Dual Counter model for ETFs
What is a Dual Counter ETF?
A Dual Counter ETF is an ETF which adopts the "Dual Counter" arrangement. An ETF with dual counter offers two trading counters ie Renminbi (RMB) counter and Hong Kong dollar (HKD) counter on The Stock Exchange of Hong Kong (SEHK) to investors for secondary trading purposes. Units traded in the RMB counter will be settled in RMB and units traded in the HKD counter will be settled in HKD.
Units traded on both counters are of the same class with the same unitholder rights. The two counters will have different stock codes, different stock short names and different ISIN numbers for identification.
Investors who wish to trade Dual Counter ETFs should check with their intermediaries (ie brokerages or banks) to ensure they are eligible to provide the relevant services. Investors may then buy and sell units of the same counter or alternatively buy in one counter and sell in the other counter by conducting inter-counter transfer of the relevant units. Inter-counter buy and sell is permissible even if the trades take place within the same trading day.
Not all ETFs adopt a Dual Counter arrangement, please refer to the prospectus for information. If in doubt, consult the ETF manager or its brokers.
For details about the operation of the Dual Counter ETFs, please refer to the FAQs published by Hong Kong Exchanges and Clearing Limited (HKEx) on its website.
What kinds of account do I need if I would like to trade units of the RMB counter?
RMB bank account
Similar to trading other listed RMB products, you will need a RMB bank account in Hong Kong and sufficient RMB for trading in the RMB counter. You should be aware of the lead time required for opening RMB bank accounts and requesting RMB cheque book as the banks may not be able to process your request immediately.
The maximum daily exchange limit for RMB is RMB20,000 per individual. Investors should check with the banks for the account opening procedures as well as terms and conditions of the RMB bank account. Some banks may impose restrictions on your RMB cheque account and fund transfer to third-party account. Therefore you should check with your bank beforehand.
Securities trading account
What you need is a securities trading account with an intermediary (eg a brokerage, bank) which is eligible to provide trading and settlement services for Dual Counter ETFs. Normally, you do not need to set up a separate account specifically for trading in the RMB counter, but it is more prudent to check with your intermediary. It is also advisable to double check with your intermediary whether there are specific terms, such as settlement procedures and risk disclosure related to trading listed RMB securities.
In addition, you should confirm readiness of your intermediary to carry out RMB securities business by asking them directly.
Investor Participant Account
If you are going to use your Investor Participant Account (IP Account) opened with Hong Kong Securities Clearing Company (HKSCC) to settle trades of RMB counter, you should make sure you have set up an RMB Designated Bank Account with the Central Clearing and Settlement System (CCASS).
What are the transaction costs involved?
Dual Counter ETFs, being listed securities, are generally subject to:
- brokerage commission;
- SFC levy;
- SEHK trading fee; and
- other fees and charges.
Brokerage commission is charged at the market rate and in a currency decided by the intermediaries (brokerages or banks) that you are using. Currently, SFC levy and SEHK trading fee on purchases and sales of listed RMB-traded securities are paid by intermediaries to HKEx in Hong Kong dollar, based on an exchange rate determined by the Hong Kong Monetary Authority on the day of the trade. The exchange rates are published on the HKEx website by 11 am on each trading day.
Before investing in any Dual Counter ETF, you should also check with your intermediaries on details of all fees related to the ETF's trading, payment process including the currency that you should use for settling such fees, and how they set the exchange rate to be used if any currency conversion is required in the transaction.
What should investors be aware of in relation to the dividend policy of the Dual Counter ETFs?
Dividends of a Dual Counter ETF whose base currency is denominated in RMB are declared in RMB and may be paid in RMB only or, where so offered by the ETF manager, in RMB as well as HKD depending on an investor's election. Depending on the distribution policy of an individual Dual Counter RMB-denominated ETF, an investor of units traded in the HKD counter may receive dividends in RMB only. In such circumstances, if a unitholder of such ETF does not have an RMB bank account, he or she may have to bear the fees and charges associated with the conversion of such dividends from RMB into HKD or any other currency.
Dividends of a Dual Counter ETF whose base currency is denominated in a non-RMB currency but which have units traded in RMB as well as units traded in HKD under the Dual Counter model may declare dividends in the ETF's base currency and in addition may declare dividends in RMB, depending on the distribution policy of the relevant ETF.
In the case where a Dual Counter ETF declares dividends in RMB, for investor who wish to convert the RMB dividends to HKD or other currencies, currency conversion costs will be incurred and you may suffer losses depending on the exchange rate movements of RMB relative to HKD or such other currency. Investors should also note that a Dual Counter ETF may or may not choose to declare dividends in RMB.
