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Hong Kong – Getting Ready For Stock Connect: HK Authorised Funds.

23 October, 2014



In a previous article (click here), we discussed the SFC’s requirements for authorised funds using the Shanghai-Hong Kong Stock Connect programme. To recap, a product issuer that intends to invest more than 30% of an SFC authorised fund’s NAV in China A Shares is advised to consider whether the use of Stock Connect amounts to a material change requiring the SFC’s prior approval. If a fund invests between 10% to 30% of its NAV in China A Shares on an ancillary basis, or such investment is less than 10% of the fund’s NAV, the SFC’s prior approval is not required. However, in most cases, affected investors should be notified of the changes and the fund’s offering documents should be updated.


When it comes to preparing disclosures for Stock Connect, such as drafting the notice to investors and updating the fund’s offering documents, the requirements are still evolving. Some fund management companies may have started the process of updating their offering documents. However, it is anticipated that Stock Connect disclosures will need to be further updated, or drafts fine-tuned, once the final rules are published.


At this stage, we suggest fund management companies consider adding the following disclosures to the offering documents for SFC authorised funds:

  • An introductory summary on Stock Connect including the basic features and eligible securities
  • The constraints under the quota system as well as the differences in trading days between Hong Kong and China
  • Information on corporate actions and shareholders’ meetings
  • Local disclosure of interests requirements, and
  • Restrictions on foreign investments in companies listed in China.


In terms of the risks relating to Stock Connect, we suggest fund management companies consider disclosures covering the following:

  • Operational risks, as the stock trading system between Hong Kong and China are quite different
  • Restrictions on selling A Shares imposed by front-end monitoring
  • Short swing profit rules in China
  • Clearing and settlement risk, and
  • Regulatory and taxation risks.


The above list covers some of the topics or issues that fund management companies might consider.  It is by no means exhaustive or conclusive.


Another area of concern to fund management companies is beneficial ownership of the China A Shares acquired via Stock Connect. On 26 September 2014, the Hong Kong Stock Exchange updated its FAQ for investors and clarified that the concept of “beneficial owner” will be expressly recognised in the relevant Stock Connect rules in China. Ultimate investors will therefore be recognised as having beneficial ownership in A Shares and can enjoy the rights and benefits as beneficial owners. From Hong Kong’s perspective, the CCASS rules and operational procedures will be updated to set out the rights and obligations of HKSCC as the “nominee holder”.


The FAQs for investors can be downloaded from the Hong Kong Stock Exchange website.



For further information, please contact:


Alwyn Li, Partner, Deacons

[email protected]


Deacons Capital Markets Practice Profile in Hong Kong




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