Ireland: Central Bank Updates Q&As On Shanghai-Hong Kong Stock Connect, AIFMD, UCITS And Directors' Time Commitments

On 15 July 2015 the Central Bank of Ireland published updated Q&As relating to AIFMD, UCITS and directors' time commitments. Most significantly, the Central Bank has set out its requirements for Irish funds investing in Chinese shares through Shanghai-Hong Kong Stock Connect.


The Central Bank has updated its AIFMD and UCITS Q&As to detail the regulatory considerations around Irish funds seeking to acquire China A-Shares via the Shanghai-Hong Kong Stock Connect ("Stock Connect") infrastructure.

Previously, Irish funds could only access Chinese A-Shares via the Qualified Foreign Institutional Investor ("QFII") or Renminbi Qualified Foreign Institutional Investor ("RQFII") schemes, which provided restricted quotas to selected government-approved institutional investors.

Northbound Stock Connect access (into China) requires accessing two central securities depositories – Hong Kong Securities Clearing Company Limited ("HKSCC") and China Securities Depository & Clearing Corporation Limited ("ChinaClear"). It is this aspect of the Stock Connect structure, and the related safekeeping of assets, which is of primary concern to the Central Bank.

Prior to acquiring Chinese shares through Stock Connect, the depositary to an Irish regulated fund must ensure that the manner in which the shares are held allow the depositary to meet its obligations under AIFMD/the UCITS Directive and related Central Bank requirements. The Central Bank has confirmed in its updated Q&As that, where an Irish fund proposes to use Stock Connect, the depositary or an entity within the depositary's custodial network (i.e. a sub-custodian) must ensure that it retains control over the shares acquired through Stock Connect at all times.

Arrangements whereby the broker of the investment fund is a participant of HKSCC, but is not an entity within the depositary's custodial network, will not satisfy the relevant regulatory requirements. As such, depositaries will need to consider the terms on which they, or a sub-custodian, could become participants in HKSCC (whether as a general clearing participant, direct clearing participant or a custodian participant), the arrangements in place from time to time between HKSCC and ChinaClear and the applicable regulatory requirements.

Finally, the Central Bank has confirmed that the depositary is obliged to review on an ongoing basis the Stock Connect arrangements to ensure that the depositary's legal obligations can be met.


Since its launch in November 2014, Stock Connect has emerged as a key access route to investment in China. The ability of Irish funds to use Stock Connect is a positive development and, provided that depositaries can satisfy themselves that the custody arrangements under Stock Connect comply with the above requirements, we expect to see Irish funds using this facility in the coming months. In particular, existing China-focussed Irish QIAIFs and UCITS ETFs are expected to work with their depositaries to quickly implement the changes necessary to invest via Stock Connect. These recent changes will further strengthen the attractiveness of Ireland for Chinese managers and products seeking access to China.


In addition to the above update regarding Stock Connect, the fourteenth edition of the Central Bank AIFMD Q&A contains an update in relation to QIAIFs availing of the flexibility to invest more than 50% of net assets in an unregulated investment fund.

The Central Bank has clarified that a QIAIF availing of this flexibility must also comply with the requirement to attach a copy of the annual report of the underlying investment fund to the QIAIF's own annual report.


The sixth edition of the Central Bank's UCITS Q&A has clarified the position in relation to the object of a UCITS fund established as an Irish collective asset-management vehicle ("ICAV").

The Irish Collective Asset-management Vehicles Act 2015 ("ICAV Act") requires that the instrument of incorporation of an ICAV must provide that the sole object of the ICAV is "the collective investment of its funds in property and giving members the benefit of the results of the management of its funds".

The UCITS Regulations provide that UCITS are undertakings the sole object of which is: "the collective investment in either or both (i) transferable securities; [and] (ii) other liquid financial assets".

The Central Bank has helpfully clarified that the UCITS' object is not inconsistent with the object in the ICAV Act and that the UCITS' object does not need to be stated in the constitutive document of the UCITS. Accordingly, UCITS established as ICAVs may provide in their constitutive document (i.e., the instrument of incorporation) that their sole object is the one provided for in the ICAV Act.


The Central Bank's Guidance on Directors' Time Commitments published in June 2015 provides that the Central Bank applies an internal risk indicator where a director (a) holds in excess of 20 directorships and (b) has an aggregate professional time commitment in excess of 2000 hours. If such a risk indicator is triggered, this may subject the director and the relevant board to increased regulatory scrutiny. It may also slow down the authorisation process for QIAIFs of which the director is a board member.

In its Q&A, the Central Bank has clarified that the reference to "20 directorships" refers only to directorships of Irish authorised investment funds and Irish authorised fund management companies (including UCITS management companies, AIFMs and AIF management companies) and that risks linked to other directorships held by a director are captured in the calculation and assessment of aggregate professional time commitments.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

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