Shanghai /Hong Kong Stock Connect

Transcription

1 Shanghai /Hong Kong Stock Connect Day 2 Developing a sustainable operating model

2 Introduction We, like many commentators, view Stock Connect as a highly significant step along the road to harmonising and normalising capital markets across Greater China. We expect the Northbound programme in particular will help facilitate injections of capital from established overseas institutional investors, helping to rebalance the shareholder constituencies in Chinese companies and further opening up markets to advance the stated objectives of the PRC. We anticipate this will be a relatively slow journey, because of both challenging macro economic conditions and the complexity of operational and regulatory convergence, as two exchanges and jurisdictions with different market practices, trading rules and technology come together. Continued collaboration is required both to address ongoing issues from the first phase of the programme and to generate greater efficiencies in the operating model. Answering the remaining questions raised by foreign regulators regarding beneficial ownership of holdings will clearly be key, as will be opening up the market to brokers who may not have direct custody capabilities. As these and other challenges are overcome, we anticipate that Stock Connect will gather momentum to become the cross-border investment scheme of choice, first for equities and ETFs, then later for bonds and exchange traded derivatives. The Stock Connect is the most significant development in China s domestic markets for many years as the country opens up its capital account. Financial Times The Chinese units of global brokers say the demand for their services has increased dramatically as their customers request information about obscure firms listed in Shanghai. Economist The new program will let investors buy A-shares directly, giving them more flexibility in that market as well as access to many sectors and stocks. Wall Street Journal This is a tool to develop effective capital markets to fund its most competitive companies and take pressure off the banking system to provide short-term loans. Foreign investors in A shares will bring in new valuation techniques that will no doubt find and reward good quality companies South China Morning Post 2

3 Stock Connect Current Status A selection of insights we have gathered from our network during the opening days of Stock Connect Trading Activity Institutional investors are waiting in the side-lines, with the initial market largely made up of hedge funds and private investors. stitutional investors are waiting on the sidelines, with the initial market largely made up of hedge funds and private investors Business Readiness System changes and data requirements have not yet been fully implemented to enable seamless straight through processing of Stock Connect transactions from order generation to settlement and valuation. Market Appeal Initial demand may have been impacted by eligibility thresholds for Southbound investors, outstanding approvals from some overseas regulators and unfamiliarity with new markets and new processes. Integration process Integration between Foreign Investors and their Custodian and Brokerage have not been smoothly integrated. A few businesses are in the processes of amending IMAs to allow trading of A-shares. This graph depicts Northbound activity for the initial 10 days of trading through Stock Connect. Though still in its infancy, and we anticipate volume will likely pick up as investors become more familiar with the Stock Connect trading channel as well as with the eligible listed companies on both sides. Graph: Northbound net trade value and number of trades for Shanghai Hong Kong Stock Connect Net Trade Value (RMB Bil) Gross Trade Value (RMB Bil) Net Trade Value (RMB Bil) Net Number of Trades Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 Day 9 Day 10 Days 180, , , , ,000 80,000 60,000 40,000 20,000 0 Net Number of Trades 3

4 Features of Stock Connect Shanghai-Hong Kong Stock Connect is a mutual market access programme, through which investors in Hong Kong and Mainland China can trade and settle shares listed on the other market respectively via the exchange and clearing house in their local market. Market Comparison Investible scope Trading Currency Pre-trade checks Settlement Cycle Quotas Intraday trading Margin trading Northbound (to SSE) 568 Eligible Names SSE 180 index / 380 index Dual-listed A&H shares listed SSE RMB for trading and settlement Broker level checks on Sells T-day (stock), T+1 (money) Aggregate Quota: RMB 300bn Daily Quota: RMB13bn No Yes, to certain H shares Southbound (to SEHK) 266 Eligible Names Hang Seng Composite LargeCap & SmallCap Indices Dual-listed A&H shares listed SSE HKD to trade, RMB to settle Individual level checks on Buys (money) and Sells (stock) T+2 (DVP) Aggregate Quota: RMB 250bn Daily Quota: RMB 10.5bn Yes Short selling Yes Yes Yes, to certain A shares The Journey so far April Announcement of Shanghai Hong Kong Stock Connect June Exchange and Clearing participants submit application form August Exchange and Clearing participants confirm their system readiness before joining market rehearsal Mid-September Market Rehearsal Round 2 October Announcement made that Northbound trading will have China tax exemptions and dividend treatments May Round 1 of Exchange and Clearing participants briefing July Round 2 of Exchange and Clearing participants briefing Late-August Market Rehearsal Round 1 Late September Trading Practice Price Restriction 17 November Go-live Settlement cycle Handling fees T- Day(Stock), T+1(Money) Yes Data as of 29 October T+2 (DVP) Yes Day 2 Expansion of broker choice, further clarification and automation 4

