Central Bank Confirms Access for Irish Funds to Stock Connect

On 15 July 2015 the Central Bank of Ireland (the “Central Bank”) issued updated versions of its

UCITS Q&A and AIFMD Q&A (the “Q&As”). The updated Q&As confirm that the Central Bank has, in

principle, no objection to investment in the Hong Kong-Shanghai Stock Connect Program (“Stock

Connect”) by Irish domiciled investment funds.

Background

Stock Connect launched on 17 November 2014 and was established as a joint collaboration of the

Hong Kong Stock Exchanges and Clearing Limited (“Hong Kong Stock Exchange”) and the

Shanghai Stock Exchange. Stock Connect established mutual stock market access between Hong

Kong and mainland China and has significantly expanded the options for persons wishing to invest in

shares listed on the Shanghai Stock Exchange.

Prior to the introduction of Stock Connect, international investors, including Irish domiciled investment

funds could only access the securities markets of mainland China indirectly through the Qualified

Foreign Institutional Investor (“QFII”) and Renminbi Qualified Foreign Institutional Investor (“RQFII”)

regimes. These regimes involve an application process in order to obtain a quota and were subject to

restrictions in relation to permitted investments and repatriation of returns. Stock Connect effectively

removes the requirement to acquire a separate QFII or RQFII quota and is one of the most significant

developments to date in the opening up of mainland China’s capital markets.

Central Bank Requirements

The Q&As issued by the Central Bank set out the regulatory considerations to be addressed by Irish

domiciled investment funds seeking to access Stock Connect. In general, the relevant fund’s

depositary needs to satisfy itself that the manner in which the shares are to be held allows that

depositary to meet its legal obligations under the UCITS / AIFM Regulations1 and any conditions

currently imposed by the Central Bank.

In particular, the Central Bank requires that the depositary (or an entity within its custodial network),

must ensure that it retains control over the shares at all times.

The Central Bank maintains that the legal obligations of a depositary can currently only be met where

the depositary, or its local broker, is a participant in Hong Kong Stock Exchange and Clearing Limited

1. UCITS: European Communities (Undertakings for Collective Investment in Transferable Securities)Regulations (SI No 352 of 2011); and AIFM: European Union (Alternative Investment Fund Managers)Regulations 2013 (SI No 257 of 2013)

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(“HKSCC”), the clearing house of the Hong Kong Stock Exchange. The Central Bank has also

confirmed that the broker must be an entity within the depositary’s custodial network (ie, a sub-

custodian).

The Q&As state that depositaries need to consider both the terms on which they or a sub-custodian

can become participants in HKSCC and the arrangements in place from time to time between HKSCC

and China Securities Depository and Clearing Corporation Limited, the clearing house of the Shanghai

Stock Exchange.

The Central Bank has outlined the various levels of participation within HKSCC ie “General Clearing

Participant”, “Direct Clearing Participant” or “Custodian Participant”. The Central Bank has further

confirmed that it is not in a position to designate the appropriate level of participation. The Central

Bank maintains that the appropriate level of participation may vary over time. The depositary or a

member of its custodial network must identify one or more appropriate levels of participation which

would be in line with its legal obligations as a depositary.

The Central Bank also requires the depositary to review and keep under review the Stock Connect

infrastructure to ensure that its legal obligations can be met.

Comment and Next Steps

This is a very positive development for the Irish funds industry; investment managers of Irish domiciled

investment funds now have the flexibility to directly access shares listed on the Shanghai Stock

Exchange without obtaining a QFII or RQFII quota.

Shay Lydon, a partner in Matheson’s Asset Management and Investment Funds Group, has been

closely involved in the preparation of industry submissions to the Central Bank in relation to the

approval of Stock Connect. In anticipation of the updated Q&As, Matheson has also been in separate

discussions with the Central Bank on behalf of our clients with respect to the appropriate level of

disclosure regarding Stock Connect to be provided in a fund’s prospectus and other documentation

and has been working closely with a number of depositaries with respect to Stock Connect.

The Central Bank is very clear that the depositary is responsible for ensuring that it can meet its legal

obligations to the relevant fund and we recommend early engagement with your depositary to ensure

that they can facilitate access to Stock Connect.

Please get in touch with your usual Asset Management and Investment Funds Group contact or any of

the contacts listed in this publication should you require further information in relation to Stock

Connect.

Please note that the Q&As can be accessed from the following links: UCITS Q&A and AIFMD Q&A.

Full details of the Asset Management and Investment Funds Group, together with further updates,

articles and briefing notes written by members of the Asset Management and Investment Funds team,

can be accessed at www.matheson.com.

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The material is provided for general information purposes only and does not purport to cover every

aspect of the themes and subject matter discussed, nor is it intended to provide, and does not

constitute, legal or any other advice on any particular matter. The information in this document is

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