Regulatory roundup, Sep 19

HKMA seeks RMB cap removal; BIS issues EM warning; London RQFII quota awarded; Shanghai FTZ head removed; HK to join OECD tax-data scheme; US allows hedge funds to advertise; and HKEx cuts tax on transactions.
Regulatory roundup, Sep 19

Hong Kong: HKMA head seeks RMB conversion cap removal
Norman Chan, head of the Hong Kong Monetary Authority (HKMA), has reportedly asked Chinese authorities to remove the cap it applies to residents in the city converting Hong Kong dollars to renminbi.

Speaking on September 15 at Hong Kong’s Treasury Markets Summit, Chan quoted by media said: “The [People’s Bank of China] says it doesn’t see any problems with removing the quota."

Chan has asked for the measure to be implemented before Stock Connect goes live. The link to allow mutual trading of securities between the Hong Kong and Shanghai exchanges is expected to go live next month.

When it does, demand for RMB could increase, as investors buying Chinese securities from Hong Kong would settle in the currency.

HKMA also announced it would implement an intra-day repo facility of up to Rmb10 billion ($1.6 billion) to ensure sufficient liquidity for trading. It said it would conduct repo transactions with five or six banks to provide liquidity, the names of which it would announce shortly.

International: BIS issues warning about EM funds
Increasing flows into small and illiquid emerging markets (EMs) from global fund managers risk fanning volatility, warned the Bank for International Settlements.

The warning comes as dedicated EM funds have grown strongly from the pre-Lehman Brothers collapse peak AUM of $900 billion in October 2007 to $1.4 trillion this May.

EM equity funds have grown to $1.1 trillion at the end of last year from $702 billion at the end of 2009.

While foreign investment in EM assets can boost investment and growth, it could also destabilise asset markets, the so-called bank for central banks said in its quarterly review.

One example of this was in May last year, when EM bonds saw large capital outflows, driving up yields and causing currencies to depreciate. Companies that borrowed in foreign currency saw their borrowing costs shoot up, BIS noted.

Because many investors can’t access EM, they must rely on managers to allocate on their behalf. This creates concentration risk whereby foreign funds are invested in a limited number of securities.

Exacerbating the effect of correlated behaviour is the use of common benchmarks by EM funds, which leads to different funds adopting similar allocation strategies, BIS said.

China: London RQFII quota awarded
China’s State Administration of Foreign Exchange (Safe) has handed HSBC Global Asset Management and BlackRock their first renminbi qualified foreign institutional investor (RQFII) quotas in London in its latest round of handouts.

HSBC and BlackRock received Rmb3 billion ($488 million) and Rmb2.1 billion, respectively, on August 26.

In total, as of end-August, nine fund houses globally have received a combined Rmb12 billion in RQFII quota across Hong Kong, Singapore and London.

HSBC previously told AsianInvestor it would use its UK quota to develop a passive RQFII hub in London with market access products tracking an index that would not have any heavy exposure to particular sectors, as reported.

HSBC and BlackRock were granted RQFII licences under the London scheme in July.

Other fund houses to have received quota last month under the Hong Kong and Singapore schemes are Singapore-based APS Asset Management, which received Rmb1.5 billion; and New Silk Road Investment and Bank of Communications Schroder Fund Management, which each got Rmb1 billion.

China: Shanghai FTZ head removed from post
The vice-secretary of the Shanghai municipal government, who also oversaw the city’s free-trade zone (FTZ), has been removed from his post, according to Xinhua.

The state-run news agency said on September 15: “Dai Haibo no longer serves as Communist Party chief and executive deputy director of the administrative committee of the China (Shanghai) Pilot Free Trade Zone”.

While the announcement did not give a reason for his departure, Hong Kong’s South China Morning Post said he was fired because of disciplinary violations, quoting anonymous sources.

Formally launched in February, the FTZ was heralded as a new way of tapping China’s securities market with a minimum of red tape. ANZ, Citi, DBS, HSBC and Standard Chartered were among the first foreign financial firms to set up a presence there.

But with many details of how the FTZ will work yet to be released, many observers are skeptical of the scheme’s importance for financial firms. Market participants have previously called for liberalisations including interest rate reform and freer currency convertibility.

Hong Kong: Government vows to join OECD’s tax-data sharing scheme
Hong Kong’s government said on September 15 that it would join the Organisation for Economic Co-operation and Development’s (OECD) initiative on the sharing of tax information.

The move comes after the supranational body published a set of rules governing how member countries share with each other financial information on individuals.

China, Japan and Korea are among the 65 countries that have also expressed interest in adopting the standards. The first automatic exchange of information is due to start by the end of 2018.

“It is crucial for Hong Kong to adopt the latest global standard on tax transparency in order to maintain our international reputation and competitiveness as an international financial and business centre,” said Hong Kong’s secretary for financial services and the treasury, Ceajer Ka-keung Chan.

The government said it would seek introduce legislation to implement the standards.

US: Hedge funds allowed to advertise
The US’s derivatives regulator eased its ban on hedge fund advertising on September 9. The change means that hedge funds can now engage in general solicitation and advertising.

In practice, hedge funds can now advertise in newspapers and on television, which was not previously allowed, because retail or other non-qualified investors could view the ads. However, only qualified wealthy individuals and institutions will be able to buy the products.

Hedge funds are required to file a notice with the Commodity Futures Trading Commission before running adverts.

“Very few hedge funds have decided to take advantage of the new SEC [Securities and Exchange Commission] regulation primarily due to their concern about additional compliance requirements imposed on firms that register for general solicitation,” said Donald Steinbrugge of Agecroft Partners, a US-based hedge fund consulting and marketing firm.

“We believe this new legislation will increase the number of firms participating in general solicitation, but [they] will still only represent a tiny fraction of the industry,” he told AsianInvestor.

Hong Kong: Market transaction levies cut
Taxes levied on trades done on Hong Kong’s stock exchange will be reduced from November 1.

Under amendments announced on September 1, the charge imposed by the Securities and Futures Commission on the purchase and sale of equities will be cut to 0.0027% from 0.003%.

Meanwhile, the levy on standard futures and options contracts will be reduced to $0.54 from $0.60 per contract, and that for mini Hang Seng index futures, mini H-shares index futures, mini Hang Seng index options and stock futures contracts will fall to $0.10 from $0.12 per contract.

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