GC Friday Interview: Stephanie Marelle, Head of Hong Kong, BNP Paribas Securities Services on Stock Connect.

The Stock Connect program, which enables investors in both Hong Kong and Shanghai to buy shares in each other’s markets directly for the first time, launched on Monday in which was termed a “historic event”. Amid much fanfare, the majority of trading went Northbound as investors swarmed to access China’s domestic securities market. According to Hong Kong Exchanges and Clearing (HKEx), there were 102,911 trades flowing into the Shanghai exchange from the northbound Hong Kong channel and 20,645 passing in the opposite direction via the southbound route on the first day. Global Custodian speaks to Stephanie Marelle, head of Hong Kong, BNP Paribas Securities Services, on how institutional investors in the region handled the first day of trading in the region, and what is next in store for traders and the Chinese renminbi.

GC: How did the first day of live trading go for you?

SM: The first day of trading was extremely busy. This wasn’t expected given that part of the start was largely around the capacity of funding in RMB, which Hong Kong had only published a week prior to the launch. At the industry level we all expected a slower start. Relatively speaking, volumes on the first day were much heavier than our average scenario. In addition most of the traffic went Northbound into China, with Chinese investors yet to match the same volumes in Southbound trading. However, it did go very smoothly for us from funding activities to settling trades. Of course we were on our toes because it is a historic moment, but it all went very smoothly.

GC: Following this where do you expect Stock Connect to go in the short-and long-term?

SM: We expect this to be a long-term development with a long-term interest. We have seen a lot of appetite from clients, who were unanimously optimistic about it. Some wanted to be ready for day one, others were a little more cautious and wanted to see how it started and be ready for phase 2. We do think the trend is there to stay, especially the flow of trading Northbound. We believe there will be other phases either through new products or connecting more exchanges in the region.

GC: What type of clients were active?

SM: Institutional investors were the most active. For them, Stock Connect is an easier route, away from the quota. We have fund clients from Singapore to Australia to the U.S., so we had to answer to a very big demand.

GC: The announcement of the start of Stock Connect was put off by regulators largely due to unresolved issues of pre-trade delivery and taxation. Did these issues affect the clearing and settlement of trades on day 1?

SM: I think the global custodian community really helped the industry mitigate those risks. There were concerns over the necessity for fund managers to place their shares in custody with the broker on the day before trading, which creates disclosure risk (i.e. disclosing their intentions). That transfer is also free of payment which has a big impact from a regulatory standpoint as such transfers would not be acceptable in most jurisdictions. You’re also taking on a big counterparty risk because you are leaving your shares in custody to local entities that aren’t necessarily as well capitalized as custodian banks. Those three risks were really a big issue for fund managers wanting to participate in Stock Connect.

But I think the three institutions, including ourselves, did contribute in creating some very interesting setups by combining clearing and custody (which we call execution-to-custody), to help mitigate those market features that were a big hindrance.

GC: Looking at the future of the renminbi, do you think the currency will be used for collateral for securities trading, and will A-Shares be used for securities lending?

SM: Securities lending is not authorized in China yet. However, by the time they are held in Hong Kong and are subject to Hong Kong rules, the environment there is opening some new routes. Whether this is a development for the immediate future, I don’t think so. However, using currency as collateral is a development that will be encouraged because there is a willingness to use the renminbi as any other currency. But today, the pool of available offshore renminbi is still relatively small compared to other currencies, so they are mainly cautious when commenting on such a development.

GC: How soon will we see derivatives and commodities listed on Stock Connect?

SM: I am not too sure derivatives will be included in the next phase- there is still so much to do in other areas. The focus is probably going to be on developing new connections rather than on instruments that are still quite new to China. Furthermore they will probably focus on timing issue for the next phase. We do expect a version 2 of Stock Connect in its current scope to be coming in in the next few months.