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On 24 June 2022, SZSE released the Implementation Measures of SZSE for Shenzhen-Hong Kong Stock Connect Business (Revised in 2022) (S.Z.S. [2022] No. 607) (the “Implementation Measures”), the Mandatory Provisions of Risk Disclosure Statement for Hong Kong Stock Connect of SZSE (Revised in 2022) (S.Z.H. [2022] No. 195) (the “Mandatory Provisions of Risk Disclosure Statement”) and Mandatory Provisions of Entrustment Agreement for Hong Kong Stock Connect of SZSE (Revised in 2022) (S.Z.H. [2022] No. 195). SZSE Press Secretary answered the questions of reporters with respect to relevant matters.
I. Q: Please introduce the background of revising the Implementation Measures.
A: To implement the consensus of CSRC and SFC on including tradable and open-ended funds (exchange-traded fund, hereinafter referred to as ETF) as the investment underlying of the interconnectivity and relevant requirements in the Certain Provisions on Trading and Interconnectivity Mechanism between the Mainland and Hong Kong Stock Markets, further diversify the varieties tradable under the Shenzhen-Hong Kong Stock Connect, and constantly improve the interconnectivity mechanism, SZSE revised the Implementation Measures and solicited opinions from the market with respect to the specific arrangements for inclusion of ETFs into underlyings for interconnectivity and regulation of participation in the northbound transaction for the Shenzhen Stock Connect by mainland investors. During the solicitation period, SZSE received 21 pieces of advices and opinions from 14 market players in total. After considering those opinions, SZSE revised and officially issued the Implementation Measures. In the next step, SZSE will, based on business development, consistently study relevant policies such as the conditions for selecting ETF underlyings and further optimize the mechanism of the Shenzhen-Hong Kong Stock Connect.
II. Q: What are major revisions to the Implementation Measures?
A: First, specify the arrangements for including ETF as the underlying under the interconnectivity. Eligible ETFs listed on SZSE and SEHK will be added as underlyings under the Shenzhen-Hong Kong Stock Connect. Details are as follows: for SZSE-listed ETFs, their average daily assets over the past six months shall reach CNY 1.5 billion, and their constituent securities are mainly the underlying stock under the Shenzhen Connect and the Shanghai Connect. For SEHK-listed ETFs, their average daily assets over the past six months shall reach HKD 1.7 billion, and their constituent securities are mainly the underlying stocks under the Hong Kong Stock Connect, and shall not be synthetic ETFs, leveraged or reverse products. The underlying ETFs must meet relevant requirements, e.g., no less than six months since listing and at least one year from the release of their underlying indexes. In principle, the underlying ETFs should be adjusted every six months. The observation period for the first inclusion of ETFs under the Shenzhen Connect and the Hong Kong Stock Connect end on 29 April 2022, and the list and effectiveness date are subject to the notices of securities trading service companies of SZSE and SEHK, please pay further attention.
Second, regulate the participation in the northbound transaction for the Shenzhen Connect by mainland investors. It is stipulated that, the investors under the Shenzhen Connect should exclude mainland investors. The scope of mainland investors and criteria for defining them are identified. To ensure enough time for SEHK participants (such as brokers in Hong Kong) to make preparations, the one-year transitional period will be arranged for mainland investors that have obtained the approval before for northbound transaction for the Shenzhen Connect after the effectiveness of relevant rules on 25 July 2022.
III. Q: Please briefly describe the background for revising the Mandatory Provisions of Risk Disclosure Statement and the major revisions made.
A: To enable investors to fully understand the risks related to trading ETFs under the Hong Kong Stock Connect, SZSE and CSDC jointly revised the Mandatory Provisions of Risk Disclosure Statement, requiring the members to fully disclose risks to the investors, duly conduct investor suitability management, and provide related education services.
The Mandatory Provisions of Risk Disclosure Statement was mainly revised to add the risk alert provisions for ETFs under the Hong Kong Stock Connect. On the whole, ETFs under the Hong Kong Stock Connect are basically in consistent with the existing stock mechanism of the Shenzhen-Hong Kong Stock Connect in terms of trading mechanism, daily quota control, investor suitability management, liquidation and settlement, and risk control arrangements. However, there are special institutional arrangements for ETFs under the Hong Kong Stock Connect in terms of replacement of fund managers, circumstances for delisting or liquidation business, and other aspects, which are somewhat different from those in the mainland securities market and the investors should watch out for the possible risks.
