The "through train" scheme to allow mainland and Hong Kong investors to cross-trade stocks in Hong Kong and Shanghai has created a quandary for local regulators, whose job of investigating illegal trading is about to become much harder.
The financial watchdogs would not be able to go to the mainland to directly investigate alleged insider trading or market manipulations under the scheme, leaving them wondering how to do their job.
Beijing and Hong Kong regulators announced on Thursday that the cross-trading scheme would be implemented in October, allowing investors to trade up to 550 billion yuan (HK$691 billion) worth of stocks listed on the Hong Kong and Shanghai stock markets.
"The insider dealing, market manipulation, disclosure of price-sensitive information and other requirements are different in Hong Kong and Shanghai," said Luke Hastings, of the Hong Kong-based commercial law firm Herbert Smith Freehills, which is a partner of Hong Kong's regulatory authority. "Investors will need to understand the requirements of the different markets before they trade or they may breach the rule as a result."
William Hallatt, also with Herbert Smith Freehills, said investors who planned to participate in cross-border trading would need to be aware of the local regulations of the market in which they were going to trade.
As a rule, the investors based in Shanghai who trade Hong Kong stocks under the through-train scheme will need to observe the Hong Kong trading rules and regulation. Likewise, the Hong Kong investors who trade Shanghai stocks need to follow Shanghai's rules and regulations.
Hallatt said another major challenge would be enforcement.
Under the "one country, two systems" arrangement, the regulatory and enforcement authorities of Hong Kong and the mainland cannot cross the border to investigate or enforce their respective rules.
If someone in Shanghai is alleged to possess insider information about a Hong Kong-listed company and trades the shares via the through-train scheme, the Securities and Futures Commission cannot go to the mainland to collect evidence or conduct an investigation.
"In Hong Kong, the SFC can compel the production of information from the financial institutions that it regulates but it could not do the same for mainland-based entities," Hallatt said.