as that of the Hong Kong - Shanghai Stock Connect, which is currently RMB 10.5 billion (approximately US$1.6 billion) a day for purchases of HK-listed stock by local Mainland Chinese investors; and up to RMB 13 billion (approximately US$2.1 billion) a day for the purchase of Shenzhen-listed stocks by global investors.

Read Dechert OnPoint: The Through-Train Leaves the Station: Hong Kong-Shanghai Stock Connect Launches

Consultation Conclusions on Reporting and Record Keeping Rules for OTC Derivatives

Fund managers received a reprieve from the initial implementation of Hong Kong’s OTC derivatives reporting regime. In November 2014, the Hong Kong Monetary Authority (“HKMA”) and the SFC jointly published the consultation conclusions on the proposed mandatory reporting and related record keeping obligations under Hong Kong’s new OTC derivatives regulatory regime (the “Conclusions”). In response to industry feedback, the Conclusions set out revisions to the proposals on OTC derivatives regulation including, amongst other things:

  • Implementation of the mandatory reporting and related record keeping obligations for OTC derivatives in phases, where the initial reporting obligations will be limited to regulated entities (i.e. authorized institutions, approved money brokers, central counterparties corporations and SFC-licensed corporations where they are either counterparties to the reportable transactions or conduct trades in Hong Kong on behalf of their affiliates acting as counterparties), and will not extend to Hong Kong licensed fund managers for the OTC transactions of offshore funds that they manage.
  • Extension of the concession period to establish reporting connections to the Hong Kong Trade Repository (“HKTR”) from 3 months to 6 months, and an extension of the period for backloading historical transactions from 6 months to 9 months.
  • Clarification to the basis behind transactions viewed as having been conducted in Hong Kong if an affiliate is a counterparty to the transaction and one of the individuals who made the decision for the affiliate to enter the transaction (i) acted in his / her capacity as a trader; and (ii) was employed or engaged by the reporting entity.

In addition to the above, the Conclusions also seek industry views on the following matters:

  • the reporting of valuation transaction information;
  • a list of designated jurisdictions for the purposes of the masking relief (i.e. where the identity of the counterparty need not be disclosed to the HKTR); and
  • a list of stock markets, futures markets and clearing houses to be prescribed for the purposes of carving out exchange-traded transactions from the definition of “OTC derivatives” and the related reporting requirements.

Read the Consultation Conclusions and Further Consultation on the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules

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