Why is Hong Kong’s markets watchdog working on mutual recognition of funds (MRF) with Switzerland when the original MRF passporting link with China is still not operating as it should?

That is a question being posed by industry observers, given asset managers’ frustration over how long it is taking for Hong Kong funds to be approved for sale in China. 

What's more, some market participants are sceptical as to the real benefits of a Hong Kong-Switzerland MRF scheme, for a number of reasons.

This follows the announcement on Friday that the Hong Kong and Switzerland regulators had signed a memorandum of understanding* (MoU) to allow MRF between the two jurisdictions – though it did not specify when it would take effect.

CSRC inertia

Stewart Aldcroft, senior fund industry adviser at Citi in Hong Kong, told AsianInvestor: “People in the industry might be saying: what is the point of having a Swiss-Hong Kong MRF when we haven’t got the China one fully up and running? They [the SFC] could have spent their time better pushing for China’s MRF.

“There has been no fund approval from China in the past 15 months,” added Aldcroft. “Many managers are stuck and very frustrated, as they have spent time and effort to get funds into the system and they are getting absolutely nowhere.”

The SFC has approved 48 mainland funds under the southbound leg. But the China Securities Regulatory Commission (CSRC) has only approved six Hong Kong products. Thirteen are awaiting approval, nine of which filed applications in 2015.

Of course, the SFC's hands may be tied. Sources suggest that the lack of action by the CSRC could be related to Beijing's clampdown on capital outflows, with more curbs being put in place last week. "But that's not the right approach if you an MRF agreement, especially given that Hong Kong has approved so many more China funds," said one investment executive.

This may mean that certain asset managers, such as US firms Capital Group and MFS, will feel vindicated in saying they did not plan to make use of the MRF scheme.

No game-changer

The most obvious benefit for Hong Kong-based asset managers of the new MoU is that they would gain access to Swiss private banks’ clients both in Switzerland.

However, the HK-Swiss MoU is not a game-changer, as bigger asset managers typically already have Ucits platforms covering Hong Kong, Switzerland and many other markets, said Stephane Karolczuk, head of the Hong Kong office of Luxembourg law firm Arendt & Medernach.

Switzerland had 1,524 locally domiciled and 7,198 foreign funds approved at the end of 2015. Almost all (98.7%) of the foreign funds are Ucits vehicles, according to the Swiss Financial Market Supervisory Authority (Finma).

What’s more, it is now increasingly easy for Ucits funds to access mainland securities through cross-border schemes such as the interbank bond market or Stock Connect. “At the end of the day, there’s not really an angle that would really differentiate a Hong Kong-based product in terms of strategy,” said Karolczuk.

He also questioned the cost-efficiency of a Hong Kong firm bringing its local funds to Switzerland but not having access to Europe. To access the entire market, they need Ucits products, he said.

Still, some Chinese managers were upbeat about the HK-Swiss MoU. The new programme will provide access to high-net-worth-individuals across continental Europe via Swiss private banks, said a spokeswoman at Harvest Global Investments, the Hong Kong arm of Beijing-based Harvest Fund Management. 

Meanwhile, it may be that Swiss private banks without a product selection desk in Hong Kong would consider setting one up, noted Alcroft. But that would be expensive for the smaller players. “You need a compliance person, someone who is properly licensed, and it is not going to be cheap,” he said. 

HK-Swiss MoU operation

To be eligible for mutual recognition under the new MoU, funds must be established, domiciled and managed in Hong Kong and Switzerland.

Finma will accept Hong Kong funds, except those with exposure to real estate, precious metals, short-selling, or which borrow more than 10% of their total net asset value. 

Hong Kong will accept Swiss funds including equity funds, bond funds, mixed-asset funds, feeder funds, funds of funds, money-market funds, index funds, exchanged-traded funds, structured funds, and funds investing in financial derivatives.