In the cross-border funds industry, Hong Kong’s ambition to become a leading global fund center is no secret. Last year a major milestone was reached when Hong Kong signed an agreement with Switzerland for registered funds to be sold freely in each other’s markets. It is Hong Kong’s first formal agreement with a jurisdiction other than Mainland China and the first fund passport between an Asian and European jurisdiction. This year two new initiatives are expected to go live that should further bolster the appeal of Hong Kong as a fund domicile.

OPEN-ENDED FUND COMPANIES COME INTO PLAY

Historically, open-ended mutual funds could only be established as unit trusts in Hong Kong. However, this year Hong Kong’s Securities and Futures Commission plans to introduce Open-ended Fund Companies (OFCs) as an approved structure. OFCs are corporate fund vehicles, similar to the funds structures commonly used in other global cross-border centers, such as Ireland and Luxembourg. Corporate fund structures are the preferred fund vehicle for cross-border distribution because OFCs tend to export better to jurisdictions where the unit trusts do not exist. Additionally, corporate fund vehicles may avail of double taxation treaty benefits on their underlying investments in a manner unit trust structures cannot, which makes them more attractive to investors. The adoption of corporate fund vehicles is not limited to Hong Kong. Singapore and Australia have similar initiatives underway. Since both are rivals to Hong Kong in the race to become the leading Asian cross-border fund hub, this underscores the importance of OFCs for Hong Kong’s success.

ETFS BECOME ELIGIBLE UNDER STOCK CONNECT

In December 2016, the Shenzhen-Hong Kong Stock Connect program, which allows for mutual access between the two stock exchanges, went live. As part of the program the China Securities Regulatory Commission announced ETFs will be included in the Shenzhen-Hong Kong Stock Connect program after it “has been in operation for a period of time and upon the satisfaction of relevant conditions.” Once ETFs are approved for the program, Mainland China and Hong Kong domiciled ETFs will be able to be sold in each other’s market.

For asset managers, this development opens another path to Chinese investors. Currently, the Mutual Recognition of funds program is the primary route to Mainland China investors, which allows Hong Kong funds to be sold into Mainland China and for Mainland funds to be sold into Hong Kong. Further details are expected to be released in the first half of 2017.

Asset managers should assess these new opportunities in the context of their larger commitment to Greater China. Policymakers are looking to develop Hong Kong into a fund center and local substance requirements must be considered. Fund managers must have a physical presence in Hong Kong and will need to be registered and hold the appropriate local licenses. Nonetheless, both developments represent significant steps in Hong Kong’s evolution as a fund domicile. OFCs bring Hong Kong into alignment with the global cross-border market, while the addition of ETFs to Hong Kong Stock Connect will increase the distribution opportunities for Hong Kong funds. Overall, both the OFC and ETF Stock Connect are two additions to Hong Kong’s cross-border toolkit that should be welcomed by asset managers.

This article was originally published in the 2017 Regulatory Field Guide. The guide features insights from a number of our experts on key regulatory developments that will have the greatest impact for asset managers in the year ahead – and beyond. Visit bbh.com/regulatoryfieldguide to explore the guide.