A launch date of the 30th of March for the new stock connect account model has been set. Confirmation of the rules and regulations were published on Thursday 20 March.
The new account ID process, to be known as the ‘Special Segregated Account Model’ (SPSA), tackles the problem of position checking when selling northbound shares.
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. That check gives a ‘snapshot’ of the account. The investor has to pass over the Investor ID which is sent on the order. Hong Kong Exchange’s China Stock Connect System checks the centrally managed inventory repository to ensure that they have the shares available. 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.
“The account snapshot is done at CCASS level and the custodians manage the SPSAs. CCASS is the ultimate share registry and the custodians, which act a mirror of CCASS, are a sub-registry of that,” explained Barnaby Nelson, the regional head for Northeast Asia and Greater China transaction banking at Standard Chartered.
An investor previously had to use an executing broker which was the same firm as his custodian, or, had to transfer those shares to the broker the day before. That process was difficult for long-only clients to manage.
“With the release of the new model and the influx of money from the Luxembourg and Irish funds, I anticipate that will lead to the aggregate quota being exceeded in a couple of months and being reset,” said Nelson. “MSCI do their re-evaluation around June, so there is a school of thought that says that their concerns around liquidity of A shares – which was their difficulty last time, will have been addressed by then – and as a result they will give a green light, which means that there would be a 5% MSCI allocation to China next year, which would be worth US$320 billion in assets under management.”
His firm now only acts as a broker-neutral custodian, having got rid of its equity broking business late in 2014. As a custodian, they have to integrate with all the big brokers so they can work together automatically. His bank participated in the working group, along with Barclays, Nomura, CLSA and Statestreet, that originally requested the SPSA model in September 2014.
The issue of beneficial ownership is also close to being solved, with Luxembourg having approved the Stock Connect, and Dublin expected to follow suit. That approval will require changes to fund prospectuses that will formally permit such European funds to participate.
The new account model also alleviates concerns over beneficial ownership. When an account is opened, the fund’s asset manager and fund’s name appear on the account and they are treated as the beneficial owner of whatever stocks are in it. The exchange will issue a certificate to confirm that.
“The segregated account would be supportive of the legal enforceability of what we do in Hong Kong, as the exchange has said that the share certificates that they produce should be legally enforceable in China. Investors’ names will be on the certificates,” said Nelson. “Rather than the ability to sue issuers, the issue is more to cover the event were the Hong Kong Exchange were to go bankrupt. The problem being of a single omnibus account in China, where everything was cleared through a single account and having to identify ownership in the event of an unwinding.”