Attractiveness of Hong Kong ETF market
- HKEx is one of the leading ETF markets in the region in terms of number of listing, turnover value and Asset Under Management
- Regulations of the ETF market in Hong Kong follow international standards
- HKEx provides efficient and robust trading, clearing and settlement facilities
- HKEx has a wide distribution network with around 500 Stock Exchange Participants from around the world
- Professional intermediaries (such as lawyers, custodians, Participating Dealers (PDs), information vendors, etc.) are widely available in Hong Kong
- Market making is available for ETFs listed on HKEx
What are ETFs?
ETFs are passively-managed open-ended funds, unit trust or similar investment arrangement that is listed and/or traded on HKEx. ETFs in Hong Kong are authorized by the Securities and Futures Commission (SFC) of Hong Kong. The principal objective of an ETF is to track or replicate the performance of an underlying index. The index can be on a stock market, a specific segment of a stock market, a group of stock markets, bonds or commodities. Some ETFs in Hong Kong also track the performance of single commodities, such as gold.
Types of ETFs
ETFs listed in Hong Kong can be broadly grouped into two types – Physical and Synthetic
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Physical ETFs directly buy all the assets needed to replicate the composition and weighting of their benchmark (e.g. constituents of a stock index). However, some only buy a portion of the assets needed to replicate the benchmark or assets which have a high degree of correlation with the underlying benchmark. Some physical ETFs with underlying equity-based indices may also invest partially in futures and options contracts. |
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Synthetic ETFs do not buy the assets in their benchmark, but invest in financial derivative instruments to replicate the benchmark’s performance. The ETFs are required to have collateral when investing in derivatives. An ETF’s net risk exposure to any single counterparty cannot be more than 10% of its NAV. Details on collateral requirements should refer to the SFC’s press release. |
There are also requirements for identification of synthetic ETF – A marker “X” is placed at the beginning of the English and Chinese stock short names of all synthetic ETFs listed on HKEx for easy identification and an asterisk with annotation (*This is a synthetic ETF) is placed right after the name of a synthetic ETF in offering documents and marketing materials. Details can be referred to the joint press release issued by the SFC and HKEx.
Eligibility of ETF Managers
ETF managers must be licensed by the SFC prior to issuance of any ETF in Hong Kong. Potential ETF managers should contact the SFC for information about their eligibility as fund managers. Related information can be found on the “licensing related matters” section of the SFC website.
Authorization of ETFs
Pursuant to the Securities and Futures Ordinance (SFO), authorization by the SFC is required for all ETFs listed in Hong Kong. The Code on Unit Trusts and Mutual Funds establishes guidelines for the authorization of collective investment schemes (CIS) which include ETFs. Potential ETF managers should seek authorization of their ETFs from the SFC prior to seeking a listing on HKEx.
Listing of ETFs
After obtaining the SFC’s “approval in-principle (AIP)”, formal listing application of an ETF can be submitted to the Listing Division of HKEx. Listing of ETFs is regulated under Chapter 20 of the Listing Rules and application form is available on HKEx website.
Trading
Market making
The SFC requires all ETFs listed on the Exchange to have at least one market maker, namely Securities Market Maker (SMM). Details of securities market making can be found here. Obligations and incentives for SMM are set out here and in the Fourteenth Schedule of the Rules of the Exchange. Click here for the latest list of SMM for all ETFs.
Short selling
An ETF may be designated by HKEx for short selling with tick rule exemption (i.e. short sales below the best current ask price) from its listing day. The list of ETFs eligible for short selling with tick rule exemption is available here.
Stamp duty
Any sale and purchase of the units of an ETF which has a primary listing in Hong Kong and invests in Hong Kong listed stocks is subject to stamp duty. ETFs that track an index comprising not more than 40% of Hong Kong stocks may be exempted from stamp duty. Click here for information on stamp duty and other trading arrangements for all ETFs.
Stock code allocation
The stock code ranges (2800 - 2849 and 3000 - 3199) are reserved for ETFs (other than RMB ETFs). For RMB ETFs, the stock code ranges (82800 - 82849 and 83000 - 83199) are reserved. ETF managers can either choose a favorite stock code with donation or to ballot for a stock code within the range.
Potential ETF managers and SMM are advised to contact Trading Division of HKEx in relation to admission to trading and market making arrangements as early as possible in parallel with the process of seeking SFC authorization.
Clearing
ETF managers will have to apply to Clearing Division of HKEx for the admission of the ETF units as eligible securities for deposit, clearing and settlement in CCASS before the ETF is listed.
ETFs issued on non-HK stocks
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HK Conversion Agency Services Limited (HKCAS), a wholly owned subsidiary of Hong Kong Securities Clearing Company Limited (HKSCC), can act as a service agent to facilitate the book-entry deposit/withdrawal of the ETF units into/from CCASS for the ETF created/redeemed outside CCASS. The ETF manager, trustee (or custodian), registrar and PDs (who must be a CCASS Participant) need to sign a service agreement with HKSCC and HKCAS. |
ETFs issued on HK stocks
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HKCAS can act as the ETF’s conversion agent. ETF managers can make use of CCASS to facilitate the settlement of unit creation and redemption instructions submitted by PDs. |
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A participation agreement (signed by the ETF manager, trustee, PD, HKSCC and HKCAS) and a conversion agency agreement (signed by the ETF manager, HKSCC and HKCAS) are required |
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Potential ETF managers are advised to contact HKEx’s Clearing Division as early as possible in parallel with the process of seeking SFC authorization. |
Fees required
For fees charged by the SFC for fund authorization, please contact the SFC directly.
Fees charged by HKEx relating to the listing of ETFs include the following:
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Initial Listing Fee: HK$20,000 |
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Annual Fee: HK$15,000 |
Fees charged by HKCAS as service agent and conversion agent:
Service agent:
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Book-entry deposit / withdrawal transaction: HK$1,000 per transaction, payable by PD |
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Reconciliation fee: HK$5,000 per month, payable by the ETF manager |
Conversion agent:
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Conversion agent’s fee: HK$5,000 – $12,000 depending on the aggregate market value of creation/redemption instructions of a PD for the day, payable by the ETF manager |
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Unit cancellation fee: HK$1 per board lot, payable by the ETF manager |
On-going disclosure
ETF managers are required to comply with the continuing obligations as stipulated in the Listing Rules (click here letter for details). In addition, ETF managers are required to submit a daily report for their ETFs to disclose such information as NAV, AUM, total units outstanding, premium/discount, etc. Click here for the templates (1 ETF / 10 ETFs) and their respective specifications (1 ETF / 10 ETFs).