Citi 2018 FinReg Outlook

ETF Connect: Big Hopes, Big Opportunity Will the much-anticipated Hong Kong ETF Connect live up to the hype? Originally announced in 2016, the much-anticipated addition of Exchange-Traded Funds (ETFs) to Hong Kong and Mainland China’s Stock Connect project is expected to go live in 2018. ETF Connect will enable the cross-border sale of ETFs listed on the Hong Kong and Mainland China’s Shanghai and Shenzhen stock exchanges to investors in both domiciles. ETF Connect is an important part of the Hong Kong Government’s efforts to build Hong Kong into the leading Asian ETF center. For Mainland China, it is part of a wider effort to open up its capital markets to outside investments. Meanwhile, for asset managers, ETF Connect could become an important channel for accessing Mainland Chinese investors. DEVIL IS IN THE DETAILS ETF Connect follows the development of several other successful cross-border programs over the last few years. While final details have not been announced, it is expected ETF Connect will follow the same template as the existing Stock Connect and Mutual Recognition of Funds (MRF) programs. The Stock Connect programs allow investors in Hong Kong and Mainland China to buy shares in each other’s markets. The MRF program allows funds domiciled in both jurisdictions to be sold to retail investors across their respective borders. USING THOSE AS A GUIDE, SOME OF THE KEY REQUIREMENTS OF ETF CONNECT ARE LIKELY TO BE: Eligibility: Only Hong Kong or Mainland China-domiciled ETFs will be eligible for inclusion in the program. This means, for example, that European ETFs cross listed in Hong Kong will not qualify. Substance: Management of the ETF must be carried out in the location of the ETF’s domicile. Groups will not be able to fully delegate management back to the US or EU. Authorization: The ETF will need to be approved and regulated by Hong Kong’s Securities and Futures Commission or the China Securities Regulatory Commission, and listed on the corresponding stock exchanges. Track Record: Eligible ETFs should have at least a 12-month track record before being included in ETF Connect. Investment Restrictions: Assets invested in the other’s market may not exceed a set percentage. Currently a maximum of 20% of Assets Under Management can be invested in the other’s market under MRF rules. STEWART ALDCROFT Managing Director, Trustee & Fiduciary Services Asia Pacific 39 38 Citi Custody & Fund Services – FinReg Outlook 2018