Hong Kong’s securities regulator and stock exchange are working with their counterparts elsewhere to revive and expand the scope of existing fund-recognition agreements with Australia and Taiwan, respectively, to further drive cross-border fund business.
And Korea may be next in line for a similar memorandum of understandig (MoU), if asset managers there get their wish.
One upshot is that mutual funds are likely to be mutually recognisable between Hong Kong and Taiwan by the end of the year, says Yap Chee-Ping, Asia-Pacific managing director of Citi’s fund services division.
The state of play with the Australia-Hong Kong talks is less clear, although Yap notes interest from Australian firms to cross-list commodity exchange-traded funds (ETFs) in Hong Kong and expects that to happen in the first half of 2014.
There are similar talks taking place in Korea regarding a potential funds MoU with Hong Kong, although these discussions are at a more preliminary stage.
Korean fund managers are urging the Financial Services Commission to establish an MoU with Hong Kong's Securities and Futures Commission (SFC), says Yap. Korean firms want to be able to use a feeder fund structure to cross-list ETFs in Hong Kong, and vice versa for Hong Kong managers into Korea, he adds.
Rather than trying to harmonise standards through fund passporting, the latest move by the SFC underlines the Hong Kong regulator’s determination to find a practical solution to connect Asia’s fragmented fund industry.
Taiwan’s Financial Supervisory Commission (FSC) and the SFC have been in talks for two years about expanding the MoU scope after signing an agreement in May 2009, an FSC official tells AsianInvestor. Since the MoU was introduced, four SFC-registered exchange-traded funds have been cross-listed on the Taiwan Stock Exchange.
Today’s discussions are centred on allowing all FSC- and SFC-registered funds to be mutually recognised in both countries.
Both Taiwan- and Hong Kong-based fund managers have expressed interest in seeing the MoU talks progress. Taiwanese firms are keen to sell their mutual funds in Hong Kong, because onshore funds in Taiwan have traditionally been limited to domestic investors, says the FSC official.
Hong Kong-based subsidiaries of Chinese fund firms are also keen to see the MoU programme expand, notes Yap. They are seeking to distribute renminbi-denominated qualified foreign institutional investor (RQFII) funds in Taiwan, given that the the country is now an offshore RMB centre with Rmb70 billion of deposits.
“Given that Taiwan had seen a significant build-up of RMB deposit balances and there is a general lack of RMB investment products, Chinese managers for example [can] leverage on the MoU already in place between Taiwan and Hong Kong to bring RQFII funds for distribution in Taiwan,” says Yap.
He notes that these Hong Kong-based Chinese managers may be looking to use their RQFII quota to launch niche strategies such as futures-focused funds, taking a similar approach to hedge funds. (The latest version of the RQFII scheme allows managers to use a wider range of instruments available in China's capital markets, such as listed derivatives.)
The FSC official says the two regulators are mapping out the mutual fund regulatory framework between their jurisdictions to ensure they are on the same page when it comes to investor protection and the supervisory regime.
Meanwhile, the SFC and the Australian Securities & Investments Commission (Asic), are working together to revive the ‘declaration of mutual recognition’ they signed in July 2008, Yap says. For example, they are seeking to promote the cross-listing of ETFs between the Hong Kong bourse and the Australian Securities Exchange.
Asic declined to comment, while the SFC says it “continues to monitor market development and maintain dialogues with industry participants”.
The original agreement was aimed at allowing cross-selling of collective investment schemes to retail investors in Hong Kong and Australia. Sources say it has garnered little interest to date, but Yap says Hong Kong-based subsidiaries of Chinese fund firms managing RQFII ETFs want to sell them to Australian investors.