The Shanghai-Hong Kong Stock Connect (the "Stock Connect") is a securities trading and clearing program developed by Hong Kong Exchanges and Clearing Limited, Shanghai Stock Exchange (the "SSE") and China Securities Depository and Clearing Corporation Limited (the "ChinaClear") with the aim to achieve mutual stock market access between mainland China and Hong Kong.
The Stock Connect comprises a Northbound Trading Link and a Southbound Trading Link. Under the Northbound Trading Link, Hong Kong and overseas investors (including Luxembourg investment funds), through their Hong Kong brokers and a securities trading service company established by the Stock Exchange of Hong Kong (the "SEHK"), may be allowed, subject to rules and regulations issued/amended from time to time, to trade certain China A-Shares listed on the SSE.
Elvinger, Hoss & Prussen has liaised with the Luxembourg Commission for the Supervision of the Financial Sector (the "CSSF") on the use of Stock Connect on behalf of a number of clients. The CSSF considers that, under certain conditions and subject to adequate disclosures in the prospectus and the KIID(1), Stock Connect is an eligible channel for the acquisition of China A-Shares for Luxembourg UCITS. The main conditions imposed by the CSSF are:
- the use of a delivery versus payment ("DVP") settlement process avoiding additional counterparty risks;
- ensuring that accounts opened by the Luxembourg depositary with the Hong Kong sub-custodian are segregated at the level of UCITS sub-funds or structured as UCITS assets omnibus accounts of the Luxembourg depositary with the Hong Kong sub-custodian; and
- the disclosure in the prospectus and KIID has to cover the specific legal risks of compulsory use of the local central securities depositaries, Hong Kong Securities Clearing Company Limited and ChinaClear for custody of securities on a cross border basis and other specific risks.
As a matter of principle, the CSSF mentioned that disclosures in the prospectus and KIID are required irrespective of the proportion of invested assets through Stock Connect. However, the CSSF indicated a certain flexibility in relation to the timing of updating prospectuses for those investment funds already permitting direct investment in mainland China and limiting such investment to 5 % of their net assets.
Stock Connect on its own or in combination with QFII(2)/RQFII(3) quota is a new channel available to Luxembourg UCITS and also AIFs to maximize their direct investments in Chinese securities.
(1) KIID means the key investor information document referred to in Article 78 Directive 2009/65/EC of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS).
(2) Qualified Foreign Institutional Investor.
(3) Renminbi Qualified Foreign Institutional Investor.