Mutual Recognition of Funds: Implications for investors
The Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC) launched the initiative of Mutual Recognition of Funds (MRF) between mainland China and Hong Kong in their joint announcement dated 22 May 2015, allowing eligible Mainland and Hong Kong funds to be distributed in each other’s market through a streamlined vetting process.
The two regulators have set out eligibility requirements, application procedures, operational and regulatory arrangements of the MRF. They have also established a cooperation mechanism for cross-border regulation and enforcement as well as a framework for exchange of information and regulatory cooperation to ensure that Mainland and Hong Kong investors will have equal protection. The MRF will be implemented on 1 July 2015. The initial investment quota will be RMB300 billion for in and out fund flows each way.
A major breakthrough for the development of the Mainland and Hong Kong fund markets
Following the launch of the Shanghai-Hong Kong Stock Connect, the MRF is another major breakthrough further promoting financial development and cooperation between the Mainland and Hong Kong. This is the first time that overseas retail funds are allowed to be sold in the Mainland and also the first attempt that Mainland retail funds can be marketed in a jurisdiction outside the Mainland. The MRF not only opens up development opportunities for the fund markets, but also provides investors in both markets with a more diverse range of fund products.
A new channel to invest in the Mainland market
Although there are already some funds that invest in the Mainland capital market (eg RQFII funds, QFII funds), the MRF provides a new channel for Hong Kong investors to access the Mainland market via investing in the funds managed by fund companies in the Mainland. Investors in Hong Kong will have more choices of fund products and they can make use of the different types of Mainland funds to further diversify their portfolios.
At the initial stage, only regular equity funds, bond funds, mixed funds, unlisted index funds and physical index-tracking exchange traded funds will be eligible for MRF.
Mainland fund managers that wish to apply for SFC authorisation of their funds for distributing in Hong Kong have to meet the following requirements:
- the fund is established and managed and operates in accordance with Mainland laws and regulations and its constitutive documents;
- 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 one 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.
Likewise, Hong Kong funds that seek to enter the Mainland market should also meet similar corresponding criteria set out by the CSRC.
Total number of funds in both markets
Hong Kong is an open market. Any funds (including overseas funds) that meet the requirements of the SFC’s Code on Unit Trusts and Mutual Funds can apply to be publicly offered in Hong Kong. Currently, about 30% of the SFC-authorised funds are set up locally in Hong Kong. The other 70% are overseas funds, including funds that are domiciled in major fund centres in Europe, such as Luxembourg and Ireland. As for the Mainland, currently all registered funds are domestically established.
|Number of funds as at end-March 2015||Funds authorised by the SFC||Funds registered in Mainland|
|Money market funds||47||180|
*Other funds include:
- Hong Kong: Index funds, fund of funds, guaranteed funds, hedge funds etc.
- Mainland: Closed-end funds, QDII funds etc.
According to preliminary estimation, around 850 Mainland funds are eligible to apply for SFC authorisation for offering in Hong Kong and around 100 Hong Kong funds are eligible for applying to be marketed in the Mainland. It is generally expected that the first batch of Mainland funds authorised by the SFC (ie Recognised Mainland Funds) will be offered in Hong Kong in Q3 or Q4 this year.
The distribution arrangements of Recognised Mainland Funds in Hong Kong is the same as those of other retail funds. It must be conducted by intermediaries that are properly licensed by the SFC and comply with all applicable Hong Kong laws and regulations. For example, Recognised Mainland Funds must meet the following requirements:
- The bilingual (traditional Chinese and English) Hong Kong offering document, including the latest offering document registered with the CSRC, the covering document which provides supplementary information to Hong Kong investors, and the product key facts statement which lists out the key features and risks of the fund, are provided to Hong Kong investors.
- All advertisements of the Recognised Mainland Funds shall comply with applicable Hong Kong laws.
- A firm in Hong Kong should be appointed as its representative to handle its affairs in Hong Kong, such as subscription and redemption applications, and making the constitutive documents of the fund available for inspection by the general public.
Risks of investing in Recognised Mainland Funds
The MRF arrangement is a new policy and thus investing in the Recognised Mainland Funds will be subject to the risks associated with the policy, such as the quota restrictions, and the possible failure of the Recognised Mainland Funds to meet the eligibility requirements on an ongoing basis. Though there may be some differences in terms of market operation between the Mainland and Hong Kong, the management companies of the Recognised Mainland Funds shall ensure investors of both markets receive the same treatment and that treatment should be fair in respect of investor protection, exercise of rights and disclosure of information etc.
Recognised Mainland Funds generally invest in the equity and bond markets in the Mainland and thus, the risks involved are similar to other funds targeting the Mainland market. These include the macro-economic risks of the Mainland, single market risk, currency risk, risk related to the Mainland A share market (eg volatility risk and risk associated with small-cap/mid-cap companies) and risks related to the Mainland bond market (eg bond quality, ratings, liquidity and credit risks) etc. To understand more, please refer to the Mainland market risk and risk associated with investments in RMB products.
Stay tuned for more information about the MRF in our dedicated MRF webpage which will be launched soon.