AsianInvestor's regulatory round-up, April 17

Hong Kong: HKEx hints at Stock Connect liberalisation
China and Hong Kong regulators are hinting that quotas could be significantly relaxed under the Shanghai-Hong Kong Stock Connect.

Proposals discussed included “significantly expanding or even eliminating quotas” capping how much mainland investors can buy into Hong Kong and vice versa, according to a report from the Wall Street Journal.

Other discussions currently taking place include the removal of the requirement to have Rmb500,000 ($80,700) in the trading account before being able to trade in markets over the border, according to the US newspaper, citing “people with knowledge of the deliberations”.

However, a spokesperson for Hong Kong's Financial Services and Treasury Bureau, which oversees the Stock Connect programme, denied that talks had taken place to relax quotas and other rules when approached by AsianInvestor.

Responding to AsianInvestor’s enquiry, a spokesman for the Hong Kong Stock Exchange said: "There have been three limitations on the scope of Stock Connect from the beginning: quotas, stock eligibility and investor eligibility. All of them were mutually agreed between the regulators and the two exchanges, as a means of managing risk in the initial stages of the programme.

"They have performed as intended based on the first few months of Stock Connect trading. We have always said that the quotas could be expanded or revised over time.

"Any changes to the quotas will be orderly. The quotas will not be adjusted quickly or without careful consideration by all regulatory authorities."

US: Fed suggests algo-trading caused mini-flash crash
The US Federal Reserve has suggested that increasing use of algorithm trading was partly to blame for the mini-flash crash in US Treasuries last October.

On October 15, US 10-year Treasury yields tumbled from a 2.17% high to a low of 1.86% within an hour, only to reverse back to 2.15% in later trading.

Speaking on the matter this week, Simon Potter, a senior official at the New York Fed, acknowledged that there has been market talk that firms engaging in automated trading may have "unplugged" their systems or carried out strategies that prompted or exacerbated the volatility.

“To be sure, the response of firms relying heavily on automated trading strategies to market volatility may be different than that of non-automated participants, given the ability of automated systems to rapidly adjust their risk exposure in response to evolving order book and market price dynamics,” said Potter.

“However, a wholesale retreat on October 15 is inconsistent with the extraordinarily high trading volumes observed throughout the day, and the continuous nature of trading that occurred even during the most volatile periods,” he added.

Taiwan: New rules target commitment from offshore funds
Taiwan’s financial watchdog is hoping foreign fund managers will start building up a greater presence on the island under new amended rules for offshore funds.

The three new rules, any one of which must be met, include a requirement that offshore fund managers must have at least NT$5 billion (US$160 million) in AUM in Taiwan or else they cannot sell new funds on the island.

Citing figures from the Financial Supervisory Commission, local news provider CardU found that only 17 of the 58 offshore fund firms currently do meet this requirement, while the remaining 41 fund groups have two years to meet this target.

Other conditions that offshore fund managers can choose to meet instead are to establish a local investment advisor with NT$3.5 billion in AUM; or to outsource NT$3.5 billion to local peers for management.

Asia: ICI Global highlights ARFP’s tax challenge
Funds lobby group ICI Global has highlighted tax and scale as some of the barriers to success that the Asia Region Funds Passport (ARFP) could face.

One of the biggest hurdles may be the way tax is levied on offshore funds as opposed to onshore funds, with CitiTrust CEO Stewart Aldcroft previously highlighting Korea and Australia as two of the countries acting as major impediments because of a lack of neutral tax treatment there.

“Tax issues, as we and others have stressed, present crucial challenges for funds distributed cross-border. We strongly support Apec’s continuing commitment to addressing issues, like tax, that could impede the ARFP’s use,” ICI Global managing director Dan Waters said in a feedback statement to ARFP’s ongoing consultation.

But while Australia is one of the biggest hurdles to resolving tax issues, ICI Global also recognises its efforts in seeing changes are made in offshore fund taxation, commission and allocations. ICI said: “We appreciate that at least one country has already begun this work. We stand ready to assist all relevant authorities in minimising, if not eliminating, tax barriers that will erode the benefits of investing in an ARFP fund.”

Waters added that other types of rules such as capital controls could inhibit the regional success of the ARFP.

Other recommendations that the lobby group is suggesting include the inclusion of more economies in the ARFP.

UK: CGT introduced on non-residents
Non-UK resident individuals, including Asian high-net-worth individuals, companies and trusts buying into UK residential properties, from this month onwards will have to pay capital gains tax.

The tax, which only previously applied to UK residents, will mean that any gains made from the sale of UK properties from April 6 onwards will now be levied at a maximum rate of 28%.