Dublin-domiciled Ucits funds have been given approval to invest in Chinese stocks via the Shanghai-Hong Kong Stock Connect.
The green light from Ireland’s financial regulator has removed the final regulatory hurdle for Ucits funds looking to use the cross-border trading scheme.
The move is also seen as paving the way for the launch of the upcoming Shenzhen-Hong Kong Connect.
In a Q&A document issued by the Central Bank of Ireland yesterday, the regulator said it would permit Dublin-domiciled Ucits funds to acquire Chinese A shares through Stock Connect if they could satisfy certain conditions.
The regulator said Ireland-authorised Ucits managers would need to ensure funds’ depositary or custodian banks retained control over the shares at all times, and kept Stock Connect’s infrastructure arrangements under review to ensure legal obligations were met. Depositaries must also use the Hong Kong Securities Clearing Company (HKSCC).
“We think it is great news,” said Pat Lardner, chief executive of the Irish Funds Industry Association (IFIA), the representative body for the cross-border investment funds industry in Ireland.
“The overall point is the central bank has a better understanding of the [Stock Connect] infrastructure, how to meet the obligation of the existing Ucits rules, and they will allow fund managers with Irish-domiciled funds who want to access the Chinese stock market through Stock Connect to do that,” said Lardner.
“We know ourselves a number of managers who want that ability in their funds to invest into China.”
Stock Connect officially went live in November last year, but long-only managers have shunned it due to concerns over beneficial ownership. The issue is particularly pertinent for Ucits funds domiciled in the EU because European regulators have strict requirements over share ownership.
The China Securities Regulatory Commission (CSRC) issued an FAQ in May to clarify concerns over beneficial ownership, and said foreign investors who held Shanghai-listed stocks through HKSCC were entitled to proprietary interests in such securities as shareholders.
Lardner noted the FAQ had been helpful for regulators in understanding Stock Connect’s infrastructure.
The Luxembourg Ucits funds regulator - the Commission de Surveillance du Secteur Financier (CSSF) - is approving fund managers who want to participate in Stock Connect on a case-by-case basis. Fund managers such as Investec Asset Management and East Capital received approval from the CSSF earlier this year.
Although the Central Bank of Ireland clarified approval over use of the Shanghai-Hong Kong Stock Connect, the upcoming Shenzhen Connect has not yet been included in the new rules. However, Lardner said “it provides a very good basic understanding on what will happen later on.”
Dublin is a leading Ucits fund-domicile centre in Europe, alongside Luxembourg. A total of 3,606 Ucits funds with €1.46 trillion ($1.59 trillion) in assets under management are domiciled in Dublin, according to IFIA data as of the end of March.