HKEx To Ease Stock Connect Worries With Custody And Settlement Fix

Hong Kong Exchanges and Clearing (HKEx) is hoping to ease worries over its trading link with Shanghai and boost volumes by providing a system fix that allows foreign investors to get around China’s custody and settlement rules.

The system fix, which is planned for March this year, is set to resolve conflicts foreign investors have found with China’s pre-delivery requirement, which requires investors to deliver stocks to their broker before 7:45am on the day they wish to sell.

Under the system change, institutional investors who hold A shares through custodians will be able to meet China’s pre-delivery checking rules without physically transferring shares from their custodian to a local broker before execution.

HKEx said in a statement on its website that it would reduce certain risk exposures by allowing foreign custodian banks to open a segregated account in the investor’s name with the clearing house.

“We understand that the market needs time to get used to the idea of beneficial ownership in shares held through a nominee in the context of Mainland law even though it is not a new concept under both Mainland and Hong Kong law,” says Christine Wong, chief counsel and head of legal services, HKEx.

The planned changes have been positively received by Hong Kong’s asset and fund managers, who have previously voiced their concerns over beneficial ownership, segregation and pre-trade checking.

“We believe that once this is implemented, it will go a long way to address the concerns of fund managers and ensure that the operation models can be in line with international practice,” says the Hong Kong Investment Fund Management Association in a statement.

HKEx also plans to roll out a short-selling service for Stock Connect this month

Since its launch in November, activity on Stock Connect has been relatively poor, with trade flow into China significantly outweighing flow into Hong Kong.