Investment Funds Update - Asia - April 2015

April 22, 2015

Dechert's investment funds update discusses the key legal and regulatory updates for the funds industry from the key jurisdictions in Asia.



Hong Kong – China Mutual Recognition Scheme (the “Scheme”)

An opportunity to market HK-domiciled and authorized funds to Mainland retail investors is starting to take shape. There is keen expectation that this Scheme will finally go “live” in the second half of 2015. The Securities and Futures Commission (“SFC”) in Hong Kong has indicated that approximately 600 funds will likely qualify for participation in the Scheme: 500 being Mainland-domiciled and approved by the China Securities Regulatory Commission (“CSRC”), and 100 being Hong Kong-domiciled and SFC-authorised.

Hedge funds or funds that use derivatives will not be able to participate in the Scheme; which will only be available to plain vanilla bond and equities funds.

There will be a total quota will be assigned to the entire Scheme, with each participating fund in Hong Kong and the Mainland receiving individual quotas based on their respective assets under management. The Scheme is said to currently be awaiting approval from the State Council of the People’s Republic of China before the SFC and CSRC can sign a Memorandum of Understanding to implement the Scheme.

At this stage, no further details on the actual rules implementing the Scheme (e.g. eligibility, track record or AUM requirements) are available.

Hong Kong - Shenzhen Stock Connect

The Shenzhen Stock Exchange (“SSE”) may soon open up to global investors. Some details of the Hong Kong-Shenzhen Stock Connect (the “Programme”) were released in an interview with the Chief Executive of the SSE, Ms. Song Liping, during the annual session of the National People’s Congress. According to the interview, it is expected that the Programme will be approved in the first half of 2015, to be implemented in the second half of 2015. The daily quota for the Programme and minimum capital requirements are expected to be the same as that of the Hong Kong - Shanghai Stock Connect, which is currently RMB 10.5 billion (approximately US$1.6 billion) a day for purchases of HK-listed stock by local Mainland Chinese investors; and up to RMB 13 billion (approximately US$2.1 billion) a day for the purchase of Shenzhen-listed stocks by global investors.

Read Dechert OnPoint: The Through-Train Leaves the Station: Hong Kong-Shanghai Stock Connect Launches

Consultation Conclusions on Reporting and Record Keeping Rules for OTC Derivatives

Fund managers received a reprieve from the initial implementation of Hong Kong’s OTC derivatives reporting regime. In November 2014, the Hong Kong Monetary Authority (“HKMA”) and the SFC jointly published the consultation conclusions on the proposed mandatory reporting and related record keeping obligations under Hong Kong’s new OTC derivatives regulatory regime (the “Conclusions”). In response to industry feedback, the Conclusions set out revisions to the proposals on OTC derivatives regulation including, amongst other things:

  • Implementation of the mandatory reporting and related record keeping obligations for OTC derivatives in phases, where the initial reporting obligations will be limited to regulated entities (i.e. authorized institutions, approved money brokers, central counterparties corporations and SFC-licensed corporations where they are either counterparties to the reportable transactions or conduct trades in Hong Kong on behalf of their affiliates acting as counterparties), and will not extend to Hong Kong licensed fund managers for the OTC transactions of offshore funds that they manage.
  • Extension of the concession period to establish reporting connections to the Hong Kong Trade Repository (“HKTR”) from 3 months to 6 months, and an extension of the period for backloading historical transactions from 6 months to 9 months.
  • Clarification to the basis behind transactions viewed as having been conducted in Hong Kong if an affiliate is a counterparty to the transaction and one of the individuals who made the decision for the affiliate to enter the transaction (i) acted in his / her capacity as a trader; and (ii) was employed or engaged by the reporting entity.

In addition to the above, the Conclusions also seek industry views on the following matters:

  • the reporting of valuation transaction information;
  • a list of designated jurisdictions for the purposes of the masking relief (i.e. where the identity of the counterparty need not be disclosed to the HKTR); and
  • a list of stock markets, futures markets and clearing houses to be prescribed for the purposes of carving out exchange-traded transactions from the definition of “OTC derivatives” and the related reporting requirements.

Read the Consultation Conclusions and Further Consultation on the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules



QFII and RQFII Capital Gains Tax

Capital gains tax (“CGT”) has been a key issue surrounding the investment by QFIIs and RQFIIs in the Mainland Chinese securities market. Mainland Chinese tax authorities have publicly decided to retrospectively collect CGT for the period from 17 November 2009 to 16 November 2014.

For quite a while, the Mainland Chinese tax authority’s stance on CGT earned by QFIIs and RQFIIs has been vague. Simultaneously with the launch of the Shanghai-Hong Kong Stock Connect programme on 14 November 2014, the CSRC, the State Administration of Tax (“SAT”) and the Ministry of Finance (“MOF”) jointly issued two tax circulars, i.e. Caishui [2014] No. 79 (“Circular 79”) and Caishui [2014] No. 81 (“Circular 81”). Pursuant to Circular 79, gains realized from the transfer of Chinese equities by QFIIs and RQFIIs are tentatively exempted from corporate income tax with effect from 17 November 2014. However, the Circular also emphasized that capital gains realized prior to 17 November 2014 remain subject to corporate income tax.

