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Stock Connect Update

Mutual Market
06 Jan 2015

Since the launch of Shanghai-Hong Kong Stock Connect (Stock Connect) in the middle of November last year, Hong Kong Exchanges and Clearing Limited (HKEx) has been working with certain overseas regulators and institutional investors to facilitate their understanding of, and address their questions about, the mutual market access programme.

HKEx’s efforts have included:

Briefing relevant regulators in Europe and local and overseas fund industry associations;
Answering questions from and providing written responses to the fund industry and overseas regulators regarding the legal and regulatory structure of Stock Connect;
Publishing Frequently Asked Questions on the HKEx website and providing supplemental Questions and Answers to technical issues that concern the fund industry (the attachment is an example); and
Updating and liaising with Mainland authorities on the issues raised by the market.

Through the above, relevant overseas regulators have gained a clearer and better understanding of Stock Connect. HKEx understands that they do not have particular concerns on funds investing in A shares via Stock Connect.  In fact, the first UCITS1 was approved by the Luxembourg regulator to join the scheme in December 2014 and a fast-track application procedure for UCITS to update their prospectuses to invest in A shares through Stock Connect has been put in place.

One of the issues frequently raised by investors is the beneficial ownership in A shares held through the nominee structure established under Stock Connect.  Initially, some investors were worried that they would not have proprietary right in the A shares held through Hong Kong Securities Clearing Company Limited (HKSCC), a wholly-owned subsidiary of HKEx, as nominee.  However, it is now accepted by investors that they do have beneficial ownership under both Hong Kong law and Mainland China law.  This means that investors will retain their proprietary rights in A shares even if HKSCC were to become insolvent - the most important hallmark of beneficial ownership.  Further, the rules of HKSCC enable investors to enjoy their rights as beneficial owner including receiving dividends and voting through HKSCC as nominee holder.  The current arrangement also allows Hong Kong and overseas investors to hold A shares without requiring them or their fund managers to obtain licences in Mainland China, thus removing a lot of the compliance burden associated with a direct holding structure.

“We understand that the market needs time to get used to the idea of beneficial ownership in shares held through a nominee in the context of Mainland law even though it is not a new concept under both Mainland and Hong Kong law.  We are committed to making this and other concepts adopted in Stock Connect properly understood by investors and other stakeholders.” said Christine Wong, HKEx’s Chief Counsel and Head of Legal Services.

“We have had some very good discussions with market participants, regulators and our Mainland counterparts so far and will continue to work with them to develop Stock Connect further,” Ms Wong added.

Meanwhile, the Stock Exchange will stage a system test on the coming weekend as it seeks to make covered short-selling of A shares through Northbound Trading available to overseas and Hong Kong investors soon.  In March, HKSCC will test a new system function which enables tracking of investors’ stock holdings in its custody.  Details of the system tests have been provided to HKSCC Participants.  If the tests are successful, HKSCC will upgrade its systems and make the related changes to Stock Connect.

The rollout of the short-selling service, which HKEx aims to complete this month, will give investors greater flexibility in trading strategy and risk management, and the other change, scheduled for implementation in March, will enable institutional investors who hold their A shares through custodians to comply with the Mainland’s pre-trade checking requirement without transferring their shares to brokers before execution of a sell transaction.

Attachment:

Issues concerning Shanghai-Hong Kong Stock Connect (December 2014)

Note:

A set of Frequently Asked Questions relating to Stock Connect is available on the HKEx website.

1 UCITS (undertakings for the collective investment in transferable securities) are funds regulated in the EU.


Ends 

Updated 06 Jan 2015