The first Hong Kong funds to be sold via mutual recognition are expected to be approved by Chinese regulators at the end of July, an asset service provider has predicted.

While applications for the cross-border scheme started to be accepted yesterday (July 1), fund managers still have to overcome a number of operational hurdles.

The obstacles include the need for a fund order processing solution, in order to resolve different operational practices in mainland China and Hong Kong.

“Optimistically, the first [Hong Kong] funds to get CSRC [China Securities Regulatory Commission] approval for mutual recognition could happen at the end of July,” said Sebastien Chaker, head of Asia at fund transaction network provider Calastone. The CSRC is likely to take a speedy and straightforward approach to approvals, he added.

Hong Kong managers which have eligible funds have been racing to complete their applications, and sales representatives have held discussions with potential distributors in mainland China, Chaker said. He expected that approved Hong Kong funds would arrive on distributors’ fund shelves soon after receiving approval.

“But people are not yet ready at an operational level,” said Chaker. “When the scheme was announced on May 22, it only gave five weeks for preparation before its launch. There has been a lot of confusion on the operational framework, particularly the way trade flows across the border.”

The key sticking point is that Hong Kong and mainland fund companies are using different market practices and standards in their fund order processing. Most China fund companies are using an automated electronic system for order placements between distributors and fund managers. The system is operated by the China Securities Depository and Clearing Corporation (CSDC).

However, most fund subscriptions and redemptions in Hong Kong are still conducted manually. Distributors and custodians mostly communicate orders with fund managers or transfer agents by fax. Most Hong Kong-domiciled funds have outsourced the transfer agent function to global custodians, with HSBC and Citi as the dominant players.

In an FAQ issued by Hong Kong’s Securities and Futures Commission (SFC) on June 12, the regulator said there was no requirement to have a particular centralised platform, and the routing of orders and confirmations was a commercial decision between fund managers and distributors.

“The problem is that Chinese distributors and fund managers are very unlikely to want to process Hong Kong funds orders by fax, or to receive fund orders from Hong Kong by fax,” said Chaker, adding that Hong Kong fund managers, custodians and distributors were trying to come up with a solution.

Chaker said Taiwan had the same challenge in 2013 when Taiwan Depository & Clearing Corp (TDCC) pushed the industry to centralise and automate offshore fund order processing in the island. The solution was to create a linkage between TDCC and offshore fund managers or their respective transfer agents.

Calastone has been working with CSDC to provide a mechanism for moving China fund order messaging practice towards global standards. Chaker said the firm expected to deliver such a solution within two months, judging by Taiwan’s experience.