5 Comparison between cross border investment schemes Stock Connect (Northbound) RQFII QFII Quota Aggregate Quota: RMB 300bn Daily Quota: RMB 13bn Quota ceiling: RMB 270bn for Hong Kong, RMB 80bn for Singapore, UK, Korea and Germany, RMB 100bn for Taiwan Quota ceiling: USD150bn Eligible Investors All Hong Kong and overseas investors (including retail and hedge funds) will be allowed to trade SSE Securities via local brokers (i.e. SEHK Participants) Regulated entities: asset managers and securities houses and asset management arms of banks and insurance companies Commercial Banks ( 10yrs in operation, USD 5 billion AUM, USD300mm Tier 1 Capital ) Securities Companies ( 5yrs in operation, USD 5 billion AUM, USD500mm Capital ) AMC, insurance companies and other institutions (experience of 2+ years, and AUM USD 500mm) Access Bilateral Inflow to Mainland China Inflow to Mainland China Currency Eligible Investments RMB RMB USD or foreign major currency 568 Eligible Names SSE 180 index / 380 index Dual-listed A&H shares listed SSE Stocks, bonds, securities investment funds, warrants, IPOs, bond issuance and index futures Stocks, bonds, securities investment funds, warrants, IPOs, bond issuance and index futures Stock Connect offers market participants a higher aggregate quota, a wider pool of eligible investors, faster time to market and lower start up and running costs than the existing RQFII and QFII investment schemes. 5

6 Stock Connect represents the convergence of two distinct markets and workflows. While this brings with it significant opportunities, it also gives rise to a number of challenges CSRC Northbound Asset Owners Asset Manager Custodian Broker Hong Kong is the gateway to for both local and foreign investors to invest into the Shanghai stock market. Shanghai Exchange SSE SPV Hong Kong Exchange Qualified H Shares Qualified A shares HKEx SPV The scheme allows investors in China to gain direct access to the Hong Kong international market for the first time. Broker Asset Manager Custodian Asset Owner Southbound SFC Under the Stock Connect scheme, the Hong Kong and Shanghai stock exchanges (SEHK and SSE) have established mutual order-routing connectivity and agreed new business process in order to enable investors in each market to trade designated equities listed on the other exchange. The Hong Kong Securities Clearing Company Limited (HKSCC), in Hong Kong, and ChinaClear on the mainland, are now responsible for the clearing, settlement and the provision of depository, nominee and other related services for the trades executed under the Stock Connect scheme. While the new technical links and processes have been successfully tested, they have given rise to certain challenges and considerations as laid out in the following pages. 6

7 Day 2 Challenges and Considerations Areas Challenges Considerations Legal and Regulatory Operations and Technology Client eligibility and authority Integration with brokerage function (internal or external) Disclosure of interest and foreign ownership Disclosure of risk Liability of positions held on T-1 (Northbound) On-boarding new clients / transferring trading accounts from other brokers Off-market share transfers and integration of broker transfers into business process Order management Quota management / unfulfilled orders Treatment of holidays / suspensions Treatment of synthetic products Clearing & settlement process Treatment of on-shore and off-shore RMB CNY / CNH Data management Asset servicing Calculating tax liability Valuations Providing / obtaining consent to proceed Supplementary IMA and other regulatory requirements for additional approval Clarification of tax liabilities arising from keeping custody of assets both by law and by contract Attain additional client consent for use of sub custodians affiliated to brokers for A Shares Establish procedures / reports to monitor counterparty exposure Clarification of liabilities in the event of a failure Allow for recovery of any liabilities arising from the tax indemnity given to SEHK in client documentation Additional AML / KYC checks on client eligibility Development of procedures to capture requirements for transfers of funds and shares on T and / or T-1 Adjustments to OMS systems and static data to reflect the operating model for Stock Connect New processes to deal with unallocated orders Inclusion of PRC /HK trading holidays and short term suspensions Adjustments to existing QFII/RQFII product solutions, given direct A Share trading capability Adjustments to workflow tools and business process to cater for new Stock Connect rules, e.g. settlement cycles and pre funding requirements Update processes to ensure valuation in CNY and settlement in CNH Enable accurate identification of A Share assets, transactions, clients & counterparties Incorporate new procedures for corporate actions on Stock Connect assets / transactions Correct treatment of tax accruals Valuation in CNY and base currency 7

