SFC chief bullish on cross-border ties, silent on schemes

A year on from the landmark agreement between regulators in Hong Kong and China that paved the way for Stock Connect, the chief executive of Hong Kong’s Securities and Futures Commission (SFC) said he was very optimistic about further cross-border cooperation.

But despite the bullish tone, still no details were forthcoming from the SFC about when the Shenzhen connect programme might commence, nor when the first products would be authorised under mutual recognition of funds (MRF).

In a speech given at a pan-Asian regulatory summit in Hong Kong this week, Ashley Alder talked about the importance of closer ties with the regulator in China, about China's support for Stock Connect and MRF, as well as Hong Kong’s continuing importance to China.

Alder said the relationship with the China Securities Regulatory Commission (CSRC) “lies at the heart of how the SFC views its role as the mainland and Hong Kong markets continue to integrate".

“Last October we had just signed a ground-breaking agreement with the CSRC. Essentially this enabled us to intensify our ability to assist each other when dealing with misconduct in the Hong Kong and Shanghai markets," added Alder.

“We also agreed on how we would share surveillance data about trading in each other’s markets. Both of these agreements were essential for the launch of Stock Connect.”

At the time, not everyone was happy with the idea of cross-border cooperation between the regulators, especially over the question of surveillance. But Alder said: “I want to make our position absolutely clear on this. Without close cooperation and information-sharing, Hong Kong’s markets – and the individuals and institutions who invest through them – would be exposed to unacceptable levels of risk.”

He said Stock Connect was “a concrete example” of this. “There is a big difference between our ability to detect misconduct when trading takes place outside Stock Connect when compared to trading through Stock Connect itself.

“For normal trading our surveillance team uses some fairly sophisticated desktop systems to detect patterns which indicate potential market abuse. Our next step is usually to require the broker who handled the trades to tell us more, including who was behind the trades, and this in turn can lead to a broader investigation.

“The problem is that this process can’t work as it’s supposed to in the Stock Connect world. We can't go directly to brokers to get more information when they are located in the mainland."

He pointed out that the CSRC was in exactly the same position, when trades in the A-share market through Stock Connect were placed through brokers in Hong Kong.

Since the programme was launched, Alder noted that regulators on both sides had a good experience under the new cooperative arrangements. In particular, he said: “We have experienced consistently rapid responses from the mainland to our requests for surveillance information about dealings in our market.”

Trading under Stock Connect still represents a small fraction of overall turnover in the Hong Kong and Shanghai markets. For a while it was roughly 2% for Shanghai and about 5% for Hong Kong. But since the summer turmoil in the A-share market this has declined to about 0.6% in Shanghai and 1% in Hong Kong.

Nonetheless,  Alder stated: “The significance for us is far greater because it has kick-started a new era of broader reciprocal engagement between ourselves and the CSRC."

Market events in the summer "understandably led to something of a temporary hiatus for some projects such as the further expansion of Stock Connect", he said. "I expect things to get back on track fairly soon." 

AsianInvestor asked the SFC to be more specific on timing of both Shenzhen connect and MRF, but it declined.

Alder also said the MRF scheme was of particular importance to the SFC. "We think MRF is as important for Hong Kong and the mainland as Stock Connect. As with Stock Connect, we expect that initial business volume will be fairly small as products and distribution channels will take time to develop. But the programme works because it is completely aligned with the mainland’s own opening-up policies."

One industry observer wondered what the hold-up was in MRF authorisations. "It is now three-and-a half months since the MRF scheme was opened to applications, and where are we?" asked Citibank senior adviser Stewart Aldcroft. "We were told it was four-to-six weeks for approval, but we haven’t had a single product approved. What’s the problem?"

He suggested it might be because the SFC and CSRC were waiting to make a joint statement when both were ready. "So the question is, which one of them is not ready?"

Again, the SFC declined to comment.

Following the SFC's announcement of a new streamlined process for funds approval late last week, other developments include  enhancement of the fund manager code of conduct, which will look at topics such as commissions and independent advice, said Alder.

The SFC is also looking at ways to promote alternative distribution channels for retail mutual funds. "Right now, the narrow bank-dominated distribution channel makes funds too expensive and limits choice for investors," said Alder.

"Different types of distribution platforms, some of which may be automated, will probably mean that we will need to issue more guidance on our approach to suitability and know-your-client requirements."

He also confirmed that the SFC was in early discussions with Hong Kong Exchanges and Clearing Limited about the possibility of an exchange-based platform "aimed at fund distribution through brokers – and we’ll pursue other ideas for similar platforms with the funds industry."

Alder concluded of all these development: "It is clear that Hong Kong will remain at the vanguard of mainland China’s financial market engagement with the world."