Hong Kong’s Securities and Futures Commission (SFC) and the Swiss Financial Market Supervisory Authority (Finma) signed the formal Mutual Recognition of Funds (MRF) and Asset Managers memorandum on Friday to provide a framework for the exchange of information and regulatory cooperation in relation to the cross-border offering of public funds.
The deal came just ahead of Monday’s official start of the new Hong Kong-Shenzhen Stock Connect link.
The Stock Connect agreement means that for the first time international investors will be able to trade stocks listed in the southern Chinese city, which is home to many more technology companies and start-ups than Shanghai. It also represents a further liberalisation of China’s capital markets.
Hong Kong centre
The MRF link with Switzerland and the Stock Connect deal are part of a drive by the Hong Kong government to beome more than just a distribution hub, according to Jeremy Lam, a Hong Kong-based partner and the head of Deacon’s financial services practice.
“What is interesting now is rather than simply adding Switzerland to the list of regimes where [the SFC authorises a fund for sale in Hong Kong], what they’ve now issued is an arrangement which is basically mutual,” Lam said.
Currently, there is a well-established process for recognised jurisdiction schemes in Europe that allows the distribution of Ucits funds in Hong Kong, but not the other way around, according to Lam.
In the case of Switzerland, there is no existing channel under which a Hong Kong-domiciled fund could be sold to the retail public in Switzerland and vice-versa, he added.
Home grown product sales
The move suggests that SFC is now looking at entering into schemes that are mutually beneficial rather than making Hong Kong just a distribution hub, where offshore funds are authorised to be sold to the retail public, he said.
Echoing Lam, Sally Wong, Hong Kong Investment Funds Association’s chief executive, said that the Hong Kong regulator wishes to have a more reciprocal approach.
“In the past, it is primarily about having Ucits products selling into Hong Kong,” she said. “This would be helpful in fostering the development of Hong Kong home-grown products.”
According to Wong, the expertise of the fund managers in the two markets would be generally different, such as the markets and sectors managed. “It means that investors in the respective markets can have access to a broader investment universe and a wider array of products.”
Wong added that this would help foster the development of expertise along the whole value chain, especially in investment management, as well as other back and middle office functions, and not just in distribution and marketing.
Deacon’s Lam does not expect a sudden rush of cross-border funds going from Hong Kong to Switzerland and vice-versa. Just like the Hong Kong-China MRF, which took two years of discussion, he said that it is something that will evolve over time.
MRF details
Swiss funds applying for SFC authorisation must be established, domiciled and managed in Switzerland, according to a circular from the SFC.
Eligible fund types include general equity funds, bond funds and mixed funds, feeder funds, fund of funds, money market or cash management funds, index funds, structured funds, funds that invest in financial derivative instruments and index tracking ETFs.
Hong Kong funds applying for Finma authorisation must be established, domiciled and managed in Hong Kong, according to a Finma document.
Hong Kong funds that invest in real estate, precious metals or precious metal certificates, commodity or commodity certificates; carry out short-selling of investments; and exceed the maximum borrowing limit of 10% of its total net asset value are not eligible under the scheme.
Other cross-border fund initiatives
Two other cross-border mutual fund initiatives have been launched in Asia.
The Asean Collective Investment Scheme (CIS) framework, between Singapore, Malaysia and Thailand, launched in 2014 and the MRF between Hong Kong and China launched in July 2015.
Currently, there are only five approved funds for retail sale under the Asean CIS, according to records from the MAS, Securities Commission Malaysia and Thailand’s Securities and Exchange Commission.
Under the Hong Kong and China MRF, there are 48 approved mainland funds for sale in Hong Kong, according to records from the SFC, and six approved Hong Kong funds for sale in the mainland.
Another scheme, the Asia Regional Funds Passport, which involves Australia, Japan, Korea, New Zealand and Thailand, is still yet to be launched.
As of end-June, the markets involved have up to 18 months to come up with agreed tax guidelines.
