(Bloomberg) — Luxembourg, home to equity funds with about $1.2 trillion of assets, gave its first approval to trade through the Shanghai-Hong Kong exchange link as international investors seek greater access to Chinese shares.
Luxembourgs financial regulator granted the authorization to a fund yesterday, Patrick Hommel, a member of the secretariat general at the Commission de Surveillance du Secteur Financier, said in an e-mailed reply to questions without naming the beneficiary. Funds domiciled in the country that arent yet invested in the Chinese market should refrain from using the link until they get regulatory approval, he said.
Overseas money managers have been working to finalize trading and compliance systems since Chinese authorities gave them a weeks notice for the programs start date on Nov. 17. While foreigners bought the maximum daily amount of mainland shares allowed on the links debut, inflows have since slowed and Mirae Asset Global Investments (HK) Ltd. said last week it may take two months for more money managers to participate.
The Luxembourg approval is super news, said Kevin Rideout, head of execution services for Asia Pacific at Citigroup Inc. This is a great first step toward unleashing some of the worlds wealth for the connect.
About 95 percent of large funds arent ready to invest through the connect because of operational and compliance reasons, said Andy Maynard, the Hong Kong-based global head of trading and execution at CLSA Ltd. It will take about two months for managers to resolve all the issues, he estimated.
Case-by-Case
The compliance officers of the funds and the legal advice the funds are getting keeps telling them to hold fire until they get clarity from the regulators in Europe, Maynard said.
Approvals will be given on a case-by-case basis and Luxembourgs regulator hasnt issued any guidance to funds since the link was started this month, Hommel wrote. CSSF concerns about the trading connection are preventing funds from participating in the program, Reuters reported this week, citing market participants.
There are more than 3,600 active equity funds that have their primary share class domiciled in Luxembourg, according to data compiled by Bloomberg. Among the largest is the $12.9 billion Templeton Asian Growth Fund, run by Mark Mobius.
Trading Concerns
Franklin Templeton Investments, which oversees about $898 billion worldwide, is seeking clarification on legal and regulatory issues for specific funds before deciding how and when to participate in the link, said Hon Gay Lau, a spokesman for the firm in Hong Kong.
The Hong Kong Investment Funds Association has been working with the industry to meet regulatory requirements, said Sally Wong, the chief executive officer at HKIFA.
Funds are subject to very stringent requirements and we are obliged to ensure that the ownership rights and legal entitlement of the funds to the securities are assured, she said.
While investors placed purchase orders for the maximum 13 billion yuan ($2.1 billion) of Shanghai shares on Nov. 17, buying has fallen short of the quota each day since then, according to data compiled by Bloomberg.
Concerns over ownership rights of shares bought through the link and a requirement for international investors to deliver stocks to a broker before markets open if they plan to sell have curbed participation, according toNickRonalds, the managing director for equities at the Asia Securities Industry & Financial Markets Association.
Some fund managers will also need to get approval from their clients before buying shares through the link, said Citigroups Rideout.
Its still hard to predict exactly when that green light comes, he said. We hope before year-end.
