Hong Kong regulator relaxes rules on sharing China ETF research #NewsMarket

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Hong Kong’s securities regulator has relaxed rules on the sharing of research with investors on mainland China-listed exchange traded funds that can be accessed by local investors via the Stock Connect schemes.

The Hong Kong-China ETF Connect was launched in July 2022 to provide investors with mutual access to eligible ETFs on mainland China and Hong Kong exchanges. But uptake has been hindered by strict regulations preventing fund firms from promoting their ETFs in the cross-border jurisdiction and restricting distributors from offering ETF product information to investors.

However, Hong Kong’s Securities and Futures Commission has moved towards liberalising some of these restrictions by issuing a circular to intermediaries to set out the conditions under which research reports on eligible ETFs in the ETF Connect could be distributed to end investors.

The move is framed as a reciprocal arrangement after the China Securities Regulatory Commission clarified that research reports of eligible Hong Kong ETFs under ETF Connect could be forwarded by mainland securities companies to end investors in order to enhance access to information.

This article was previously published by Ignites Asia, a title owned by the FT Group.

The SFC circular said that a “relevant report would not be considered an advertisement or invitation”, which is currently prohibited by Hong Kong’s Securities and Futures Ordinance, subject to certain conditions.

A research report must be issued by certain defined licensed intermediaries and must provide information that is “factual, fair and balanced” and is “timely and consistent” with a mainland China-listed ETF’s offering documents.

The SFC clarified that the research report “may contain views on buying, holding or selling with target prices provided that there is a reasonable basis for such views”.

Regulatory concerns about providing information on mainland China-listed ETFs included the potential for cross-promotion or other inappropriate activity when a CSRC-licensed group company of an intermediary distributes such ETF research report.

In such cases, the SFC circular states that an intermediary must “exercise due skill, care and diligence” when it selects or monitors the CSRC-licensed group company to “ensure its competence”.

An intermediary must also implement processes and procedures to ensure the group company complies with applicable mainland laws and regulations and ensure a legally binding written contract is in place between itself and the group company, according to the Hong Kong regulator.

The HK-China ETF Connect went live in 2022 with 87 initial eligible products, 83 of which were mainland-listed ETFs that could be accessed by Hong Kong investors.

Over the past two years, the number of eligible mainland-listed ETFs under the scheme has risen to just over 141.

In April this year, stock exchanges in Hong Kong and China agreed to relax requirements for ETF funds that can be included in the Stock Connect schemes, giving a boost to the HK-China ETF Connect. The expansion of the scheme took place in July.

Tom Digby, Invesco’s head of ETF business development and capital markets for Asia Pacific, told Ignites Asia at the time that Hong Kong authorities had been “relatively quick” in expanding the ETF Connect scheme.

“The challenge for the ETF issuer is how you go about authorising and marketing them on both sides,” said Digby.

Selling and distributing Hong Kong-listed ETFs in mainland China and vice versa is “very difficult under the current joint marketing regimes”.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.