Stock Connect set to clear obstacle in EU

Europe's main funds regulator has introduced a "fast-track" procedure for approving mutual funds that wish to participate in a landmark Shanghai-Hong Kong equity trading program.

The announcement, made by the Association of the Luxembourg Fund Industry on Tuesday, comes amid growing industry frustration over European regulatory hurdles that have prevented many asset managers from participating in the Shanghai-Hong Kong Stock Connect program.

Luxembourg's Commission de Surveillance du Secteur Financier will fast-track applications from mutual funds sold to retail investors, also known as UCITS, whose investment policy already permits exposure to China shares and which only need to adapt their existing paperwork, ALFI said.

The move will make it much easier in theory for many large institutional investors to use the Chinese stock link, although how many funds will benefit from the new process in practice is unclear.

More than 13,000 mutual funds are domiciled in low-tax Luxembourg and regulated by the CSSF, but only a small proportion of them have already invested in Chinese shares through cross-border investment programs known as QFII and RQFII.

Currently, the CSSF has approved one UCITS fund to use the Stock Connect and has just two other applications for it pending.

Sally Wong, chief executive of the Hong Kong Investment Funds Association, said she was analyzing the details of the announcement but said: "I reckon a large number of UCITS funds will be able to avail of this process".

A spokeswoman for ALFI could not provide details on timings for the fast-track process, adding funds would be assessed "case by case".

The Stock Connect program, launched on Nov 17, allows foreign investors to trade Shanghai-listed shares via the Hong Kong stock exchange, and mainland investors to buy Hong Kong shares via the Shanghai bourse.

But within a week of its launch, trading volumes had dwindled to less than 20 percent of the maximum allowance.

Last week, the CSSF's concerns about investor protection prevented most EU funds from participating, an earlier report said.

Market participants said the CSSF wants to ensure that Chinese shares EU investors buy through the link-up can be adequately monitored and recovered should the bank that guards the stocks－the custodian bank－or one of the exchanges, go bust.

The China trading program makes it tough for funds and custodians to fulfill these obligations, because Shanghai shares are physically held in China through an unusually complex three-tiered structure involving the custodian, the Hong Kong clearing house, and the Shanghai clearing house.