The Role of Depositary Banks for ADR Stocks: How Hong Kong Investors Can Choose ADR Custody Services

In March 2025, the Hong Kong Securities and Futures Commission (SFC) issued a circular reminding intermediaries of their obligations when facilitating clients’ investments in American Depositary Receipts (ADRs), specifically highlighting risks around custody chain transparency and corporate action processing. This followed a sharp increase in Hong Kong retail investor holdings of ADR-listed Chinese companies—such as Alibaba and JD.com—whose primary shares trade on the Hong Kong Exchange (HKEX). The SFC’s 2024 annual report noted that cross-border custody assets held by Hong Kong intermediaries grew by 18% year-on-year, driven partly by ADR arbitrage strategies. For Hong Kong investors, choosing the right depositary bank for ADR custody is not merely a matter of convenience; it determines how dividends are taxed, how voting rights are exercised, and how quickly shares can be converted between markets. This article explains the role of depositary banks in the ADR ecosystem and provides a structured approach for Hong Kong investors to evaluate custody services.

The ADR Structure and the Depositary Bank’s Role

An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. depositary bank representing a specified number of shares in a non-U.S. company. The depositary bank holds the underlying foreign shares in a local custodian bank in the company’s home market and issues ADRs to U.S. investors. For Hong Kong investors, ADRs provide a way to trade shares of companies like Tencent or Meituan on U.S. exchanges without opening a U.S. brokerage account—but the legal relationship is with the depositary bank, not the issuing company directly.

Step 1: Understand the Three-Tier Custody Chain

The Hong Kong investor’s ADR custody chain typically involves three layers: the depositary bank (e.g., BNY Mellon, JPMorgan Chase, Citibank), a U.S. clearing agent (usually the Depository Trust Company, DTC), and the investor’s Hong Kong broker or custodian. The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the SFC Code) requires intermediaries to disclose the custody arrangement to clients, including whether the assets are held in the intermediary’s name or in a nominee account. Paragraph 7.1 of the SFC Code states that a licensed person must “take all reasonable steps to ensure that client assets are properly safeguarded.” This means the depositary bank’s role is not passive—it must process dividends, handle stock splits, and facilitate conversions between ADRs and underlying shares.

Step 2: Identify the Key Depositary Banks for Hong Kong-Related ADRs

As of 2025, three depositary banks dominate the ADR market for Chinese companies: BNY Mellon, JPMorgan Chase, and Citibank. BNY Mellon is the depositary for Alibaba Group Holding Limited (BABA), JD.com (JD), and NetEase (NTES). JPMorgan Chase handles Baidu (BIDU) and NIO (NIO). Citibank manages Tencent Music Entertainment Group (TME) and Trip.com Group (TCOM). Each bank’s fee schedule, corporate action processing speed, and dividend tax handling differ. For example, BNY Mellon charges an ADR issuance fee of USD 0.05 per ADR for new issuances, while JPMorgan Chase charges USD 0.08 per ADR. These fees are deducted from the investor’s dividend or from the proceeds of a sale.

How Hong Kong Investors Can Evaluate ADR Custody Services

The choice of depositary bank is often made by the issuing company, but Hong Kong investors can influence the quality of service by selecting a broker or custodian that partners with a depositary bank offering favorable terms. The following factors are critical.

Factor 1: Dividend Tax Withholding and Processing

Dividends on ADRs are subject to U.S. withholding tax at a rate of 30% for non-U.S. residents, unless a tax treaty reduces the rate. Hong Kong has a tax treaty with the United States (the U.S.-Hong Kong Double Taxation Agreement, effective from 2019) that reduces the withholding rate on dividends to 15% for Hong Kong residents holding less than 10% of the issuing company’s shares. The depositary bank is responsible for applying the correct treaty rate. If the bank applies the default 30% rate, the investor must file a U.S. tax return (Form W-8BEN) to claim a refund—a process that can take 6 to 12 months. BNY Mellon, as of its 2024 annual report, processed dividend refunds for Hong Kong investors in an average of 8 months. Citibank’s average was 10 months. Investors should confirm with their broker whether the depositary bank automatically applies the treaty rate at source.