8 Challenges and Considerations Areas Challenges Considerations Risk and Compliance New business approval process Selection of custodians, asset managers and brokers Dependency on single brokers Pre-trade compliance A Share requirements Staff trading Operating risk Clearing and settlement risk Post trade compliance Tax Tax implications when the product scope is expanded to non equity type of investment Tax implications such as stamp duty when more equity linked products and instruments are added to the stock connect regime such as stock borrowing and lending transactions Adjust on-boarding processes, enhance KYC / AML checks to incorporate Stock Connect risk and compliance Eligibility of service providers to participate in Stock Connect, including integrated brokerage and custody services Choice of brokers for A Share trading Procedures to monitor and report on counterparty exposure and risk Incorporation of SSE / SEHK restrictions in trading systems Monitoring foreign ownership restrictions in A shares Additional internal rules may be required for controlling the flow of information which may give a market advantage / insider dealing Arbitrage of market opening times and valuation differences off-shore to on-shore Insider trading Education of key staff, e.g. on the different clearing and settlement practices between HK and PRC Seek further clarifications on tax treatments from relevant tax authorities. Adjust on-boarding processes, enhance KYC procedures to monitor such types of transactions 8

9 Developing the next phase of Stock Connect Planning the next phase of Stock Connect development should include detailed consideration of the following components: Legal & Regulatory For some organisations, this is the first exposure to the Shanghai exchange and the associated regulatory framework in mainland China. Fundamental differences need to be fully understood and integrated into existing procedures. Overseas regulators require clarification of rules and processes, and comfort around the rights of underlying investors, particularly around the role of ChinaClear and the underlying account structures and look through capability. Operations & Technology New processes and procedures are required to be brought into place, together with associated systems changes and new data requirements. In particular, procedures dealing with the management of transfers between brokers and custodians require thoughtful planning, together with pre-trade compliance checks, order management processes, treatment of onshore versus offshore RMB (CNY / CNH) and much more. Risk & Compliance Significant new operating risks are introduced with the Stock Connect scheme, which require careful assessment and adaptation of existing risk and compliance procedures and the introduction of new ones, for example around client eligibility, error reporting and staff dealing. Five high level considerations for organisations planning to develop their Stock Connect product offering: 1. Disciplined programme management adapting for change of this type requires deployment of skilled project management resources who can operate across business lines. 2. Collaboration across the value chain for example to ensure operating procedures involving participating brokers and custodians are sufficiently robust and fully tested. 3. Future proofing for the next wave of change planning for both tactical and strategic changes, to further automate the model over time to develop multi-broker and multi custodian solutions for investors. 4. Risk management active involvement of key risk & compliance managers and executive sponsorship will be required for a successful outcome. 5. Data management the requirement to accurately recognise and distinguish between the classification and market data associated with the various assets, transactions, clients and counterparties which are the subject of each individual trade and position will be critical, to ensure correct valuations, reporting and treatment of on-shore versus off-shore RMB. 9

10 Next steps Market Participants are recommended to maintain programmes around Stock Connect, to ensure a holistic view of the various changes required to the design of the operating model, the build and testing of specific requirements and the implementation and integration of the new processes into BAU. Programmes of work would typically cover legal and regulatory requirements, data governance, risk and compliance, technology and operations, communicating closely with third parties and shared services. Third parties and industry bodies Stock Connect Programme Design Build Test Implement Legal and Regulatory Data Governance Risk and Compliance Operations and Technology Shared Services How can we help? As the leading professional services firm in the financial services sector in Hong Kong & China, is well placed to support market participants in the development of Stock Connect and similar programmes. helps organisations across the world connect strategy with execution. We bring the industry, functional and technical depth required to close the gap between ideas and results, using a proven approach and methodology. 65% SFC-authorised unit trusts & mutual funds serviced by 108 Financial Services Partners in the Hong Kong and China Region 2,400 Financial Services specialists in Hong Kong and China 13,000 Financial Services professionals accessible through our Global Network 10

11 Contacts Key Subject Matter Contacts Adams Chan HK, Partner Regulatory Advisory Services Rex Ho HK, Partner Tax Albert Lo HK, Partner Financial Services Consulting Roger Emms HK, Associate Director Consulting Other China / HK Lead Contacts Aileen Wang Shanghai, Partner Risk Assurance +86 (21) aileen.wang@cn.pwc.com Florence Yip HK, Partner Asia Pacific Financial Services and Asset Management Tax Leader florence.kf.yip@hk.pwc.com Jimmy Leung Shanghai, Partner Banking and Capital Markets Leader +86 (21) jimmy.leung@cn.pwc.com Peter Li HK, Partner Banking and Capital Markets Leader peter.pt.li@hk.pwc.com Edmond Chan HK, Partner Capital Market Services Group edmond.chan@hk.pwc.com James Quinnild HK, Partner Asia Pacific Financial Services Consulting Leader james.m.quinnild@hk.pwc.com Marie-Anne Kong HK, Partner Asset Management Leader marie-anne.kong@hk.pwc.com Rick Heathcote HK, Partner Financial Services Markets Leader rick.heathcote@hk.pwc.com 65% 13,000 11

12 Thank you This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors All rights reserved. refers to the network and/or one or more of its Shanghai member firms, Hong eachkong of which Stock is a separate Connect legal entity. Please see for further details. HK C1 November