The landscape for capital outflows is seeing further tightening as regulators have called for a suspension on adding new scale to cross-border Total Return Swap (TRS) business focused on equities. According to multiple sources, market institutions began receiving window guidance notices from partner brokerages on June 23rd, indicating the regulatory directive. In response, a significant volume of domestic capital that had relied on cross-border TRS to deploy assets overseas has started evaluating adjustments to its future investment strategies.

The current unified requirement for brokerages is to cease adding new business scale for equity cross-border TRS. Existing positions can be held to maturity or closed out voluntarily, with no forced liquidation mandates, although the detailed implementation standards for this policy have not yet been fully finalized.

Review of Primary Capital Outflow Channels

For domestic capital participating in cornerstone investments for Hong Kong IPOs, the main historical channels have included Overseas Direct Investment (ODI), Special Account Qualified Domestic Institutional Investor (QDII), Qualified Domestic Limited Partner (QDLP), and TRS. As regulatory oversight over these four channels has progressively intensified, a supplementary avenue using bank structured deposits has gradually emerged. Each channel faces multiple constraints regarding quotas, approval timelines, and regulatory rules, with barriers to entry consistently rising.

Examining 83 Hong Kong IPO projects with cornerstone investors since 2026: 46 projects involved various cross-border channel funds. Among these, TRS participated in 30 projects, with an investment scale of HKD 2.93 billion, covering listed enterprises of different sizes and across various sectors. It is evident that TRS has become a crucial tool for domestic capital accessing Hong Kong cornerstone investments. The following analysis will outline the practical challenges of each cross-border channel and objectively assess the potential short and long-term impacts of this regulatory window guidance on TRS for the Hong Kong IPO issuance market.

Strengthening Constraints Across All Major Outbound Channels

All primary pathways for domestic capital to participate in Hong Kong IPO cornerstone investments face persistent and tightening constraints, each with its own implementation bottlenecks.

ODI: Limited to Government-Linked Entities

Overseas Direct Investment requires joint filing with multiple departments including the NDRC, MOFCOM, and SAFE, involving a lengthy approval cycle that is difficult to align with the flexible timing needs for participating in new share cornerstone rounds. Furthermore, previous models involving local industrial platforms jointly applying for quotas with domestic capital have been substantially tightened. Now, only local governments possess independent application qualifications.

Since 2026, 24 projects have featured government-backed investment institutions, with a total investment of HKD 3.91 billion. While prospectuses do not disclose the specific outbound channels for these entities, industry sources indicate most rely on ODI for capital outflow.

QDLP: Scarce Pilot Quotas

QDLP is a standardized cross-border investment channel with full fund custody, transparent underlying entities, controllable overall costs, and a clear compliance framework. However, the national pilot quota is strictly controlled. As of 2026, there is virtually no new, tradable QDLP quota available in the market.

Since 2026, only 6 projects have utilized the QDLP channel, corresponding to a cornerstone investment scale of HKD 2.24 billion. This capital is highly concentrated with a single licensed institution in Beijing, and project approval cycles are long. For domestic capital needing to quickly secure quality IPO cornerstone allocations, the dual shortcomings of quota scarcity and long implementation cycles are significant, preventing it from meeting regular primary market allocation needs at scale.

Special Account QDII: Regulatory Tightening Leaves Mostly Historical Quotas

Special account QDII was a mainstream outbound channel for domestic capital during 2022-2023. Subsequent regulations explicitly restricted such funds from being invested solely in a single Hong Kong IPO company, effectively closing the path for establishing new special-purpose QDII accounts dedicated to single new share cornerstone investments.

Since 2026, 9 projects have used the QDII channel, with a corresponding cornerstone investment scale of only HKD 450 million. Most do not involve newly established special accounts but rely on institutions' historical quota balances. Individual investment sizes are relatively low, falling into two main categories: QDII quotas approved earlier for diversified portfolio allocation, which inherently met regulatory requirements for multi-asset investment; and existing QDII products from prior investments, where quotas were released after lock-up periods ended and were reused for Hong Kong cornerstone investments.

It is important to distinguish that public funds using their own QDII quotas for new share investments are not within the scope of this special account QDII discussion. The current market lacks the ability to establish new single-project dedicated QDII accounts, and existing quotas are limited, making it difficult to accommodate large-scale new allocation demand.

