The Hong Kong Exchanges and Clearing Limited (HKEx) issued a press release on 6 January 2015 providing an update on the Shanghai-Hong Kong Stock Connect (Stock Connect) since its launch in November 2014 (please see our previous blog post). Of particular interest are the following points noted by HKEx:

  • Engagement with industry bodies and overseas regulators: HKEx has been actively engaging with overseas regulators and fund industry associations in Hong Kong and overseas resulting in a better understanding of Stock Connect. For example, HKEx has been dealing with industry and regulatory queries regarding the legal and regulatory structure of, and technical issues relating to, Stock Connect, and has published relevant Frequently Asked Questions (FAQs) and Supplemental Questions and Answers.
  • Cross-border enforcement cooperation: The FAQs highlight cross-border regulatory enforcement issues arising from Stock Connect and the intention of the Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC) to work actively to improve investigatory cooperation and to establish referral and information exchange mechanisms to combat improper activities. This aligns with the Stock Connect memorandum of understanding 1 signed in October 2014 which emphasises timely, sufficient and effective information sharing between the CSRC and SFC to assist investigations and sets out  the scope of how the information can be used.
  • UCITS investing in A shares through Stock Connect: The joining of the first undertaking for the collective investment in transferable securities ((UCITS) a form of investment funds regulated at European Union level) to Stock Connect was approved by the Luxembourg regulator in December and a fast-track application process for the updating of prospectuses to invest in A shares through Stock Connect has been introduced.
  • Clarification on beneficial ownership structure of A shares: The HKEx publications clarify that where investors hold A shares through Hong Kong Securities Clearing Company Limited (HKSCC) (a wholly-owned subsidiary of HKEx) as nominee, the investors will have beneficial ownership in the shares under both Hong Kong law and Mainland China law. HKEx further notes that investors would retain their proprietary rights in the shares even if HKSCC were to become insolvent.
  • Roll-out of short selling service: The HKEx is expected to introduce a ‘Northbound Trading’ short-selling service of A shares by the end of January 2015. ‘Northbound Trading’ is the trading of permitted Shanghai Stock Exchange securities by Hong Kong and overseas investors. The short-selling service is to give investors greater flexibility in trading strategy and risk management. HKSCC will conduct a system test to make this service available to overseas and Hong Kong investors. In March 2015, the HKSCC intends to conduct another system test to facilitate investors to track their stock holdings. This latter change would enable institutional investors which hold their A shares through custodians to comply with Mainland China’s pre-trade checking requirement without transferring their shares to brokers before executing a sale.

1 Memorandum of Understanding between the CSRC and the SFC on Strengthening of Regulatory and Enforcement Cooperation under Shanghai-Hong Kong Stock Connect