Citi launches new settlement service for Stock Connect trades

Citi has launched an RVP/DVP settlement solution for cash and securities trades between investors and their brokers in the Shanghai-Hong Kong Stock Connect program.

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Citi has launched an RVP/DVP settlement solution for cash and securities trades between investors and their brokers in the Shanghai-Hong Kong Stock Connect program. 

The solution is designed to augment the Hong Kong Exchanges and Clearing’s (HKEx) Special Segregated Accounts (SPSA) SPSA model to help address its limitations and reduce the risk of fail trades or a compulsory buy-in. 

The pre-trade checking model allows investors to instruct their local Hong Kong custodian to set up a segregated securities account in the Hong Kong Central Clearing and Settlement System (CCASS) for holding their A-shares position, be assigned a unique Investor ID, and appoint up to 20 brokers, who are exchange participants. Such arrangement enables the HKEx China Stock Connect System (CSC) to perform pre-trade checking on the investor’s sellable position in the SPSA maintained with their custodians, thereby eliminating the need to pre-deliver the shares from the custodian to the brokers before executing the sell trades. Pre-trade checking is required since overselling of A-shares is prohibited under Stock Connect rules. 

Although SPSA eliminates the need to pre-deliver of shares, it also added an extra step in the post trade process, which could increase the risk of a fail trade or compulsory buy-in for the broker due to the very tight settlement cycle. 

In conjunction with the launch of SPSA, Hong Kong Securities Clearing Company (HKSCC) also enabled its clearing and custodian participants to transfer shares using RVP/DVP method. Under such arrangement, for a sell trade, shares will be transferred on T+0; however, the cash will only be confirmed during the morning of T+1 for value T. Such arrangement does not fully eliminate counterparty risk with the broker.

Citi SPSA+ offering allows both securities and cash to be settled simultaneously on T+0, which eliminates overnight counterparty risks with brokers as long as the investors transact through any one of the Citi Third Party Clear (TPC) brokers. It also eliminates the extra step in the post trade process and therefore helps investors reduce the risk of the fail trades and potential buy-in claims from their brokers.

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