SFC mulls more foreign ETF listings in HK

The regulator holds talks with the exchange-traded fund industry as it considers increasing cross-listings in Hong Kong. The city's ETF market has faced criticism over its dependence on Greater China funds.
SFC mulls more foreign ETF listings in HK

Hong Kong’s Securities & Futures Commission (SFC) is considering allowing more offshore ETFs, including from the US, to be cross-listed in Hong Kong.

The move comes amid calls by some industry players for Hong Kong to diversify its ETF business, because the product range at present is predominantly Greater China-focused.

A senior executive in the ETF business told AsianInvestor that the SFC has set up a working group to look into expanding the scope of the ETF industry and further developing it. It reached out to individual fund managers towards the end of last year to solicit interest on cross-listing their offshore ETFs in Hong Kong.

The senior executive said their group was interested in listing its American ETF in Hong Kong, but the decision hinges on the SFC and will involve a change in regulatory policy.

“We have a dialogue with the SFC who have been consistent in saying they are amenable to have US ETFs in Hong Kong; if that is allowed it will be a first,” the senior executive noted.

“What spurred this interest from SFC? My guess would be that it wants the exchange to be viable as China grows. As Chinese investors trade in Hong Kong, they will look to not just Asian and Hong Kong stocks to trade, but also US and other stocks,” the executive added.

When asked to comment, an SFC spokesman said: “Overseas ETFs are already allowed to cross-list to Hong Kong. The SFC’s regulatory approach towards cross-listing of ETFs has always been to promote cross-border offering of funds so as to broaden investment choices for the public without compromising investor protection.”

The spokesman added that “cross-listing arrangements have to be based on the fundamental requirement that there is broad equivalence in regulatory standards and investor protection, and satisfactory mutual regulatory assistance and cooperation arrangements must be in place between the two markets.

As of December 31 last year, about one-third of ETFs listed on the Stock Exchange of Hong Kong were cross-listings. Of these, none were from US or Europe (except for Ucits-listed ETFs and London-listed gold ETF). Most of these cross-listed funds were Asia-focused.

Asked if State Street Global Advisors would be interested in cross listing its products from other jurisdictions in Hong Kong, Ray Chan, head of ETF business development for Asia ex-Japan, declined to comment.

However, he noted that ETF providers needed to consider a number of factors before making such a move.

He said the positive effects of such a move were: “It enhances accessibility for investors and the ability to generate flows to local listing counter. It also increases visibility in the local exchange for the brand.”

But the potential problems would include: ”From the provider’s perspective, whether cross listing of a certain product would effectively address clients’ investment need for the respective asset type in the market is something important to consider.”

According to another ETF executive, the SFC’s move to expand the ETF industry is necessary to grow and maintain its market position.

“Being already in the leading position in Asia Pacific, it makes sense for the city and the industry to look for ways to further enhance the longer term growth of the ETF industry, “the source noted.

According to the Hong Kong Stock Exchange, ETF trading on its platform grew throughout 2014. The average daily turnover (ADT) increased to a record high of HK$14.24 billion in December from HK$6.29 billion the previous month; and the ADT for the year rose 27.7% from 2013 to a record high of HK$4.73 billion.

Deutsche Asset and Wealth Management said that 91.3% of the HK ETF’s AUM is linked to the Greater China region, and the firm has called on HK to diversify, adding that the growth of the Hong Kong ETF market will depend on the rise of non-Greater China underlying assets, as reported.

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