The launch of Shanghai-Hong Kong Stock Connect: documentation issues for asset managers

The much-anticipated Shanghai-Hong Kong Stock Connect, a pilot programme for establishing mutual stock market access between Mainland China and Hong Kong, will commence on 17 November 2014.

The programme will allow non-PRC investors to trade in A-shares listed on the Shanghai Stock Exchange (SSE) via the Hong Kong Stock Exchange (HKSE), and PRC investors to trade in HKSE listed shares via the SSE. Prior to the launch of Stock Connect, non-PRC investors could only access A-shares via institutional investor programmes administered by the China Securities Regulatory Commission.

In our September Financial Services newsletter, we discussed client documentation disclosures for Hong Kong authorised fund managers planning to use Stock Connect, following an FAQ released by the Securities and Futures Commission (SFC) on 22 September 2014. Our October Financial Services newsletter looked at further documentation issues for SFC authorised funds. We highlighted tax as a risk that is advisable to cover in disclosures. The market remains concerned about the PRC tax treatment of Northbound trades – specifically whether PRC capital gains tax will be levied on A-share trades made through Hong Kong. However, according to press reports, an announcement clarifying this issue is anticipated this week.

In addition to documentation for authorised funds, asset managers are advised to consider appropriate investor documentation treatment across all products and services which may seek to take advantage of Stock Connect, such as supplemental Investment Management Agreements for segregated accounts to cover additional broker terms and to secure the client’s acknowledgement of the related risk disclosures.