Ironing out the details

08 April 2014   Category: News, Asia, Hong Kong   By Hui Ching-hoo

Hong Kong and Mainland regulators are putting the finishing touches to the much-awaited mutual recognition initiative following the Hong Kong Securities and Futures Commission (SFC) announcing in January that both sides had reached a broad agreement on the scope of the project.

Andrew M Gordon, managing director and head of Asia with RBC Investor & Treasury Services, tells Asia Asset Management that the initiative could create significant opportunities for those international custodians and fund administrators with established local market capabilities. However, he cautions that players should exercise real caution about potential risks given that operational details have yet to be clearly defined.

Since the initiative enables Hong Kong-domiciled asset managers to distribute their fund products in China and vice versa, in Mr. Gordon’s opinion: “The industry has reacted very positively to this opportunity, and is very keen for it to get started as it will open US$7.5 trillion Mainland worth of household savings to international companies.”

He continues, saying: “However, the implementation of mutual recognition hinges on a number of factors. The most prominent of these is the need for asset managers to arrange good distribution and the eagerness for Chinese investors to purchase Hong Kong-domiciled funds.”

In terms of market practices, Mr. Gordon notes that practitioners are concerned over whether the reality of the initiative when up and running will resonate with the details published so far.

He adds that one of the most affected groups in the “clockwork” process of settlement and transactions is likely to be transfer agents (TAs). TAs anticipate an increasing number of orders coming from Mainland investors via distributors, including banks, trustees, and securities brokerages. This points to a real need to harmonise the practice to ensure that the distribution process proceeds smoothly and efficiently.

There is real risk involved in launching funds without knowing precisely what the rules are; especially as it has been construed that not all types of funds will be approved for distribution. In Mr. Gordon’s view, funds that feature straightforward investment strategies, with less emphasis on using derivatives, are likely to be incorporated in the scheme.

The quotas placed under the scheme are most likely to be on an individual fund basis. In order to build a sustainable business, managers will need to work closely with their distributors to build a sustainable base of assets for Chinese investors.

China’s mutual fund market is significantly different to Hong Kong’s, which is due in no small part to the fact that Mainland fund distribution is dominated by a handful of lenders.

In addition, Mr. Gordon discloses it is still unclear as to what extent Hong Kong-domiciled funds would be welcomed for distribution via China’s online “fund supermarkets”. The prospects for this happening seem unlikely in the near term, as so far, it is only money market funds that have been peddled online in China.

Mr. Gordon says: “From RBC’s perspective, our key competitive advantage is providing full service to funds − with a recognised strength in transfer agent services. One of the biggest segments of our business is servicing UCITS funds out of Luxembourg and Dublin, as well as local Hong Kong funds.

“Applying our skill-set to the mutual recognition scheme, we not only offer our clients quality core custody and fund accounting services, but also local effective management of the transfer agent processes and distribution support; for example, receiving subscription and redemption orders from their distributors. This ensures their operational flows are carried out with optimal efficiency and low risk from our Hong Kong base.”