Concerns by Europe's top funds watchdog that a landmark Hong Kong-Shanghai trading link may not adequately protect investors are preventing thousands of funds from buying mainland shares, threatening the success of the project, market participants said. The stock connect scheme, launched on November 17, allows foreign investors to trade Shanghai-listed shares through the Hong Kong stock exchange and mainland investors to buy Hong Kong shares through the Shanghai bourse. But within a week of its launch, trading volumes had dwindled to less than 20 per cent of the maximum quota. Banks, fund managers and lawyers said that was because many large EU-regulated funds were unable to participate until Europe's main funds regulator, Luxembourg's Commission de Surveillance du Secteur Financier (CSSF), was satisfied that the scheme protected investors. About 13,000 global mutual funds, or two-thirds of Europe's funds industry, are domiciled in low-tax Luxembourg and regulated by the CSSF. They include heavyweights such as BlackRock, Templeton and Fidelity, which are part of Luxembourg's €3 trillion (HK$28.9 trillion) asset-management industry. The CSSF, market participants said, wanted to be sure that mainland shares European Union savers bought through the link could be adequately recovered should the bank that guards the stocks - the custodian bank - or one of the exchanges, go bust. The collapse of Lehman Brothers in 2008, which saw billions in fund assets sucked into the insolvent Lehman estate, has made investors and regulators highly sensitive over custody arrangements. Several market participants said the CSSF had questioned whether stock connect's arrangements met Europe's strict rules governing the safe-keeping of assets managed by mutual funds for retail investors, known as UCITS - undertakings for collective investment in transferable securities. "The Luxembourg regulator is asking the custodians to clarify that the custody arrangements comply with UCITS rules," said Jeremy Lam, a partner at law firm Deacons in Hong Kong. But some custodians felt unable to provide that reassurance, lawyers and industry participants said. The CSSF said it had had "contacts with some custodians [over stock connect] and the discussions were related at this stage to general points". It declined to give further details of the discussions, but added that it had yet to receive any formal application by a UCITS fund to participate in the Hong Kong-Shanghai scheme. Sally Wong, the chief executive of the Hong Kong Investment Funds Association, said funds had been working around the clock with European regulators to resolve the issue.