Institutional investors hesitate to join the Shanghai-Hong Kong Stock Connect program as they fear they may not hold beneficial ownership of A shares through the program. Qilai Shen / Bloomberg

Fund managers have found their hands tied by technical concerns over the Shanghai-Hong Kong Stock Connect program, yet asset management institutions still see near-term opportunities in the A-share market, according to a survey of local industrial organizations.

Local fund houses' usage of the program was "not extensive" in the first two months of the program's launch, with only 13 fund houses, or 31 percent of respondents, having made direct investment through the program, said the survey released by the Hong Kong Investment Funds Association (HKIFA) on Tuesday.

By contrast, more than half, or 53 percent, of the respondents plan to use the cross-trading program this year, the survey found, and among them 86 percent expect to do so within the next six months.

Although the remaining 47 percent of the fund houses are also "interested", yet they are awaiting the nod from relevant authorities, depositary banks as well as clients, the poll showed.

The association polled all its 63 members in November and December last year. The 41 respondents, mainly regulated funds, pensions and institutional mandates, managed a total of $20 trillion globally by end of last October.

"Nearly all respondents expressed concern over key technical and legal issues over the Stock Connect. Due to a number of issues, many traditional long-only managers, which are keen to make use of this channel, have not been able to leverage on it," said HKIFA Chairman Bruno Lee Kam-wing, indicating that the Northbound trading flow under the Stock Connect does not fully reflect the latent demand.

Resolving these issues would boost the program's usage, he added.

In particular, 85 percent respondents in the survey identified regulations over beneficial ownership on the Chinese mainland as their top concern, which is "particularly pertinent" to funds domiciled in the European Union - known as UCITS (Undertakings for Collective Investment in Transferable Securities). About 88 percent of funds authorized in Hong Kong are UCITS in terms of net asset value.

UCITS are under "very strict" requirements on beneficial ownership from European regulators. But uncertainty over relevant regulations has put UCITS on hold to use the Stock Connect, the HKIFA survey said.

However, Hong Kong Exchanges and Clearing Ltd (HKEx) issued a statement on Tuesday, reassuring the safety of investments via the Stock Connect.

"Initially, some investors were worried that they would not have proprietary right in the A shares held through Hong Kong Securities Clearing Company Limited (HKSCC), a wholly-owned subsidiary of HKEx, as nominee. However, it is now accepted by investors that they do have beneficial ownership under both Hong Kong law and mainland law. This means that investors will retain their proprietary rights in A shares even if HKSCC were to become insolvent - the most important hallmark of beneficial ownership," the statement said.

The exchange stressed that overseas regulators have gained a "clearer and better understanding" of the Stock Connect. "They do not have particular concerns on funds investing in A shares via the Stock Connect."

It also highlighted that, the first UCITS was approved by the Luxembourg regulator to join the program last December and a fast-track application procedure for UCITS to update their prospectuses to invest in A shares through the Stock Connect has been put in place.

"We understand that the market needs time to get used to the idea of beneficial ownership in shares held through a nominee in the context of mainland law. We are committed to making this and other concepts adopted in the Stock Connect properly understood by investors and other stakeholders," said Christine Wong, HKEx's chief counsel and head of legal services.

Separately, the HKIFA survey also found 65 percent of respondents uncomfortable with the pre-trade checking rules of the Stock Connect, saying it boosts information-leaking risks ahead of deals.

Meanwhile, 38 percent fund houses also underscored disclosure of interest and short swing profits rules on the mainland, saying the mainland's securities laws are rather vague on definitions and calculation, which fuels the fear that large fund houses particularly could easily cross the line.

emmadai@chinadailyhk.com

(HK Edition 01/07/2015 page8)