In general, any dividend policy will have to be consistent with the fact that units traded on the two counters are of the same class and unitholders of both counters should have the same unitholder rights. Investors should refer to the prospectus in relation to details of dividend payment and if in doubt, consult the ETF manager or its brokers.
Can I trade the units of the RMB counter on margin?
Although investors may be able to get margin financing in Hong Kong dollar from brokerages or banks for stock trading, under the current agreement between banks and the Clearing Bank for RMB Business in Hong Kong, banks are not permitted to lend RMB to personal customers.
For non-bank financial institutions, such as brokerages, such a restriction is not applicable. However, if you want to purchase units of the RMB Counter using a credit or margin facility, you should check with your brokerages first on the availability of such a facility and the detailed arrangements. Whether a brokerage would provide financing services or finance individual customer is a commercial decision of the brokerage.
Besides, you should carefully study the terms of the credit/margin facility and understand the risks of margin trading. In particular, you should enquire with your brokerage the currency in which the margin loan would be denominated and the currency in which margin call and loan repayment would be settled, and pay special attention to any risks of currency mismatch and exchange rate fluctuations which may arise from such trading. You should note that margin trading is not suitable for everyone.
If no such financing is available from the brokerage, investors need to have sufficient RMB to settle the transactions.
What are the key risks associated with the Dual Counter model?
General risks in relation to the Dual Counter Model
Risks relating to different trading prices in RMB and HKD counters
The RMB counter and HKD counter are traded separately. The trading prices of units of the same Dual Counter ETF in the two counters may be different and may not always maintain a close relationship depending on factors such as market supply and demand, liquidity in each counter and the exchange rate between RMB and HKD in both onshore and offshore markets.
New model risks
The Dual Counter model in Hong Kong is relatively recent and may bring additional risks.
Inter-counter trading risks
If your intermediary (eg brokerage or bank) does not provide both HKD and RMB trading services at the same time or offer inter-counter transfer services to support dual counter trading, you will not be able to buy units traded in one counter and sell them in the other counter. Even if your intermediary is able to provide such service, it may impose an earlier cut-off time, other procedures and fees.
If there is a suspension of the inter-counter transfer of ETF units between the HKD counter and the RMB counter for any reason, investors will only be able to trade their ETF units in the relevant counter on the SEHK.
Since Dual Counter ETFs are denominated and/or traded in RMB, such ETFs are also subject to the following risks:
Risks regarding trading and settlement of units in RMB
Risks relating to RMB trading and settlement of units
Not all intermediaries are eligible to provide trading and settlement of RMB-traded units. In addition, the liquidity and trading price of the RMB-traded units may be adversely affected by the limited availability of RMB outside mainland China and the restrictions on the conversion between foreign currency and RMB.
RMB currency risk
RMB is currently not freely convertible and is subject to exchange controls and restrictions. For investors holding units of ETFs denominated and/or traded in RMB may be exposed to fluctuations in the RMB exchange rate against their base currencies. Investors should note that the exchange rate of offshore RMB (known as "CNH") and the onshore RMB (known as "CNY") may not necessarily be the same and may not move in the same direction as they are traded in different and separate markets which operate independently. In addition, like any currency, the exchange rate of RMB may rise or fall. There is no guarantee that RMB will not depreciate. Investors who choose to convert the RMB redemption or sales proceeds or dividends paid by a Dual Counter ETF into a different currency may incur substantial capital loss due to foreign exchange risk.
Reliance on market maker risk
Market makers may not be as interested in making a market in Dual Counter ETF units denominated and/or traded in RMB. Any disruption to the availability of RMB may adversely affect the capability of market makers in providing liquidity for the units of Dual Counter ETFs traded in RMB. The liquidity of the Dual Counter ETF may be adversely affected if there is no market maker for the fund or if the market making activities are not effective.
Will the RMB Equity Trading Support Facility (TSF) launched by Hong Kong Exchanges and Clearing Limited support the trading of the RMB counter for the Dual Counter ETFs?
Hong Kong Exchanges and Clearing Limited (HKEx) provides the RMB Equity Trading Support Facility (TSF) to enable investors who have insufficient RMB to buy RMB-traded securities and equity based ETFs in the secondary market using Hong Kong dollars. Non-equity based ETFs are not supported at this stage however. For details about this arrangement and the list of securities supported by the TSF, please refer to the HKEx's website.
What should investors consider before investing in a Dual Counter ETF?
You should read carefully the offering document including the Product Key Facts Statement to fully understand the nature, investment objective and strategy, key features, major risks and dividend policy of a Dual Counter ETF.
Assess whether the product is suitable for you in light of your investment objectives, the amount of investment required and your risk appetite. Trading of the RMB units of a Dual Counter ETF may not necessarily give you the benefits of appreciation in RMB (if any).
For further information on Dual Counter ETFs, please also refer to the HKEx website.