Beneficial ownership problems on Stock Connect are close to being resolved with Hong Kong and China regulators attempting to make changes to the rules governing the trading scheme.

The move is expected to be welcomed by foreign investors, who have cited beneficial ownership as one of the biggest hurdles for them as they attempt to invest in China’s A-share market through the stock link. 

Meanwhile at least three more Luxembourg-domiciled Ucits funds have been authorised for trading on the Shanghai-Hong Kong stock link. 

The issue of beneficial ownership has plagued Stock Connect since its launch last November and global asset managers were still struggling with it, said Sandra Lu, Shanghai-based partner of Llinks Law Offices. She was speaking yesterday at the annual Luxembourg Investment Fund Seminar in Hong Kong. 

Lu said that foreign managers were particularly worried about what their legal status would be in an enforcement scenario. 

For example, if a foreign investor using Stock Connect wanted to take up legal action against a Chinese listed company, one worry was that the Chinese court may not accept the case as the foreign owner would only be a beneficial owner. This was in contrast to being a nominee holder, where ownership rests with the Hong Kong Securities Clearing Company. 

But Lu said a two-pronged solution to the issue had now emerged, which will involve both the Hong Kong Stock Exchange (HKEx), the parent of the securities clearing company, and the China Securities and Regulatory Commission (CSRC). 

The Chinese regulator recently submitted the issue to the Supreme People’s Court with the view of the court changing the law to recognise foreign ownership. 

“We have already raised this with the CSRC and the regulator fully understands the enforcement issue,” explained Lu, “They have already submitted this issue to the Chinese Supreme Court. Because this enforcement issue is related to the Supreme Court, even the CSRC cannot interpret this issue.” 

Meanwhile, Lu noted HKEx will this month publish amendments to its own rules so that while it continues to make clear that it has no obligation to be involved in legal actions between foreign investors and a mainland-listed company, it will provide “necessary assistance” to foreign investors. The current rules strictly forbid HKEx from being involved in any legal actions. 

However, regardless of continuing worries over beneficial ownership, this has not stopped some funds looking to use Stock Connect from receiving European regulatory approval. 

Jacques Elvinger, partner at Elvinger Hoss & Prussen, the Luxembourg law firm which hosted the seminar, revealed that at least three or four more Luxembourg-domiciled Ucits fund had been authorised by the country's financial watchdog CSSF to use Stock Connect. 

Although he declined to name the fund houses involved, Elvinger noted that changes had to be made to win the approval of the regulator, such as adding risk disclosures to the funds' prospectuses. 

“We have worked very closely with the CSSF, the Hong Kong authorities and others to try and convince the CSSF that this [investment] channel was acceptable,” said Elvinger. 

The upcoming batch will join Investec Asset Management, which revealed in February that it was launching the world's first Ucits fund that could use the stock link scheme.