Hong Kong, Shanghai regulators wonder how to police 'through train'

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.