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Article (125/220)
Hong Kong Mutual Recognition of Funds (MRF) - regulation memo
Hong Kong Mutual Recognition of Funds (MRF) - regulation memo

Hong Kong Mutual Recognition of Funds (MRF) - regulation memo


The Mutual Recognition of Funds (MRF) is an initiative driven by the Hong Kong Securities and Futures Commission (SFC) to promote the city as an international asset management centre.

About the Mutual Recognition of Funds (MRF)

The MRF is a bilateral regulatory framework which allows mutual funds of two markets to be distributed to retail investors in each market through a streamlined authorisation process.

Memoranda of Understanding have been signed between Hong Kong SAR, China (HK) and 4 European countries: Switzerland, France, the UK and Luxembourg.

Through the scheme, fund managers in HK can gain access to a large pool of international investors. Inversely, investors from France, Switzerland, the UK and Luxembourg can increase their exposure to Asian markets benefitting from the expertise of local fund managers. For Swiss, French and Luxembourg asset managers, the MRF complements the UCITs framework.


MRF with Switzerland

The MoU allows a wide variety of Swiss funds to be distributed in HK, including feeder funds, funds of funds, index funds and structured funds.

Various HK fund types are eligible for distribution in Switzerland, with some exceptions namely structured funds that include real estate, commodities or precious metals funds, and those that use strategies based on short selling or investment in derivatives. There are also limits on permissible leverage.

MRF with France

HK public funds to be distributed in France are restricted to general equity funds, bond funds and mixed funds. Various eligibility rules apply, including the requirement of a minimum of 20% of the net asset value (NAV) to be attributable to HK investors on an ongoing basis Importantly, funds are considered Alternative Investment Funds (AIFs) and rules applicable to AIF marketing and management apply.

Covered French funds eligible for distribution in HK have similar restrictions in terms of underlying assets, local NAV limits, leverage and hedging arrangements.

MRF with the UK

Eligible HK domiciled funds may be distributed to the UK retail market. Fund types are restricted to regular funds, passive ETFs, index funds and funds of funds investing in equities, bond or mixed funds. Eligible funds may not leverage over 100% of NAV and hedging - except currency hedging - is prohibited. Further, commodities, precious metal and real estate exposure are not allowed.

MRF with Luxembourg

HK Covered Funds are restricted to regular funds with investment in equities, bonds or mixed funds. Leverage above 100% of NAV is prohibited. Commodities exposure is not permitted and a Management company must have a minimum of HKD 10 million in capital.

Industry implications

MRF with Switzerland

Foreign collective investment schemes distributed in Switzerland require the asset management company to mandate both a representative and a paying agent in the country in fulfilment of its regulatory obligations for both non-qualified and qualified investors. BNP Paribas is licenced as a bank by the Swiss Financial Market Supervisory Authority FINMA so can offer both services.

MRF with France

HK funds marketed in France require one or more correspondents established in France under conditions stipulated by the Autorité des Marchés Financiers (AMF) including a local centralising agent responsible for the collection of subscription and redemption orders, the payment of dividends, and the provision of fund documentation. This, including the prospectus and key investor information document, must be available in French.

MRF with the UK

HK Covered Funds distributing in the UK retail segment need to appoint approved trustees and a custodian under HK jurisdiction, while offering documents must be approved by the SFC with a UK covering document to comply with UK regulation on disclosure.

MRF with Luxembourg

HK Covered Funds must appoint an approved trustee/ custodian. Section 16 of the Banking Ordinance states that the trustee/ custodian must be a licensed bank, or a subsidiary of such a bank; or a trust company approved by the Manadtory Provident Schemes Authority.

Hong Kong

Fund managers are responsible for product governance covering the entire chain from inception to post sales. They must have a detailed fair valuation policy and procedures in place. Guidance on suspension of dealing as well as disclosures on ongoing charges and past performance, as well as payment of dividends out of capital, must be published.

The role of the trustee is particularly crucial. A trustee needs to oversee a range of services including asset safekeeping, verifying NAV calculations, compliance with investment and borrowing limitations, keeping a register of unitholders and issuing an annual report.

BNP Paribas Securities Services’ view

Maximising opportunities from regulatory breakthroughs like the Hong Kong Mutual Recognition of Funds with France, Switzerland, the UK and Luxembourg requires moving swiftly in jurisdictions that may not be familiar to the fund manager. It therefore requires comprehensive, seamless and trustworthy support.

BNP Paribas Securities Services can provide services in these MRF covered markets. For example, in Switzerland BNP Paribas Sercurities Services can act as a fund representative and local paying agent, as well as a contact point for FINMA and monitor of distributors; in Hong Kong through a range of seamless and flexible trustee, fiduciary and fund administration services; in France, as the leading bank in Europe with overall capacity to support cross-border distribution services.

Key dates

December 2016 - MoU signed with Switzerland

July 2017 - MoU signed with France

October 2018 - MoU with United Kingdom

Jan 2019 - MoU with Luxembourg

Read more

From small steps to giant leaps: navigating China’s cross-border investment schemes - Click here

Access to China - Click here

Hong Kong open-ended fund company (OFC) - Click here

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