FAQs – Mainland-Hong Kong Mutual Recognition of Funds: Frequently Asked Questions (FAQs) on Mainland-Hong Kong MRF

The Securities and Futures Commission of Hong Kong (SFC) published revised Frequently Asked Questions (FAQs) on Mainland-Hong Kong Mutual Recognition of Funds. The FAQs outline, among other things, the eligibility requirements for being recognized as a mutually recognized fund (MRF), ongoing operations requirements, disclosure requirements for MRF funds, licensing requirements of the Hong Kong representative of a Mainland fund, and distribution and sales obligations in each other’s markets. Also included is an appendix which provides „illustrative examples of risk disclosures in the Hong Kong covering document of a Recognised Mainland Fund“.
This latest revised version contains a one revised FAQ under Subpart C, page 8 relating to disclosure requirements, which reads as follows – as quoted:
FAQ 3: What are the risks expected to be disclosed in the Product KFS and/or Hong Kong covering document of a Recognised Mainland Fund?
Answer: It is expected that risks relating to the product features of a Recognised Mainland Fund in general have been included in its Mainland offering documents, which form part of the offering documents for Hong Kong investors. The Hong Kong covering document of a Recognised Mainland Fund should therefore provide additional risk disclosures, taking into account the specific risks relating to the MRF arrangement and the differences in market practices and investor expectations in the two markets. Set out below are some illustrative examples of risk disclosures that are expected to be included, if applicable, in the Hong Kong covering document. Management firms shall determine, in light of the specific circumstances of a Recognised Mainland Fund, the key risks to be highlighted in the Product KFS. Management firms are also reminded to disclose such risks in the Product KFS in a clear, concise and effective manner.
– Risks associated with the MRF arrangement, eg, quota restrictions, failure to meet eligibility requirements, Mainland tax risk, differences in market practices and fund classifications (if applicable);
– Investment risks;
– Concentration risks / Mainland market risks;
– RMB currency and conversion risks;
– Mainland equity risks, eg, market risk, volatility risk, liquidity risk, high valuation risk, policy risk, risks associated with small-capitalisation / mid-capitalisation companies;
– Mainland debt securities risks, eg, volatility and liquidity risks, counterparty risk, interest rate risk, downgrading risk, credit rating agency risk, risks associated with urban investment bonds, asset-backed securities, debt securities which are rated BB+ or below by a Mainland credit rating agency or unrated, etc;
– Risks associated with unlisted index funds, eg, passive investment risk, tracking error risk, index-related risk;
– Risks associated with companies listed on boards with generally lower listing eligibility criteria than main boards (eg, ChiNext market, the Science and Technology Innovation Board), eg, higher fluctuation in stock prices, over-valuation risk, differences in regulation, delisting risk, concentration risk; and
– Risks associated with securities financing transactions.
To provide further guidance to the industry, we set out more detailed explanation of these risks in Appendix A.
The above list and related explanation are not intended to be an exhaustive list of the risk disclosures to be included in the Product KFS and/or Hong Kong covering document. Management firms shall exercise their professional judgment and take into account the specific circumstances of a Recognised Mainland Fund in preparing the risk disclosures in the Product KFS and/or Hong Kong covering document.
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The SFC has also updated the beforementioned illustrative examples beginning on page 32.