Luxembourg-domiciled UCITS funds are now able to take advantage of the Shanghai-Hong Kong Stock Connect scheme, which allows investors to trade Chinese A-share stocks through the Hong Kong exchange, and vice versa. The first Luxembourg fund received authorisation from the CSSF to use the trading link in December 2014.
Although UCITS domiciled in Luxembourg and elsewhere already had opportunities to invest in Chinese equities, notably through the renminbi qualified foreign institutional investor scheme, the volume of investment is limited by quotas, which has restricted purchases by some fund managers.
According to ALFI director general Camille Thommes, the Stock Connect programme – launched on November 17 last year – represents one of the biggest developments for foreign investors wishing to access the Chinese market.
ALFI says that in order to use the scheme, the Luxembourg UCITS, its management company (if applicable) and the fund’s depositary bank must first ensure that certain conditions are in place. These include:
• Accounts opened by the depositary with a sub-custodian in Hong Kong must be segregated at the level of the UCITS’ sub-funds or structured as UCITS client assets omnibus accounts of the Luxembourg depositary with the sub-custodian.
• The Delivery Versus Payment settlement model must be chosen to limit counterparty risk.
• The fund’s prospectus and KIID, must explicitly inform investors of the specific legal risks relating to the compulsory requirements of the respective markets’ central securities depositaries, Hong Kong Securities Clearing Company and ChinaClear, for custody of securities on a cross-border basis.
Hong Kong Exchanges and Clearing says that some investors were initially concerned about beneficial ownership in A-shares through the nominee structure established under Stock Connect, fearing that they would not have proprietary rights in the A-shares held through the exchange’s subsidiary HKSCC as nominee.
However, HKEx says investors now have confidence that they do have beneficial ownership under both Hong Kong and mainland China law, meaning they would retain their proprietary rights even if HKSCC were to become insolvent. Investors enjoy beneficial ownership rights such as receiving dividends and voting through HKSCC as nominee holder.
Luxembourg UCITS whose investment policy already authorised exposure to A-shares and that need only adapt their prospectus and KIID to cover access to the market through the Stock Connect scheme benefit from a fast-track procedure when filing applications with the CSSF.