The Security and Futures Commission (SFC) signed a Memorandum of
Regulatory Cooperation concerning Mutual Recognition of Funds
between the Mainland and Hong Kong (the "scheme") on May
22, 2015. The scheme allows mutual access to investment funds
between the PRC and Hong Kong.
This platform will now allow offshore funds to be open to
investors in the PRC and in return open up greater access for
retail and institutional investors to invest in the PRC funds
market. PRC fund managers will also gain from the scheme, as access
to Hong Kong investors will expose them to an international
platform, helping them develop their capability to manage assets
and serve customers abroad and to compete globally.
Currently, 100 Hong Kong funds and 850 PRC funds are eligible to
trade mutually. In total, the accessible Hong Kong funds will have
around RMB300 billion in assets, while the total accessible
Mainland funds will have roughly RMB2 trillion in assets.
The scheme, however, has its limitations which will take time to
Criteria for Recognition
In order to qualify under the scheme
for Hong Kong funds, such funds must be domiciled in Hong Kong and
operated by a management vehicle with a Type 9 license issued by
the SFC. This limits overseas asset managers that have set up sales
offices in Hong Kong with a Type 1 license.
For PRC funds to qualify under the
scheme, the fund will need to have a minimum of a one year track
record with assets under management of approximately RMB200
The fund manager must be staffed by
two key full-time portfolio managers with five years or more in
retail funds experience and two responsible officers for licensing
purposes with at least one who resides in Hong Kong.
Distribution of Retail Funds
Fund managers in PRC and Hong Kong
differs in their practice of selling funds to investors.In Hong
Kong, funds are usually offered by commercial banks by way of a
nominee arrangement, while in PRC, fund managers deal directly with
investors. As such, this would imply the need for a mainland sales
force to market Hong Kong funds in the PRC.
Application Process and Required Documents
China currently offers fast-track
authorization for "plain vanilla" onshore China funds
(approximately 20 working days).However, many funds cannot use the
fast-track procedure, including cross-market ETFs, leveraged funds,
short-term wealth management funds and other "innovative
products" (those without market precedent). For such fund,
application approval would take around six months.As such, Hong
Kong funds under the scheme may not be able to take advantage of
the fast-track route at this initial stage.
The SFC has now begun accepting applications, and Hong Kong may
see the first approved Mainland fund start selling as soon as the
third quarter of this year.
In the meantime, regulators will be working with the industry to
prepare them for the scheme.
Please see link here for more details on the scheme.
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications
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Investment funds with high net worth individuals as investors will need to have a client agreement with their high net worth investors.
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