HK and Taiwan move closer to cross listing of ETFs

May 24, 2009

Hong Kong's Securities and Futures Commission and Taiwan's Financial Supervisory Commission sign a deal to facilitate the cross listing of exchange-traded funds.

Hong Kong's Securities and Futures Commission and the Taiwan Financial Supervisory Commission have moved closer towards a common goal of cross listing exchange-traded funds (ETFs). The move is expected to help deepen the demand for ETFs, and pave the way for other exchanges to take their cue from Hong Kong and Taiwan.

The two regulators have signed and exchanged a side letter containing additional details to a bilateral memorandum of understanding, which will facilitate cross listing of ETFs in the two markets.

Under the terms of the side letter, ETFs listed on the Hong Kong or Taiwan stock exchange and managed by asset managers licensed respectively by the Securities and Futures Commission (SFC) or the Taiwan Financial Supervisory Commission (FSC) will be mutually recognised in each other's jurisdiction for the purpose of cross listings and offerings. That MOU was entered into by the two financial regulators as far back as 1996. So far under the terms of the side letter, 16 ETFs listed in Hong Kong and 11 ETFs listed in Taiwan are qualified to cross list in the other jurisdiction.

The side letter is also expected to strengthen regulatory cooperation between the SFC and the FSC, in particular arrangements relating to information sharing and confidentiality regarding management of ETFs.

"This side letter marks a milestone in the regulatory cooperation with our Taiwan counterpart since the signing of the MOU," says SFC chairman Eddy Fong. "The fund management industry will benefit not only from the diversified product markets, but also increased investment flows."

As far as the SFC is concerned, this is a major step in its effort to consolidate Hong Kong's position as a preferred ETF platform with exposure to markets in Hong Kong, China and Taiwan.

According to Deutsche Bank, there are 200 ETFs in the Asia-Pacific region, with 243 listings in 12 countries across 15 exchanges. Total assets under management of the ETFs is $57.4 billion. Hong Kong is the region's second largest ETF market by AUM next to Japan, while Taiwan is the fifth largest.

Reacting to the news, Tang Hing, Hong Kong-based investment director for quants at BOCI-Prudential, says he is eager to be able to cross list his fund house's products once the go signal is given.

Tang -- who managed the iShares FTSE/Xinhua A50 China Tracker when he was with Barclays Global Investors (BGI) and co-managed the Tracker Fund of Hong Kong when he was with State Street Global Advisors (SSgA) -- is spearheading the growth of BOCI-Prudential's ETF business.

Tang believes the move towards the integration of markets in China, Hong Kong and Taiwan is "irrevocable" and BOCI-Prudential is ready to cross list its Hong Kong-listed ETFs when the rules make that possible.

"We are very interested in exploring the possibility (of cross listing in Taiwan) and are working with potential partners on this," Tang says. "It looks like initially Taiwan investors are very interested in China A-shares but we are open to work something out for all of our three ETFs. Hopefully we will have some formal announcement with our potential partners soon."

In mid-April, BOCI-Prudential launched its third exchange-traded fund in Hong Kong, the W.I.S.E.-SSE 50 China Tracker. Under the umbrella fund of BOCI-Prudential's World Index Shares ETFs, the W.I.S.E.-SSE 50 seeks to track the performance of the Shanghai Stock Exchange (SSE) 50 Index, which is managed by China Securities Index Company (CSI). The index is made up of the 50 largest constituent A-shares on the Shanghai Stock Exchange, representing around 70% of the total market capitalisation of the SSE, and covers the major sectors.

That ETF builds on BOCI-Prudential's CSI 300 China Tracker launched in July 2007, which tracks the performance of the top and most liquid 300 stocks on the Shanghai and Shenzhen exchanges; as well as its CSI HK 100 Tracker launched in May 2008, which tracks the performance of the top and most liquid 100 stocks on the Hong Kong exchange.

Another strong advocate of cross listing of ETFs is Paul Hoff, the Tokyo-based Asia-Pacific managing director of index provider FTSE Group.

Hoff notes that FTSE and other index providers spend a lot of time to make sure that their indices are tradable, liquid, and are meeting the needs of investors. Restrictions that inhibit local fund managers from offering their ETFs across exchanges is an impediment, he says.

"They need to have the regulatory structure in place to allow them to work cross border," Hoff said in a previous interview with AsianInvestor. "Just to get an ETF structure in place requires a lot of work. Now we have to find a way to facilitate cross listing and open up the trading of various ETFs in various markets in Asia."

While the cooperation between Hong Kong and Taiwan is a move forward, Hoff would like to see some kind of Ucits-type platform for ETFs in Asia, which he thinks is feasible and could take place particularly within the Asean-member countries.