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.