[ U P D AT E ]
ETF Connect on
pause as other
access channels
considered
ETF CONNECT, EXPECTED TO
LAUNCH LAST YEAR, HAD
STRUGGLED TO OVERCOME
A NUMBER OF TECHNICAL
ISSUES CONCERNING DIF-
FERENCES IN TRADING AND
SETTLEMENT MECHANISMS.
T
he instigators behind China’s capital
market reforms have a stellar track re-
cord of proving doubters wrong. In 2015, the
then embryonic concept of Bond Connect
was derided by some experts at an industry
conference in Shanghai as being fanciful,
an assumption which was discredited two
years later.
Likewise, the premise of a London-Shang-
hai Stock Connect was until recently dis-
paraged as unworkable by cynics, who were
again outflanked, with the scheme expected
to go live very shortly.
However, the operational impediments
facing the latest cross-border trading scheme
linking Hong Kong with mainland China – ETF
(exchange traded fund) Connect – appear
to have become excessively stifling for all
parties involved, prompting Hong Kong’s
Securities and Futures Commission (SFC) to
postpone the initiative in December 2018.
The SFC said that ETF Connect, which was
expected to launch last year, had struggled
to overcome a number of technical issues
concerning differences in trading and set-
tlement mechanisms between Hong Kong
and China.
“Access to cash equities via Stock Connect
is straightforward while many of the brokers
and custodians have found effective ways
to enable T+0 stock settlement for clients
in accordance with mainland practices. ETFs
are slightly different. This is partly because
the exchanges in China operate different
settlement cycles for ETFs compared to
Hong Kong, a technicality which many ex-
perts felt was quite challenging,” said Flor-
ence Lee, head of China sales and business
development for EMEA at HSBC Securities
Services.
Other factors have also slowed down
ETF Connect’s progress. Lee said Chinese
regulators had an exceptionally busy year
with market liberalisation initiatives in 2018,
adding they were working tirelessly to en-
hance China-inbound investment schemes
including the Qualified Foreign Institutional
Investor (QFII), Renminbi Foreign Qualified
Foreign Institutional Investor (RQFII), CIBM
(China Interbank Bond Market) Direct, Bond
Connect, and Stock Connect.
She also said the regulators were heavily
involved in the roll-out of London-Shanghai
Stock Connect, something which may have
contributed to fewer resources being allo-
cated to the ETF Connect programme.
While postponing a project is certainly
not the same as giving up on it, it is clear
that both China and Hong Kong’s regulators
are putting their energies into exploring
alternative mechanisms to enable ETFs to
be distributed cross-border.
One solution reportedly under consider-
ation is to allow ETFs to list cross-border
via the Mutual Recognition of Funds (MRF)
model, a four-year old programme allowing
Hong Kong and Chinese asset managers to
distribute in each other’s jurisdiction.
“Global ETF players see China as an
excellent distribution opportunity given the
size of the mainland investor market,” said
Lee. While larger ETF providers are roundly
upbeat about China, smaller firms may find
the cost of a dual listing in both Hong Kong
and the mainland unpalatable. The time and
effort required when obtaining authorisa-
tion to distribute in China through the MRF
channel may also be off-putting for some
ETF managers.
“Distributing ETFs under MRF requires
product owners to obtain authorisation for
each fund from the host regulators, which
can be a rather less straightforward process
while there are sometimes uncertainties
in terms of the speed of approval. In past
cases, there have been applications pending
now for two to three years. The success
of cross-listing will depend on the speed
at which ETFs are approved, although it is
important to note that the regulators have
yet to announce the finer details about the
rules,” commented Lee.
Spring 2019
globalcustodian.com
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