It’s been brewing for a while, but it may still come as a surprise to some that today the securities and funds regulators in China and Hong Kong have jointly announced the implementation of a mutual recognition initiative for funds regulated in the respective jurisdictions.
Referred to as the “Mainland-Hong Kong Mutual Recognition of Funds” (MRF) initiative, the initiative has now been formally agreed between the China Securities Regulatory Commission (CSRC) and the Hong Kong Securities and Futures Commission, under a memorandum of regulatory cooperation signed today, 22 May 2015. Not only does the signing of memorandum confirm the much awaited scheme is now going ahead, the regulators have set an effective roll-out date of 1 July 2015, just over a month away.
As stated in the Joint Announcement of China Securities Regulatory Commission and Securities and Futures Commission, under the MRF, the CSRC and SFC will allow Mainland and Hong Kong funds that meet the relevant eligibility requirements to follow stream-lined procedures to obtain authorisation or approval for offering to retail investors in each other’s market. There will be an initial investment quota of RMB300 billion as a cap on total fund-flows each way.
According to the SFC announcement, Mainland funds applying for SFC authorization must meet the following eligibility requirements:
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- the fund is established and managed and operates in accordance with Mainland laws and regulations and its constitutive documents;
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- the fund is a publicly offered securities investment fund registered with the CSRC under the Securities Investment Fund Law of the People’s Republic of China;
- the fund must be established for more than 1 year;
- the fund must have a minimum fund size of not less than RMB200 million or its equivalent in a different currency;
- the fund must not primarily invest in the Hong Kong market; and
- the value of shares/units in the fund sold to investors in Hong Kong shall not be more than 50% of the value of the fund’s total assets.
- At the initial stage, only general equity funds, bond funds, mixed funds, unlisted index funds and physical index-tracking exchange traded funds would be eligible under the scheme.
Detailed requirements, application procedures and regulatory arrangements are set out in the SFC “Circular on Mutual Recognition of Funds between the Mainland and Hong Kong”. The corresponding requirements for Hong Kong SFC authorised funds to be recognised for retail distribution in Mainland China, the requirements and application procedures to the CSRC are in the “Provisional Rules for Recognised Hong Kong Funds” issued by the CSRC.
According to the Joint Announcement, the CSRC and SFC have established cooperation mechanism for cross-border regulation and enforcement, to ensure that Mainland and Hong Kong investors will receive equal protection. One of the general principles for recognition requires that the management firm of a fund to be recognised shall ensure that holders of both the home jurisdiction and the host jurisdiction receive fair and the same treatment, including in respect of investor protection, exercise of rights, compensation and disclosure of information.
Each Mainland fund to be recognised by the SFC (“Recognised Mainland Fund”) must appoint a firm in Hong Kong to be its representative, and comply with Chapter 9 of the SFC Code on Unit Trusts and Mutual Funds. The SFC Circular also stipulates that the management firm of the Mainland fund shall make effective and proper arrangement to ensure that, where constitutive documents provide for effective resolution by way of litigation, the courts of Hong Kong shall not be excluded from entertaining an action concerning the fund. This is an area we believe management firms seeking recognition should pay particular attention in addressing and consider whether specific amendments to the fund constitutive documents are required.
A Recognised Mainland Fund may use the offering documents registered with the CSRC, but in addition, there must be a Hong Kong covering document which complies with the SFC requirements for bilingual offering document, product key facts statement (KFS) and other disclosure requirements of the SFC. Further to the bilingual offering document requirement, the Hong Kong supplement covering offering document and other documents, notices and announcements made to Hong Kong investors will need to be in English and Chinese (traditional Chinese).
The MRF initiative is an important milestone towards the further opening up of the Mainland market, and an additional enhancement to the close cross-border cooperation between Mainland and Hong Kong especially in the areas of investments and asset management. The Stock Connect scheme introduced quite recently has been another strong example of that.
The Joint Announcement also states that the MRF will lay the foundation for the CSRC and SFC to jointly develop a fund regulatory standard, introduce diverse fund investment products to Mainland and Hong Kong investors and enhance the international competitiveness of Mainland and Hong Kong fund management firms. Further, it goes beyond China and Hong Kong, as its stated aims extend to also promote the integration and development of the Asian asset management industry, and encourage the transformation of Asian savings into cross-border investments.
Mainland firms who wish to seek authorisation of Mainland funds under the MRF initiatve are encouraged to consult the SFC Investment Products Division for any clarification or guidance. Firms should be preparing for making application to the SFC and organising the application materials to be among the firsts to have their funds authorised by the SFC come 1 July 2015.