In February 2015, SAT staff publicly mentioned that CGT for gains realized prior to 17 November 2014 would be levied on a transactional basis with no netting off among multiple transactions permitted. This may result in the actual CGT payable by certain QFIIs and RQFIIs exceeding the amounts of tax provision made, where the tax provisions had been made on the basis of net asset value. In such cases, QFIIs and RQFIIs may need to divert a portion of their current net assets to make up the shortfall between the CGT payable and the tax provision.

Similarly, for QFIIs and RQFIIs that did not make any tax provision, collection of the CGT may have a significant impact on their assets, adversely affecting the interests of existing investors, particularly those who made their investments after the gains corresponding to the income tax had been realized. In addition, with respect to investment products that were liquidated before the collection of CGT, it still remains to be seen who will be responsible to actually pay the tax. As it will be difficult to trace the investors of those investment products which have been wound up, the tax authorities may, instead, pursue the respective QFIIs and RQFIIs who had provided such products.

QFIIs and RQFIIs are urged to consider taking the following steps:

  • coordinate with their service providers to review their past transactions;
  • prepare the relevant filings to the Mainland China tax authorities;
  • determine the impact (if any) of CGT on their investment products and investors; and
  • enhance the disclosure on CGT in the relevant offering documents to the relevant investors.


Regulation of OTC Derivatives and Singapore Regulatory Reforms

The Monetary Authority of Singapore (“MAS”) published a consultation paper on the proposed amendments to the Securities and Futures Act (the “SFA”) which proposes to extend the SFA to regulate OTC derivatives. The consultation paper clarified that contracts booked in Singapore are subject to the derivatives reporting obligations even if the contracts were not traded in Singapore. The consultation also proposes the following amendments to the SFA:

  • simplify product definitions such as “securities” and “derivative contracts”;
  • introduce a new part setting out the framework for short selling and short selling reporting requirements;
  • strengthen the effectiveness of the enforcement regime to deter market misconduct; and
  • widen the range of factors to be considered in recognizing a foreign collective investment scheme for offer to the public.

The proposals closed for comment on 24 March 2015.

Read the Consultation Paper on Proposed Amendments to the Securities and Futures Act

Securities-based Crowdfunding

The MAS has published a consultation paper setting out proposals and clarifications to facilitate access by corporates to alternative sources of funding through securities-based crowdfunding - a capital-raising approach that seeks to raise funds from a large number of individuals, typically, through an online platform. Securities offered may be debentures or shares and are subject to appropriate local regulation of securities. The MAS is seeking industry views on the proposed regulatory approach to allow securities-based crowdfunding by accredited and institutional investors. The consultation aims to strike a balance between facilitating investments in start-ups and small businesses whilst ensuring sufficient safeguards for investors.

Read the Consultation Paper on Facilitating Securities-based Crowdfunding

Guidelines on Good Drafting Practices for Prospectuses

The MAS consulted the industry on good drafting practices for prospectuses to facilitate the understanding of offering documents by the investing public. The proposed guidelines aim to improve the readability of prospectuses by encouraging the use of plain English and the presentation of information in a clear, concise and logical manner. The consultation paper is in response to industry feedback from an earlier MAS Policy Consultation on Proposals to Facilitate Better Understanding of Prospectuses, published in October 2013.

Read the Public Consultation on Guidelines on Good Drafting Practices for Prospectuses



Licensing Manual for Financial Investment Services Business

The Financial Supervisory Service (“FSS”) announced a complete revision of the manual for licensing requirements and procedures for financial investment services business. The new manual enhances transparency on the licensing criteria for regulatory approval. Specifically, the new manual provides guidance on:

  • requirements on human capital allocation and physical facilities including IT facilities, communication channels, business space security system and supplemental facilities needed in order to maintain business continuity;
  • requirements on the applicant’s business plan, such as feasibility and consistency of the business plan in respect of profitability forecasts and internal controls for investor protection; and
  • arrangements for prevention of conflict of interests, internal control standards and the integrity and efficacy of Chinese walls.
The FSS also announced that an English translation of the manual will be available on its website in due course.


Working Group Issues Consultation Paper

The working group consisting of six participating countries (Singapore, Australia, South Korea, New Zealand, Thailand and the Philippines) in the Asia Region Funds Passport initiative (“ARFP”) released a consultation paper (the “Consultation”) on 27 February 2015, on the proposed eligibility criteria, operational details and application process of the ARFP. The Consultation also set forth the proposed obligations of host countries and common regulatory arrangements between participating members.

Of particular note is the proposed streamlined application process in which a passported fund will be deemed “approved-for-offer” in the host country if it does not receive notification otherwise within 21 days of application with the host country’s regulator. It is expected that participating countries will become a party to a Memorandum of Understanding setting out the final operational rules sometime in September 2015. The ARFP is targeted to be implemented in the third quarter of 2016.


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