CSRC and SFC Announce the Inclusion of ETFs into the W88win优德中国有限公司 between Mainland and Hong Kong Stock Markets

On June 28, 2022, the China Securities Regulatory Commission ("CSRC") and the Hong Kong Securities and Futures Commission ("SFC") jointly announced the inclusion of eligible exchange-traded funds ("ETFs")¹ into the W88win优德中国有限公司 between mainland and Hong Kong stock markets (the "W88win优德中国有限公司"), according to which, the trading of ETF under the W88win优德中国有限公司 will be officially launched on July 4, 2022. 

The CSRC promulgated the Circular on Inclusion of ETFs into the W88win优德中国有限公司 (the "Circular No.39") to set out the regulatory principles for EFT trading, aiming to ensure the smooth implementation of ETF trading under the W88win优德中国有限公司. On the same day, the Shanghai Stock Exchange and the Shenzhen Stock Exchange (collectively, the "SSE and SZSE") also made further improvements to the business rules relating to the W88win优德中国有限公司. Some of the key points of the amendments are:

I. Regulatory Principles of the CSRC

Circular No.39 provides the following key provisions on the regulatory principles for ETF trading under the W88win优德中国有限公司:

(1) Under the W88win优德中国有限公司, the Several Provisions on the W88win优德中国有限公司 between the Mainland and Hong Kong Stock Markets (the "Several Provisions"), shall apply to ETF trading in terms of trading, registration and settlement, investor suitability, cross-border regulatory cooperation and others. 

(2) Foreign investors’ trading of onshore ETFs through the W88win优德中国有限公司 shall not be subject to the shareholding limits on foreign investors as set forth in Article 12 of the Several Provisions. Other laws, regulations and regulatory requirements shall prevail if they otherwise provide for ETF holding limits on foreign investors. ²

(3) The BCAN Investor Identification System shall apply to ETF trading under the W88win优德中国有限公司. 

(4) Securities companies and public fund managers that engage in ETF business under the W88win优德中国有限公司 shall refer to the Guidelines for Securities and Fund Operation Institutions’ Participating in the W88win优德中国有限公司 between Mainland and Hong Kong Stock Markets, the Interim Provisions on Securities and Fund Operation Institutions’ Engagement of Hong Kong Domiciled Institutions to Provide Securities Investment Advisory Services, and other relevant regulations. 

II. SSE and SZSE Business Rules

The SSE and SZSE have respectively amended the SSE Implementation Measures for the Shanghai-Hong Kong Stock Connect Business and the SZSE Implementation Measures for the Shenzhen-Hong Kong Stock Connect Business (collectively, the "Stock Connect Business Rules"), which not only added ETF trading-specific provisions, but also made important supplements and adjustments to other provisions of the Stock Connect Business Rules, specifically as follows:

(1) It clarifies the conditions on which ETFs in two respective markets will be accepted as eligible ETFs, the circumstances where ETFs will be ruled out of the scope, and the relevant adjustment mechanisms. 

(2) It sets out the exclusion of round-trip investments in onshore stock markets through the W88win优德中国有限公司 by onshore investors. The SSE and SZSE explicitly stipulate in the Stock Connect Business Rules that investors under the W88win优德中国有限公司 shall not include mainland investors and clearly defined “mainland investors”[ Please refer to JunHe Client Briefing “CSRC Proposes to Restrict Mainland China Investors’ Northbound Trading through Stock Connect,” which can be found at: http://www.junhe.com/legal-updates/1643]. 

(3) It adds that the rule whereby “the guaranteed short selling price shall not be lower than the latest execution price” shall not be applicable to the guaranteed short selling of ETFs under northbound ETF trading. However, according to the announcements of the SSE and SZSE, the provisions of the Stock Connect Business Rules governing the northbound guaranteed short selling of ETFs will not be implemented for the time being and the specific timing for implementation will be otherwise notified by the SSE and SZSE. Currently, guaranteed short selling is not allowed in northbound ETF trading.

(4) It adds that the trading of stocks listed on the STAR Board and the ChiNext through northbound trading may be executed at an after-hours fixed price, and the after-hours fixed-price trades will be subject to the trading limit for northbound trading. However, according to announcements by the SSE and SZSE, the provisions of the Stock Connect Business Rules governing after-hours fixed-price trading will not be implemented for the time being and the specific timing for the implementation will be otherwise notified by the SSE and SZSE. 

Our Observation

The inclusion of ETFs into the W88win优德中国有限公司 is a vital process in the opening-up of the mainland capital markets and the further development of the Guangdong-Hong Kong-Macau Greater Bay Area. The regulation of ETF trading under the W88win优德中国有限公司 is based on the various arrangements under the existing W88win优德中国有限公司. Furthermore, it is specified that the BCAN Investor Identification System shall apply to ETF trading under the W88win优德中国有限公司, which means that the mainland regulators will apply a similar monitoring standard as that applied to stock trading in their daily monitoring of northbound ETF trading, especially in the surveillance and regulation of abnormal trading involving ETFs. In addition, guaranteed short selling is currently not allowed in northbound ETF trading.

 1. According to the current regulations, the ETFs that will be included into the W88win优德中国有限公司 are limited to stock-type ETFs.

 2. Please refer to JunHe Client Briefing “CSRC Proposes to Restrict Mainland China Investors’ Northbound Trading through Stock Connect,” which can be found at: http://www.junhe.com/legal-updates/1643