The issue concerning pre-delivery of shares, one that has bedevilled the Shanghai-Hong Kong Stock Connect, is on the verge of being eliminated with the introduction of a new account ID process, to be known as the ‘Special Segregated Account Model’ (SPSA).
“The SPSA investor ID programme, which is hopefully coming out in March, will address some of the challenges of position checking in the first phase,” said Ian Smith, head of Goldman Sachs Electronic Trading in Asia Pacific. “There have been relatively rapid innovations with what was already a bold statement about access to the Chinese market. It has been an impressive development and it keeps evolving. Some of the operational challenges meant that not all clients could be ready for day one, nonetheless it all went incredibly smoothly.”
He added that the firm had received a lot of positive feedback and is now looking to build on that for the next phase of the programme’s development this spring and expand on the set of clients.
The situation that the SPSA strives to rectify is where one is selling northbound shares. An investor either has to use an executing broker which is the same firm as his custodian, or, has to transfer those shares to the broker the day before. That process has been difficult for long only clients to manage.
Upon the investor’s request, the custodian participant and non-broker General Clearing participant can open an SPSA, and CCASS will assign an investor ID for that account.
The SPSA process allows a central inventory check of mainland shares that are held for Northbound Stock Connect investors. Some describe that check as providing a ‘snapshot’ of the account. The investor has to pass over the Investor ID which is sent on the order. HKEx China Stock Connect System (CSC) then checks the centrally managed inventory repository to ensure that they have the shares in the quantity that they want to sell.
The broker then receives back a confirmation that the client has enough shares to sell and the order is passed to the SSE for execution. This procedure is only available for northbound Stock Connect sales.
Based on the investor’s instructions, custodians will transfer shares from the SPSA to the relevant exchange participants or clearing participants between 5.30pm and 7.00pm in order to allow settlement to take place.
“We’re working with custodians and ensuring our platform and technology are ready for phase 2, which will hopefully allow long only clients to become far more active in northbound trading,” said Smith. “A number of other things need to happen to open up the channel fully, but this is a big, positive step and one that long only clients are waiting for. So far, the predominant type of client using northbound has been hedge funds, so it will be exciting to get long only investors more involved.”
There exists a set of brokerage clients – both long only and hedge funds, which still do not have operational or legal approvals from their own legal, compliance or risk managers to access northbound Stock Connect trading. Outstanding issues include those of beneficial ownership and the same day settlement of FX. Smith thinks these are not insurmountable but nevertheless quite challenging in the near term.
“Usage may increase in two distinct phases, one as the operational challenges for long only investors are addressed,” he said. “The next phase will be if and when MSCI or FTSE include China A as a core component of their indices, as passive index money will come into the market to follow the benchmark – and that will increase usage for the Stock Connect.”