Exchange-traded open-end funds (Exchange Traded Funds, ETFs) are included in the Connect for the first time.

  On June 24, the Shanghai and Shenzhen Stock Exchanges released the "Measures for the Implementation of the Shanghai-Hong Kong Stock Connect Business of the Shanghai Stock Exchange (Revised in 2022)" and the "Measures for the Implementation of the Shenzhen-Hong Kong Stock Connect Business of the Shenzhen Stock Exchange (Revised in 2022)", and both Effective from the date of publication.

For the first time, stock ETFs were included in the Shanghai and Shenzhen Stock Connect targets.

  So, which stock ETFs can be included in Shanghai and Shenzhen Stock Connect?

What is the adjustment mechanism?

What are the constraints on investors' trading behavior?

The Paper reporters sorted out eight key points.

Point 1: Clarify the inclusion criteria for stock ETFs. The average daily asset size of ETFs on the Shanghai and Shenzhen Stock Exchanges in the past 6 months needs to reach 1.5 billion yuan, and the constituent securities are mainly the underlying stocks of Shanghai and Shenzhen Stock Connect.

  There are three specific requirements for the inclusion of stock ETFs on the Shanghai and Shenzhen Stock Exchanges and The Stock Exchange of Hong Kong Limited (hereinafter referred to as the "Stock Exchange") that meet the conditions for inclusion in the scope of the Shanghai-Shenzhen-Hong Kong Stock Connect:

  First, the average daily asset size of the ETFs on the Shanghai and Shenzhen Stock Exchanges in the past six months has reached 1.5 billion yuan, and its constituent securities are mainly the underlying stocks of Shanghai and Shenzhen Stock Connect.

  Second, the average daily asset size of ETFs on the Stock Exchange in the past six months has reached 1.7 billion Hong Kong dollars, and its constituent securities are mainly the underlying stocks of Hong Kong Stock Connect, which cannot be synthetic ETFs, leveraged and inverse products.

  The third is that the ETF to be included in the target must meet the requirements of listing for 6 months and the release of its target index for one year at the same time.

Point 2: Adjust once every six months

  The Shanghai and Shenzhen exchanges said that in principle, the underlying ETFs will be adjusted every six months.

  Among them, the deadline for the first-time inclusion of the Shanghai-Shenzhen Stock Connect ETF and the Hong Kong Stock Connect ETF is April 29, 2022.

  In addition, the Shanghai and Shenzhen Stock Exchange Securities Trading Service Company and the Stock Exchange Securities Trading Service Company will notify separately the list of ETFs included in the Hong Kong Stock Connect and Shanghai-Shenzhen Stock Connect for the first time and the effective date.

Point 3: All 6 conditions can be met, and the weight of a single component of the broad-based stock index does not exceed 30%

  The Shanghai and Shenzhen Stock Exchanges stated that listed stock ETFs will be transferred to the Shanghai-Shenzhen Stock Connect ETF if they meet all the six conditions on the deadline for regular adjustment and inspection.

  Specifically, first, it is denominated in RMB, and the average daily asset scale in the past six months is not less than RMB 1.5 billion.

  Second, the listing time is 6 months.

  The third is that the tracked underlying index has been released for one year.

  Fourth, among the underlying index constituent securities to be tracked, the weight of stocks listed on the Shanghai and Shenzhen Stock Exchanges should not be less than 90%, and the weight of Shanghai and Shenzhen Stock Connect stocks should not be less than 80%.

  Fifth, the underlying index to be tracked or its compilation plan must meet the corresponding conditions.

Among them, if it is a broad-based stock index, the weight of a single constituent does not exceed 30%.

  For a non-broad-based stock index, the number of constituent stocks shall not be less than 30.

The weight of a single component security does not exceed 15% and the total weight of the top 5 component securities does not exceed 60%.

The average daily trading value of the constituent stocks with a total weight of more than 90% in the past 1 year ranks in the top 80% of the stocks listed on the stock exchange where they are located.

  Sixth, other conditions identified by the Exchange.

Point 4: One of the four situations will be transferred out, including that the average daily asset scale in the past 6 months is less than RMB 1 billion

  The Shanghai and Shenzhen Stock Exchange stated that the Shanghai and Shenzhen Stock Connect ETF will be transferred out of the Shanghai and Shenzhen Stock Connect ETF if one of the following circumstances exists on the deadline for regular adjustment and inspection.

  First, the average daily asset scale in the past six months was less than RMB 1 billion.