TRS: Gained Popularity Through Speed, Became a Common Complementary Channel

TRS was not widely adopted in 2022-2023, primarily constrained by a comprehensive channel cost of around 6%, significantly higher than the approximately 2% average cost for ODI, QDLP, and QDII. However, as those three mainstream channels faced quota limits, extended approval cycles, and restrictive investment rules, TRS's advantages—no need for actual principal outflow and no lengthy filing process—offset its cost disadvantage, making it an important complementary tool for domestic capital in Hong Kong IPOs.

From a transaction structure perspective, domestic capital signs over-the-counter swap agreements with licensed brokerages, whose overseas subsidiaries then act to complete the new share cornerstone subscription. Many domestic entities, optimistic about the long-term prospects of leading projects based on their own asset allocation or industrial strategy but lacking direct overseas capital channels, found TRS to be a practical and viable path to participate in quality IPO cornerstone investments. This channel imposes no size restrictions on target companies, with TRS-supported funds participating in cornerstone rounds for large hard-tech leaders as well as growth companies in niche sectors.

Bank Structured Deposits: A Later, Limited Supplementary Option

Only after the comprehensive tightening of the four mainstream channels did the bank structured deposit outbound solution emerge. Based on cases since 2026, this model primarily relies on a cooperative framework with OCBC Singapore, where domestic capital is deposited in an onshore account and the offshore branch completes the Hong Kong cornerstone capital contribution, bypassing multi-layer domestic forex approvals. However, it faces challenges including a limited number of cooperative institutions and relatively high comprehensive capital costs.

Since 2026, only 4 projects have used this channel, with an investment scale of HKD 410 million. Even if TRS incremental business is completely halted, the capital capacity and implementation efficiency of structured deposits cannot meet the overall market demand for domestic capital allocation. Frontline industry institutions generally indicate there is currently no stable, efficient alternative cross-border allocation tool available in the market.

TRS Role in Supporting IPO Issuance and Market Stability

The Hong Kong cornerstone investor system is designed to introduce medium to long-term capital, provide subscription support for issuers during the offering stage, signal market confidence to secondary investors, and reduce new share issuance volatility. The emergence of various capital outflow channels is essentially the result of matching domestic capital's global asset allocation needs with companies' primary market financing requirements.

From the issuer's perspective, the TRS channel effectively supplements conventional funding sources, filling subscription gaps and ensuring smooth IPO execution. The first half of 2026 saw a peak in Hong Kong IPO supply, amplifying the demand for diversified capital. Domestic capital channeled through TRS effectively supplemented cornerstone and international placement subscription volumes, helping issuers fully complete their fundraising plans and access offshore capital market financing channels.

Comparing capital scales, the total cornerstone investment in Hong Kong since 2026 amounts to HKD 112.51 billion, with TRS accounting for HKD 2.93 billion. While its overall proportion is not dominant, its marginal supporting role during market cycle transitions should not be overlooked.

The current Hong Kong primary market is in a phase of peak supply, with ample capital from foreign institutions and Chinese institutions possessing offshore funds, making TRS merely a supplementary channel. However, capital markets are cyclical. If the secondary market sentiment cools and institutional risk appetite recedes in the future, standardized cross-border channels cannot be rapidly expanded in the short term. In such a scenario, flexible and efficient allocation channels like TRS would become a crucial buffer to support successful IPO issuances, preventing many quality companies from delaying listings due to funding shortfalls.

The current policy adopts a moderate adjustment approach of "existing contracts continue, new additions prohibited," balancing market stability during the transition with regulatory standardization goals. In the short term, existing TRS contracts that have not yet matured allow domestic capital that relied on this channel for IPO exposure to continue participating in existing projects. Projects in July 2026, such as those involving Jinghe Integrated, Binhu Shares, and Momenta, continue to use this channel normally, providing a sufficient buffer period for both domestic capital and issuers to switch funding channels.

From a medium to long-term perspective, the cyclical nature of capital markets must be considered. If primary and secondary market sentiment weakens and institutional investor participation willingness declines, compounded by restricted capital outflow channels, issuers may face challenges such as insufficient international placement subscriptions, downward adjustments to issuance valuations, and postponed listing timetables in the absence of flexible supplementary funding options.

Regarding alternative channels, bank structured deposits and the remaining small amount of legacy QDLP quota cannot absorb the capital volume previously handled by TRS. Industry insiders report there is currently no alternative capital outflow tool that combines the advantages of speed, quota availability, and cost. In the long run, the core objective of this policy adjustment is to standardize over-the-counter cross-border derivative business. Consequently, the overall entry barrier for domestic capital's cross-border equity allocation will rise, and the flexibility of capital supply for the Hong Kong primary market will correspondingly contract.