Factor 2: Corporate Action and Conversion Processing

A key advantage of ADRs is the ability to convert them into the underlying Hong Kong-listed shares and vice versa—a process known as “ADR conversion.” This is essential for arbitrage strategies when the ADR price diverges from the HKEX price. The depositary bank sets the conversion fee and the timeline. For example, converting Alibaba ADRs (BABA) into Hong Kong shares (9988.HK) through BNY Mellon costs USD 0.05 per ADR and takes 3 business days. JPMorgan Chase charges USD 0.08 per ADR for Baidu conversion and takes 5 business days. The HKEX’s Listing Rules Chapter 19C, which governs secondary listings, require that the conversion mechanism be “efficient and transparent.” Investors should ask their broker for the depositary bank’s conversion fee schedule and estimated processing time before initiating a trade.

Factor 3: Voting Rights and Shareholder Engagement

Depositary banks hold the voting rights for the underlying shares and must pass them through to ADR holders. However, the process varies. BNY Mellon, in its ADR Depositary Agreement for Alibaba (filed with the U.S. SEC in 2023), states that it will distribute voting instructions to ADR holders at least 10 business days before the meeting date. JPMorgan Chase’s agreement for Baidu provides for 7 business days. The SFC’s Corporate Governance Code (Appendix 14 to the HKEX Listing Rules) recommends that companies ensure “all shareholders are treated equally and have access to timely information.” For Hong Kong investors holding ADRs, this means verifying with their broker whether the depositary bank will transmit their voting instructions to the company. Some depositary banks charge a fee for processing votes—BNY Mellon charges USD 0.10 per vote; Citibank charges USD 0.15 per vote.

Legal and Regulatory Considerations for Hong Kong Investors

Hong Kong investors must navigate both U.S. securities law and Hong Kong’s regulatory framework when holding ADRs. The SFC has issued specific guidance on ADR custody risks.

Step 1: Understand the SFC’s Stance on Cross-Border Custody

In its 2024 circular on cross-border custody, the SFC emphasized that intermediaries must conduct due diligence on foreign depositary banks. The SFC’s Guidelines on the Prevention of Money Laundering and Terrorist Financing (the AML Guidelines) require that intermediaries verify the identity of the depositary bank and assess its compliance with U.S. anti-money laundering (AML) regulations. Failure to do so could expose the intermediary to regulatory action. For the investor, this means that the broker should be able to provide a written statement confirming the depositary bank’s AML status.

Step 2: Assess the Impact of U.S. Securities Law Changes

The U.S. Securities and Exchange Commission (SEC) has proposed amendments to Rule 12g-2 under the Securities Exchange Act of 1934, which would require foreign issuers with ADR programs to file annual reports in a structured data format starting in 2026. This could affect the timeliness of corporate disclosures for Hong Kong investors. The depositary bank is responsible for disseminating these filings to ADR holders. Investors should confirm with their broker whether the depositary bank provides email or portal-based access to SEC filings.

Step 3: Review Fee Transparency Requirements

The SFC’s Code of Conduct requires that intermediaries disclose all fees associated with client assets, including depositary bank fees. Paragraph 6.2 of the Code states that “a licensed person must not impose any charges on a client that are not reasonable.” Hong Kong brokers typically pass through depositary bank fees to the investor. A 2024 survey by the Hong Kong Investor Education Centre found that 34% of retail investors were unaware of ADR custody fees until after they had purchased the ADRs. Investors should request a fee schedule from their broker before buying ADRs, including issuance fees, cancellation fees, dividend processing fees, and conversion fees.

Actionable Takeaways for Hong Kong Investors

1. Before purchasing any ADR, request a written fee schedule from your Hong Kong broker that includes the depositary bank’s issuance, dividend, and conversion fees.
2. Confirm with your broker whether the depositary bank automatically applies the 15% U.S.-Hong Kong tax treaty rate on dividends, or whether you must file a Form W-8BEN to claim a refund.
3. Check the depositary bank’s conversion processing time for the specific ADR you hold—this affects your ability to arbitrage price differences between the U.S. and Hong Kong markets.
4. Verify that your broker can provide voting instructions from the depositary bank at least 10 business days before the shareholder meeting, or consider switching to a broker with a faster processing agreement.
5. Review the SFC’s 2024 circular on cross-border custody (available on the SFC website) to understand your intermediary’s obligations regarding depositary bank due diligence.

This does not constitute legal advice. Consult a solicitor for your specific case.