Cross-Border 2019 UCITS and Beyond Article

1780318 12/18 The first option is to establish a Hong Kong fund and distribute it in Mainland China via the Mutual Recognition of Funds (MRF) program. The MRF program allows Mainland China and Hong Kong domiciled funds to be sold in either market. There are several restrictions to the MRF program, such as: local Hong Kong substance requirements and a quota system limits cross- border investors in MRF funds to no more than 50% of the fund’s total net assets. The quota restriction in particular has limited the success of the MRF program to date and has driven many asset managers to consider a local fund approach. The local fund approach is to establish a Wholly Foreign-Owned Enterprise (WFOE) with a private fund management license in Mainland China. This allows managers to launch Mainland Chinese private funds that can be sold to domestic institutional investors. Establishing a WFOE requires a commitment of substance in Mainland China, as firms are currently limited to private funds and cannot access retail investors. However, starting in 2021 non-Chinese firms will be able to apply for a Fund Management Company license that enables the firm to offer services and products to the Mainland retail market. The Way Forward In order to take advantage of these opportunities, asset managers must be prepared to evolve their strategies to meet the new challenges. This includes having a holistic global vision on products and domiciles, and understanding how they can incorporate both UCITS and non-UCITS into their toolkits. Firms that can align their product offering with new distribution trends, while understanding how to capitalize on the benefits of upcoming regulation, will be positioned to succeed in 2019. 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