Asifma flags fund firms' Stock Connect concerns

The industry association says share-transfer and pre-delivery rules are preventing long-only managers from using the trading link. It expects regulators to tackle the latter issue early in 2015.
Asifma flags fund firms' Stock Connect concerns

Industry trade body Asifma has added its voice to concerns raised by long-only fund managers over hurdles to their participation in the new Shanghai-Hong Kong Stock Connect scheme.

Share-transfer and pre-delivery requirements are two roadblocks preventing investors using the link to trade mainland stocks, noted Mark Austen, CEO of the Asia Securities Industry & Financial Markets Association. 

Shares traded through Stock Connect are held by the Hong Kong Securities Clearing Company (HKSCC) on behalf of investors. China’s securities regulator views these shares as being held by a nominee, meaning they are neither HKSCC’s assets nor owned by the beneficial investors.

Mark Austen

Asifma has pointed out that there is no mechanism in China or Hong Kong for identifying the beneficial owners of A-shares held by HKSCC.

Austen said investors might not be able to exercise their rights as beneficial owners if the nominee refused to do so.

Another issue is the fact that shares must be delivered at least a day before a trade is made, as has been highlighted by fund firms such as Lion Global Investors and BNP Paribas Investment Partners.

Many international buy-side market participants are unable to use Stock Connect because their regulator forbids them from delivering stocks to a broker prior to a trade, or because they often make the decision to trade on the same day as they execute the transaction, noted Austen.

Luxembourg-domiciled mutual funds must gain approval from the country’s regulator, the Commission de Surveillance du Secteur Financier, to use Stock Connect. Last week, it granted one Ucits fund approval, according to a Bloomberg report.

“From our understanding, that was a one-off case and not necessarily an indication that a stream of Luxembourg funds will get approval,” Austen said. He said he did not know the identity of the fund in question.

Austen noted that regulators in Hong Kong and China are aware of the issues and said he expects them to tackle the pre-delivery concerns in the first half of next year.

Asifma said it expected Stock Connect to be expanded to include other onshore Chinese assets, such as exchange-traded funds, CSI 300 futures contracts, commodity futures and bonds.

The trading link was officially launched on November 17, with early volumes seen as generally muted. Northbound trades yesterday reached Rmb45.4 billion, or 15% of the aggregate quota.

Most long-only managers that have received qualified foreign institutional investor (QFII) quota are not using Stock Connect, added the association, and most trading in the first two weeks has been by hedge funds.

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