Overview of recent hedge fund regulatory developments in Asia
By Henri Arslanian, Director, UBS Prime Services, Business Consulting Services
Published: 30 June 2014
A number of regulatory developments have taken place over recent months in the Asia-Pacific region that may have a practical impact on hedge funds trading or operating in the region. This article sets out three main developments that have taken place in China, Hong Kong and Singapore.
China
On 10 April 2014, the CSRC and the SFC announced the approval of the Shanghai-Hong Kong Stock Connect pilot program (commonly known as the Mutual Market Access Scheme or MMA) for the establishing mutual stock market access between Mainland China and Hong Kong operating between the Shanghai Stock Exchange (SSE) and the Stock Exchange of Hong Kong (SEHK).
What is the Mutual Market Access Scheme?
- The MMA scheme is a securities trading and clearing program announced in April 2014 aimed to provide mutual market access between the Mainland and Hong Kong by establishing mutual order-routing connectivity and related technical infrastructure to enable investors to trade designated securities listed in the other’s market.
Who can participate in the MMA Scheme?
- Northbound Trading - All Hong Kong and overseas investors will be allowed to trade certain stocks listed on the SSE
- Southbound Trading - Mainland institutional investors and certain eligible individual investors will be allowed to trade certain stocks listed on the SEHK
When will the MMA Scheme launch?
- The MMA is expected to launch in an approximately six months, in or around q4 2014, as it can only take place once relevant trading and clearing rules and systems have been finalized, all regulatory approvals have been granted, market participants have had sufficient opportunity to configure and adapt their operational and technical systems and necessary investor education programs are put in place.
What type of instruments can be traded?
- Northbound Trading - generally able to trade constituent A Shares of the SSE 180 Index and SSE 380 Index and all the SSE-listed A shares that are not included as constituent stocks of the relevant indices but which have corresponding H shares listed on SEHK. Please note that as B shares, ETFs, bonds, and other securities are not initially allowed.
- Southbound Trading - generally able to trade the constituent stocks of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index, and all H shares that are not included as constituent stocks of the relevant indices but which have corresponding shares in the form of SSE-listed Shares.
What are the quotas in place?
-
The MMA Scheme will have a daily quota a well as an aggregate quota.
- Northbound Trading - daily quota of Rmb13b with an aggregate quota of Rmb300b
- Southbound Trading - daily quota of Rmb10.5b with an aggregate quota of Rmb250b
- Please note that the aggregate quota and the daily quota will apply on a “net buy” basis allowing investors to always be able to sell regardless of the quota balance.
What are the main differences with the existing QFII/RQFII schemes?
- The MMA Scheme is meant to co-exist with other existing schemes (e.g. QFII, RQFII, QDII). The main differences between the MMA and QFII/RQFII schemes are the following:
- Eligible Investors – there are no restrictions for Northbound Trading and any Exchange Participant and their clients can participate (including hedge funds). QFII/RQFII in comparison is available mainly to institutional investors (e.g. hedge funds cannot apply for their own QFII)
- Eligible Products - MMA only allows trading in certain specific stocks (mainly SSE 180 and SSE 380 Index) whereas the QFII/RQFII scheme allows trading in a broader range of products (inc. bonds, ETFs)
- Quota - MMA has strict daily and aggregate quotas applicable to the market (Rmb13b/Rmb300b) whereas a QFII/RQFII has its own quota.
Hong Kong
In March 2014, Hong Kong's Financial Services and Treasury Bureau (FTSB) issued the consultation paper on open-ended fund companies (OFC). This follows many years of lobbying by the industry and is seen by the industry as potentially one of the most important developments in recent years in Hong Kong.
Currently open-ended funds may be established in HK in the form of a unit trust but not in a corporate form due to various restrictions on capital reduction (e.g. in the event of a redemption from the fund).
What are the main highlights of this consultation?
- Proposal - the consultation proposes to introduce OFCs in Hong Kong which will provide more flexibility in establishing funds in Hong Kong.
- Oversight - these new OFC vehicles will be regulated and supervised by the SFC. They will be established under the Securities and Futures Ordinance ("SFO") and not the Companies Ordinance ("CO"), except for certain narrow exceptions (e.g. winding up).
- New legislation - new OFC legislation and an OFC Code will be enacted.
- Responsibilities - the Companies Registry will be responsible for the incorporation but the SFC will be responsible of the registration and regulation.
- Nature - the OFC will be structured in a corporate form with limited liability and variable share capital. It will have a separate legal personality, be governed by a board of directors and the shareholders' liability will be limited.
- Type 9 license - the day to day management and investment functions of the OFC must be delegated to an investment manager with a Type 9 SFC license.
- Profits Tax - the existing profits tax exemption for privately offered funds (e.g. hedge funds) will be available for OFCs with their central management and control located outside Hong Kong. Practical impact is that initially, a HK based fund will still need to have offshore directors and ensure central management and control are offshore in order to be exempt from tax.
- Stamp Duty – as shares in an OFC are by definition Hong Kong stocks, their transfers should be subject to stamp duty (0.1%).
- Board of Directors – BOD will be comprised of only natural persons (i.e. no corporate directors).
- Name – will need to end by "open-ended fund company".
- Timeline – No timeline yet as consultation ends on 19 June 2014.
Singapore
- In February 2014, the Monetary Authority of Singapore (MAS) proposed a Review of Securities Market Structure and Practices ("Consultation"), which includes, amongst other proposals, a proposal to introduce a short position reporting regime. The Consultation closed on 2 May 2014 and the industry is now waiting for the MAS response.
What are the reporting regime options proposed by the Consultation?
- The Consultation proposed 2 reporting regime options:
- Aggregate Position Reporting
- Investors with net shorts positions that are the lower of 0.05% or S$100,000 of issued shares of a listed entity would be required to report weekly. The aggregate short positions would be published on a weekly basis without revealing investor identity.
- By comparison, Hong Kong has a somewhat similar reporting regime where the short reporting threshold is 0.02% or HK$30m.
- Public disclosure of short positions
- Short position holders would be required to report their net short positions by T+2 days, if their net short position exceeds 0.5% of issued shares, and for every subsequent change in position of 0.1% or more. The identity of short position holders and their net short positions would be published on an ongoing basis.
- By comparison, Japan has somewhat of a similar regime that also requires a short position public disclosure if an investor holds 0.5% or more of the share capital of a company. Such a requirement does not exist in Hong Kong.
Are swaps included?
- It appears from the consultation language that swaps will be excluded as the Consultation states that net short positions for all securities listed on SGX Mainboard and Catalist "which require delivery of underlying securities" are to be reported. The Consultation however also states that derivatives "which could require delivery of an underlying security (e.g. exchange-listed options) would need to be included.
What is the timeline?
- Very difficult to estimate when this may be implemented, as it is still at the consultation stage, but the industry believes that this may be around 2H 2015.
The views expressed are those of the author and do not necessarily represent those of UBS.