CSRC Optimises the Northbound Mutual Recognition of Funds Regime
The Mutual Recognition of Funds (“MRF”) regime, initially introduced in 2015, facilitates the registration of eligible funds from Hong Kong with the China Securities Regulatory Commission (“CSRC”), enabling their distribution to domestic investors in the Chinese mainland (the “Northbound MRF”), and vice versa. Over the past nine years, the MRF has provided an important channel for investors in both the Chinese mainland and Hong Kong to directly access each other’s financial markets, without the need to establish a feeder fund in the host jurisdiction.
On 19 April 2024, CSRC issued five measures aiming at enhancing cooperation with Hong Kong in the financial markets, including efforts to optimise the MRF framework. On 20 December 2024, CSRC formally promulgated the Provisions on the Management of Hong Kong Mutual Recognition Funds (the “MRF Provisions”), which will come into effect on 1 January 2025. The MRF Provisions has introduced significant amendments to the previous MRF rules issued by the CSRC in 2015 (“Interim Provisions”). In addition, CSRC has updated its Q&A and the application document checklist to align with the changes introduced in the MRF Provisions (“MRF Q&A”).
Please see below a summary of the key developments of the MRF Provisions, eligibility requirements for the Northbound MRF and ongoing obligations.
I. Key Developments
Compared to the Interim Provisions, the MRF Provisions introduce the following key changes:
- Relaxation of limit on how much of a Northbound MRF may be sold to PRC investors
In the past a Northbound MRF may only sell up to 50% of its total assets to PRC investors and now the MRF Provisions have increased this to 80%. According to the updated MRF Q&A, this relaxation will also apply to existing Northbound MRFs.
The fund managers of Northbound MRFs (“Fund Managers”) are required to implement measures to monitor a fund’s subscription and redemption to ensure continuous compliance with the updated limit. The Fund Managers are also expected to issue warning and disclosures to investors when it is reaching the 80% limit and, if such limit is breached even passively, report to regulators and suspend any sales.
- Relaxation of restrictions on delegating investment management functions
The Interim Provisions prohibited the Fund Manager from delegating investment management functions to third parties, except to an investment advisor licensed in Hong Kong. Pleasingly, the updated MRF Provisions, along with the MRF Q&A, now allow the Fund Manager to delegate their investment management functions to affiliated entities within the same group, provided the affiliated entity is located in a country or region that has signed a regulatory cooperation memorandum of understanding (MoU) with CSRC and maintains an effective regulatory cooperation relationship.
Such relaxation allows the Fund Manager to leverage their global capabilities and resources, significantly expanding the range and types of Hong Kong funds participating in the MRF regime and potentially attracting more investors from the Chinese mainland.
- Relaxation of the scope of eligible funds
In addition to general equity funds, hybrid funds, bond funds, and index funds (including ETFs) as provided in the Interim Provisions, the MRF Provisions introduce a catch-all provision that allows for the inclusion of other types of funds approved by CSRC. This provision provides flexibility for expanding the scope of funds eligible for the MRF regime in the future.
II. Key Eligibility Requirements for Registration of Northbound MRF
(A) Funds
(B) Fund Manager
III. Ongoing obligations
- Onshore Agent. The Fund Manager is required to appoint an onshore agent holding a mutual fund licence or a fund custodian licence to handle matters related to the fund in the Chinese mainland. These responsibilities include fund registration, information disclosure, sales arrangements, data exchange, fund clearing, regulatory reporting, communication, customer service, and monitoring, among others.
- Legal Documents. For offering fund units in the Chinese mainland, the Fund Manager must publicly disclose the prospectus, key facts statement, trust deed or articles of association, fund offering announcement, and the most recent annual and semi-annual financial reports at least three days prior to the fund’s unit offering. The prospectus and key facts statement must be prepared in accordance with both of the regulatory requirements of the SFC and CSRC.
- Investment Operation. All investment-related activities, including but not limited to investment trading, asset custody, valuation and accounting, subscription and redemption, fee arrangements, tax arrangements, unitholders’ meetings, and amendments to relevant legal documents, shall continue to follow SFC’s requirements and the fund’s constitutional documents.
- Distribution. The distributor of the Northbound MRF must be qualified to distribute mutual funds in the Chinese mainland, and distribution must comply with the relevant PRC laws and regulations governing mutual fund distribution. The distribution agreement may be signed either by the Fund Manager and the distributor or by the onshore agent and the distributor.
- Information Disclosure. The content, format, deadlines, frequency, and matters related to the information disclosure documents for the Northbound MRF in the Chinese mainland (including but not limited to the prospectus, key facts statement, net asset value announcements, periodic financial reports, and interim announcements) must comply with the regulatory requirements of the SFC and the fund’s constitutional documents. The Fund Manager must take reasonable measures to ensure that the relevant disclosure documents and regulatory reports are simultaneously disclosed or submitted to both investors and regulatory authorities in Hong Kong and the Chinese mainland.
- Suspension of Distribution. If the fund’s size, primary investment focus, or main target investors no longer meet the eligibility conditions stipulated in the MRF Provisions, the onshore agent must promptly report the situation to the relevant local offices of CSRC and suspend the fund’s distribution in the Chinese mainland until the conditions are rectified.
- Reapplication. In the event of significant changes to the fund’s type or operational model, the fund’s distribution activities in the Chinese mainland must be suspended, and a new registration application must be submitted to CSRC. CSRC may consult with the SFT in order to determine whether a major change has occurred.
Impact to the Industry
In conclusion, the optimisation of the MRF provides asset managers with greater opportunities to expand their footprint in the Chinese mainland by leveraging their global management capabilities. This development not only creates a more favourable environment for the sale of (registered) funds in the domestic market but also better serves the cross-border wealth management needs of mainland investors. Moreover, it reflects China’s regulators’ commitment to further opening the market to the world.
Feel free to get in touch with us if you would like to have more information on the above.
联系人:
杨帆
联席负责人，上海/北京
电话：+86 21 8013 5022
司瑶瑶
合伙人，上海
电话：+86 21 8013 5158
