HK’s WMC scheme revamp leaves structured products out for now

Hong Kong SAR and Mainland China authorities' new guidance on the cross-boundary Wealth Management Connect Pilot Scheme (WMC Scheme) expands eligible product offerings and quotas.

There’s a slight increase in the risk rating of funds that can be sold under the Southbound Scheme, but they do not include derivative products - Richard Mazzochi, KWM

The scope of the latest revision consists of an expansion of eligible product offering choices with higher risk ratings and high quotas for individual investors. It also allows securities firms to sell products which were restricted to banks in the past, while clarifying the promotion and sales arrangements.

The revision on top of the original WMC Scheme demonstrates a positive narrative as it enables cross-border investment within the confines of People’s Republic of China’s capital controls, according to Richard Mazzochi (pictured), partner at King & Wood Mallesons (KWM), Hong Kong.

Under the updated circular, whilst the type of products that can be sold in Mainland China are now more diverse than they were before, they are still quite controlled, Mazzochi pointed out.

“Hong Kong SAR providers can sell all SFC-authorised funds domiciled in Hong Kong that primarily invest in Greater China equity, which removes any risk limitation; and, subject to a few exceptions, SFC-registered providers can sell low to medium-high risk SFC-authorised funds domiciled in Hong Kong, increasing the highest risk rating to medium-high,” he told SRP.

“There’s a slight increase in the risk rating of funds that can be sold under the Southbound Scheme, but they do not include derivative products,” he added.

The revised changes come into effect on 26 February, according to the circulars issued by the People’s Bank of China, the Hong Kong Monetary Authority (HKMA), and the SFC.

KWM partner Minny Siu (right) highlighted that one of the aims of the WMC scheme is to connect investors in the southern part of the region, including Hong Kong SAR, Macau SAR and other cities in the Greater Bay area.

“There is a tendency to facilitate people moving across the region, as well as bank opportunities for [investors] to have broader investment choice,” Siu told SRP.

According to Siu, under the new requirements for the Southbound Scheme, the assessment for eligible funds domiciled in Hong Kong and authorised by the SFC, which primarily invests in Greater China equities, has turned into “non-complex” rather than purely “low to medium risk.”

“When a distributor has to consider whether a product is complex or not, one of the factors that they use to measure this is whether there are derivatives elements,” Siu said. “So, for now, structured products are not yet eligible under the new requirements but there will be room for future opportunities.”

Stock Connect

The opportunity to introduce structured products, particularly listed structured products, however, is more likely to come through an expansion of the existing Stock Connect programme, a cross-boundary investment channel between Hong Kong SAR and China, according to Mazzochi and Siu, who participated in a Financial Services Development Council Working Group initiative that formulated policy recommendations on further developing the A-share market and Stock Connect in 2020.

In August 2022, SRP reported that Morgan Stanley, J.P. Morgan, BNP Paribas, and Goldman Sachs had listed a combined 33 structured warrants (DWs) on the MSCI China A50 Connect Index (A5C) on the Hong Kong Stock Exchange (HKEX). The A5C tracks the performance of 50 key Shanghai and Shenzhen stocks available via Northbound Stock Connect.

The listing came after exchange CEO Nicolas Aguzin said in June 2022 that the bourse was encouraging investment banks to issue structured products like DWs on the A5C.

Morgan Stanley – which issued 20 A5C-linked DWs in Hong Kong SAR– tops the league table with a volume of US$1.17m in 2023, according to SRP data. By product issuance, MS was followed by J.P. Morgan (nine products) and HSBC Bank (six). Other issuers include Goldman Sachs (five), Guotai Junan Securities (three), and Société Générale (one).

Meanwhile, in May 2023, 27 offshore investors traded onshore renminbi (RMB) interest rate swaps with a notional value exceeding CNY8.3 billion (US$1.2 billion) on the first day of Swap Connect, the mutual access programme between Hong Kong SAR and Mainland China’s interbank interest rate swap markets.