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The Swiss Route

The mutual recognition of funds between Switzerland and Hong Kong broadens asset manager horizons

The signing of a mutual recognition of funds (MRF) scheme between Hong Kong and Swiss regulatory supervisors in December 2016  marked a small yet significant step in the evolution of global cross-border financial market integration and development.

By opening access to retail markets in one of Europe's wealthiest economies and one of Asia's key financial centres to a large pool of international asset managers, the MRF creates access to a range of asset classes beyond equities and bonds for an increasingly wealthy and sophisticated generation of Asians. As a gateway to China, the memorandum of understanding also opens a door for Swiss-based fund management companies to expand and diversify their investments while burnishing Hong Kong's reputation as a leading Asian center for retail financial services.

Key insights

  • The mutual recognition of funds scheme may create new opportunities for Swiss and Hong Kong asset managers who will aim to provide investors in both markets with a broader selection of fund products
  • It is expected that Hong Kong will pursue additional MRF arrangements and further solidify itself as a regional asset management centre and domicile for cross-border funds

A broad framework

The memorandum of understanding between Hong Kong's Securities and Futures Commission (SFC) and the Swiss Financial Market Supervisory Authority (FINMA) allows eligible Swiss and Hong Kong public funds to be distributed in each other's jurisdiction and streamlines the vetting process. The document establishes a framework for the exchange of information, regular dialogue, and regulatory cooperation over the cross-border offering of public funds.1

It is not the first MRF to be signed by Hong Kong, which agreed to a similar regime with mainland China in July 2015. That accord established Hong Kong as an international mutual fund gateway to China's fast-growing retail market for financial services. The Switzerland-Hong Kong MRF brings a greater international dimension to the China- Hong Kong MRF by expanding mutual access  beyond Asia to include an important European center for wealth management and private banking services. Over time, it should help to boost the efficient flow of fund-based investment capital into those economies, business sectors, and individual companies that offer the most promising growth opportunities.

Over time, it should help to boost the efficient flow of fund-based investment capital into those economies

Given the relative popularity of UCITS funds in Asia, it was initially thought that Hong Kong-domiciled funds may be the first to explore distribution into Swiss markets. International Adviser reported in February 2017  that Rex Lo, managing director of business development at BEA Union, that "the firm is currently approaching Swiss banks and distributors to gauge their interest in Hong Kong-domiciled funds."2 Harvest Global Investments, an asset management firm based in Hong Kong, however, announced in June 2017  that they were the first firm to qualify funds for the MRF since it was established.3 The approval by Swiss regulators to allow investors to tap into China's funds market by a Hong Kong-based firm signals that interest may be the other way around.

Accessing diverse fund strategies

The type of Swiss funds that are eligible for SFC approval and distribution in Hong Kong under the mutual recognition initiative is broader than the scope of the China-Hong

Kong MRF. In addition to equity funds, bond funds, mixed funds, index tracking funds, and ETFs, the Switzerland-Hong Kong MRF scheme permits Swiss funds to offer through Hong Kong feeder funds products such as:

  • fund of funds
  • money market funds structured funds
  • funds that use financial derivatives for investments

A similarly extensive list of eligible funds for Hong Kong-domiciled funds authorizsed by the SFC is now authorized by the Swiss regulator for distribution in Switzerland.4 If the Switzerland-Hong Kong MRF generates interest like the earlier China-Hong Kong MRF, it could result in substantial new fund flows.5

Beyond regional passporting

There is growing competition among international fund managers to provide asset management services to mainland China's enormous domestic market

There is competition among Asia's major financial centres to become the main regional base for the distribution of funds. The stakes are high because of the potential for funds to profit from investments in China's growth industries, for example if Swiss-based institutional investors gain access to the Asian market through domestic fund managers and utilize the ETFs and feeder fund vehicles available under the MRF framework. There is also growing competition among international fund managers to provide asset management services to mainland China's enormous domestic market, as access is gradually opened to foreign financial service providers.6

In this context, the Switzerland-Hong Kong MRF represents a step-change in Hong Kong's bid to prevail as Asia's premier investment centre, both in terms of global distribution capacity and the sophistication of its offerings. Access to Switzerland gives Hong Kong an exclusive channel for funneling Asia-based fund investments into one of Europe's most reputable and highly regarded private banking markets.

"This pioneering initiative, whereby home-grown Hong Kong funds – for the first time – gain direct access to the investing public in a European market, is a testament to Hong Kong's commitment to develop the city into an international asset management centre," the SFC's Chairman, Carlson Tong said at last year's signing.7

The new arrangement between Switzerland and Hong Kong is likely to face competitive challenges from other Asian financial centers as they seek further traction in the globalized financial investments market.8 By building innovative, mutually beneficial reciprocal arrangements with Switzerland, Europe and the rest of the world, Hong Kong may not only be creating easier access to China's wealth, but also enhancing its efforts to become one of Asia's pre-eminent fund centres.9


Sources

  1. The Securities and Futures Commission (December 2, 2016) SFC and FINMA sign agreement on Switzerland-Hong Kong Mutual Recognition of Funds
  2. International Adviser (February 22, 2017) Swiss-Hong Kong fund recognition scheme garners interest
  3. MarketWatch (June 26, 2016) Harvest Global Investments First to Qualify for Swiss-HK Mutual Recognition of Funds Scheme
  4. Deacons (December 6, 2016) Mutual Recognition of Funds - Switzerland and Hong Kong
  5. AsianInvestor (Sept. 29, 2016) MRF northbound flows soar, led by JPM AM
  6. Europacifica Consulting (November 9, 2015) MRF, ARFP and opportunities for Australian fund management
  7. The Securities and Futures Commission (December 2, 2016) SFC and FINMA sign agreement on Switzerland-Hong Kong Mutual Recognition of Funds
  8. AsianInvestor, (September 29, 2016) MRF northbound flows soar, led by JPM AM
  9. Deacons (December 6, 2016)