HK fund executives want MRF rule changes

Hong Kong-based asset managers want to see certain rules relaxed under the cross-border mutual recognition of funds (MRF) scheme with China, finds a survey by the Hong Kong Investment Funds Association (HKIFA).

Top of respondents’ wish list is the removal of the requirement that 50% of assets in an MRF fund must be raised overseas. This is seen as a limitation on fund-raising in China, which means the MRF business would not be cost-effective, at least in the short term. Twenty-six percent of respondents cited this as a key issue to be addressed.

In addition, almost a quarter (23%) of managers said non-Hong Kong domiciled funds should be allowed under the MRF scheme and the same proportion feel they should be permitted to delegate the investment management function overseas. Meanwhile, 14% wanted to see the removal of the requirement to have a one-year track record for MRF products.

The requirement to have portfolio management and operational functions in Hong Kong poses significant challenges and cost, said Terry Pan, chairman of HKIFA. Fund houses have different centres of excellence for each asset class, he noted, and it is generally more effective to have the investment managers be located close to their relevant markets.

“Now that the system is running smoothly, it is an opportune time to start reviewing the framework and study whether certain enhancements can be introduced,” said Pan. He added that the association wanted to work closely with regulators on revisions to the rules and on rollout plans.

On the subject of business plans, 37% of respondents had already filed or planned to offer MRF funds, while 9% were set to establish a Hong Kong platform or re-domicile their funds in the city to participate in the scheme. Twenty-six percent of the respondents said they did not plan to participate in the scheme.

With regard to fund structures, 46% of respondents said they may use an open-ended fund company (OFC) structure when it becomes available, while 37% said they would not. The proposal to set up an OFC framework is under legislative process.

An OFC is an open-ended collective investment scheme structured in corporate form with limited liability and variable share capital. While open-ended funds in unit trust form are widely used, the corporate structure is more popular internationally.

HKIFA has welcomed the use of OFC vehicles, but said the use of this structure would depend on factors such as its cost relative to unit trusts, approval times and complexity of the approval process.

Singapore is also reviewing a move towards an open-ended fund company structure regime, as reported.

This survey focused on the northbound leg of the MRF scheme (Hong Kong funds sold into China). HKIFA will also conduct a poll on the southbound leg (Chinese funds sold into Hong Kong).