Major disagreements holding back ETF Connect

As rival exchanges vie for control of key aspects of the cross-border system for trading ETFs, Hong Kong's regulator attempts to move the market forward in other ways
Major disagreements holding back ETF Connect

Relations between China and Hong Kong around the future of the ETF Connect scheme are in danger of turning sour as different stakeholders push for their own vision of the cross-border scheme, say industry players.

ETF Connect was expected to start in the second half of this year, following the Shanghai and Shenzhen Stock Connect schemes introduced in 2014 and 2016, and the Bond Connect scheme for northbound investors launched in 2017.

Stewart Aldcroft, managing director of Citi Trust Services in Hong Kong, told AsianInvestor the main problem between Hong Kong and China stems from their unmatched settlement systems. In China, they operate on a ‘T+0’ basis (ie. trading and settlement on the same day) while in Hong Kong it is ‘T+2’ (settlement two days after trading).

“They (China and Hong Kong) haven’t been able to find a compromise on that."

The Hong Kong market is facing pressure to alter its settlement rules to be able to offer China ETFs. But Aldcroft suggests the demand for buying a mainland ETF, compared with buying a mainland stock, is “vastly different, and almost certainly much lower, so why make the effort and spend the money developing systems that don’t get used?”

Tobias Bland, chief executive of Hong Kong-based fund manager Enhanced Investment Products (EIP), said it is an ongoing saga of disagreement between the various parties that is holding back ETF Connect.

“We understand the exchanges wish to do ETF Connect, but Shanghai wants to do international and restrict Hong Kong to Hong Kong listings only,“ he told AsianInvestor

“The last meeting (between the exchanges) in September discussed how Hong Kong is benefiting from ‎Connect more than China," said Bland. "The next meeting is in January and it is a priority for HKEx to try and break the impasse on Shanghai getting the international ETFs.”

Aldcroft said he has been told that the Hong Kong stock exchange operator “has been less than enthusiastic about the fact the requirements for ETF Connect were only for Hong Kong-domiciled funds in Hong Kong and listed on the exchange.”

For its part, the HKEx wants ETF Connect to include any ETF listed in Hong Kong, plus cross-listings from Dublin and New York. “That way they could see themselves becoming a regional exchange for cross-listings,” Aldcroft suggested.

The HKEx refused to be drawn on the “rumours and speculation” around cross-listings.

“Our goal is to make Hong Kong Asia’s primary ETF marketplace and we remain focused on delivering a successful ETF Connect,” an HKEx spokesperson told AsianInvestor.

Hong Kong's Securities and Futures Commission is clear that in the absence of agreement on ETF Connect it has “decided to shift our focus to launch the ETF cross-listings,” said newly-appointed Securities and Futures Commission chairman Tim Lui.

The approval process for cross-listings, he added, would be similar to that for the mutual recognition of funds scheme.

However, EIP’s Bland warned that the challenge facing cross-listings is that they would have to deal with two different sets of regulation.

"If you have to seek regulatory approval from both the SFC in Hong Kong and the China Securities Regulatory Commission, who have different requirements, it will be very costly and time intensive,” he said.

An article in last week’s South China Morning Post quoted Tim Lui saying Hong Kong’s delayed ETF Connect scheme would be shelved.  

“This is not the case”, a spokesman for the SFC subsequently told AsianInvestor. A spokesperson for the HKEx also said the SCMP article was inaccurate. Both organisations have affirmed their commitment to pushing through ETF Connect.

It is true, nonetheless, that ETF Connect has been significantly delayed, with the SFC blaming “technical issues” for the delay.

“The trading and settlement methods for ETFs between Hong Kong, Shanghai and Shenzhen are all very different. It will need a very long period of discussion to establish the infrastructure to build an ETF Connect,” the SFC's Lui said in his first official briefing last Wednesday.

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