Change to settlement process boosts Stock Connect traffic

Traffic on the Shanghai-Hong Kong Stock Connect program may become much busier after the Hong Kong Exchange and Clearing Ltd said on Thursday that investors would be able to avoid the pre-trade quota check before transaction starting next Monday.

A small change in the settlement process could open the door for more participants in the Stock Connect. Fund managers including those with most big mutual funds domiciled in Europe's Luxembourg have been prevented from participating in the Stock Connect scheme, as it requires them to transfer shares to the brokerage from their custodian bank before sell orders are executed, which is contradictory to their compliance requirements.

The HKEx said in a statement on Thursday night that they are rolling out a significant enhancement to its Central Clearing and Settlement System on Monday to enable investors to settle their trades of A shares (Northbound trades) through Shanghai-Hong Kong Stock Connect similar to the way they settle their trades of Hong Kong stocks.

To put it another way, investors will only be required to transfer shares they are selling to their broker for settlement after their sell orders are executed.

Technically, the new service will allow investors to open Special Segregated Accounts in CCASS via its custodian participants or its general clearing participants which are not exchange participants.

"This new service is part of HKEx's ongoing effort to refine the Stock Connect program," said Calvin Tai, HKEx's head of global clearing (Asia). "SPSAs will make it easier for investors to minimize counterparty risk in A-share settlement and to maintain compliance with asset segregation and safe keeping requirements for institutional funds. They are expected to benefit exchange participants by giving them additional business opportunities."

"This is a major achievement to address a major concern from the institutional investors. We welcome the enhance model that provides a different option. But as for the implementation, I believe it still needs coordination from different parties on the value chain," said Hong Kong Investment Funds Association chief executive Sally Wong.

About 13,000 global mutual funds, or two-thirds of Europe's funds industry, are domiciled in low-tax Luxembourg. These include heavyweights such as Blackrock, Templeton and Fidelity, part of Luxembourg's 3 trillion euro ($3.28 trillion) asset management industry.