  Second, among the underlying index constituent securities to be tracked, the weight of stocks listed on the Shanghai and Shenzhen Stock Exchanges is less than 85%, or the weight of Shanghai and Shenzhen Stock Connect stocks is less than 70%.

  The third is to no longer meet the above-mentioned tracked underlying index or its compilation plan, and the corresponding conditions that need to be met.

  Fourth, other circumstances identified by the Shanghai and Shenzhen Stock Exchanges.

Point 5: Clarify temporary adjustment arrangements, and those who terminate listing will be transferred out on the date of termination of listing

  The Shanghai and Shenzhen Stock Exchanges have clarified that if a Shanghai-Shenzhen ETF is terminated from listing, the Shanghai-Shenzhen ETF will be transferred out on the date of termination of listing.

  At the same time, if the listing of the Southbound ETF is terminated, the Southbound ETF will be transferred out on the Southbound trading day following the last trading day of the relevant stock ETF on the Stock Exchange.

Point 6: Regulate the return journey of mainland investors to participate in the Shanghai Stock Connect trading behavior, Shanghai and Shenzhen Stock Connect investors do not include mainland investors

  The Shanghai and Shenzhen Stock Exchange stated that it is clear that the investors of Shanghai Stock Connect do not include mainland investors.

  At the same time, in order to give Hong Kong brokers and other stock exchange participants sufficient preparation time, the relevant regulations will come into effect on July 25, 2022.

A one-year transition period will be set up for Mainland investors who have opened the trading authority of Shanghai Stock Connect.

  Specifically, Mainland investors refer to Chinese citizens holding identity documents in Mainland China and legal persons and unincorporated organizations registered in Mainland China, excluding Chinese citizens who have obtained identity documents for permanent residence abroad.

  Mainland identity documents include domestic residence booklet, resident identity card, passport of the People's Republic of China, and travel permit for travel to and from Hong Kong and Macau.

Overseas permanent residence identification documents include but are not limited to permanent resident cards and permanent resident visas issued by overseas countries and regions.

  At the same time, mainland identity documents do not include travel permits for Hong Kong and Macau (commonly known as one-way permits).

Branches or subsidiaries established overseas by mainland-registered legal persons and unincorporated organizations can use the identification documents obtained overseas (such as business registration certificates, etc.) to open the trading authority of Shanghai Stock Connect.

  In addition, if any of the investors in the joint account is a mainland investor, the joint account shall be regulated as a mainland investor account.

Point 7: Newly added Shanghai and Shenzhen Stock Connect ETF Guaranteed Short Selling Exemption from Price Increase Restrictions

  According to the "Implementation Rules for Margin Trading and Securities Lending" of the Shanghai and Shenzhen Stock Exchanges, the selling of ETF securities is exempted from price increase restrictions (that is, the declared price must not be lower than the most recent transaction price), and new exemption provisions have been added.

  Specifically, guaranteed short selling of ETFs in Shanghai and Shenzhen Stock Connect is not subject to the two preceding paragraphs: First, the declared price of guaranteed short selling shall not be lower than the latest transaction price of the underlying securities; if there is no transaction on the day, the declared price shall not be lower the previous closing price.

  Second, the securities trading service company of the Stock Exchange shall urge the participants of the Stock Exchange to require its clients to sell the same underlying securities before returning the underlying securities borrowed for guaranteed short selling. Except for the portion that returns the underlying security quantity.

Point 8: Revise the "Required Clauses of Risk Disclosure Statement" and increase the risk warning clauses of ETFs in Hong Kong Stock Connect

  The Shanghai and Shenzhen Stock Exchanges stated that in order to enable investors to fully understand the risks associated with trading ETFs in Southbound Trading, the Shanghai and Shenzhen Stock Exchanges and China Securities Depository and Clearing Co., Ltd. jointly revised the "Required Terms of Risk Disclosure Statements", requiring members to fully inform investors. Related risks, do a good job in investor suitability management and related education services.

  Among them, the "Required Clauses of Risk Disclosure Statement" mainly increases the risk warning clauses of ETFs in Hong Kong Stock Connect.

On the whole, the trading mechanism, daily quota limit control, investor suitability management, clearing and settlement and risk control arrangements of Southbound ETFs are basically consistent with the existing stock mechanism of Shanghai-Hong Kong Stock Connect.

  However, Southbound ETFs have special institutional arrangements in terms of changing fund managers, terminating listing, or conducting liquidation, which are different from those in the mainland securities market. Investors should pay attention to the possible risks.

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