Ton-up for Stock Connect, but challenges remain

Over 100 participants in Hong Kong have signed up for the new Shanghai Hong Kong Stock Connect, the pipeline for two-way securities investment between the mainland and Hong Kong which is scheduled to go live this year. Nevertheless, there are still hurdles to overcome.

Over 100 participants in Hong Kong have signed up for the new Shanghai Hong Kong Stock Connect, the pipeline for two-way securities investment between the mainland and Hong Kong which is scheduled to go live this year. Nevertheless, there are still hurdles to overcome.

Among those obstacles is the issue of pre-delivery.

“There are challenges for the buy-side. The T -1 pre-delivery is a particular hurdle– involving the transfer of shares to an outside party,” said Christine To, the head of Asian Trading at T. Rowe Price Hong Kong.

Additional preparations for the Shanghai Hong Kong Stock Connect have been delineated by Charles Li, the chief executive of Hong Kong Exchanges and Clearing (HKEx). He said that 110 broker participants representing 80% market share have submitted applications. That number is comprised of 104 exchange participants and six clearing participants.

Getting the message out has been a busy part of the process according to Li. 600 institutional buy-side firms in Hong Kong and overseas have been covered, and 3,500 investors on the mainland have been reached via conferences and training sessions.

More details have percolated out about the mainland’s state of readiness. For pre-trade checking, there will be an additional transfer process for custodians to transfer shares on the morning of the trade day. For quota management, the system function is ready to restrict the order input price to a prescribed percentage above (or below) the market price. Free real-time A share market data will be provided every five seconds.

There are also mainland issues that remain outstanding. HKEx says that clarity on tax issues should be resolved soon. There is still discussion about Rights Issues, and that will be finalised before launch. Matters surrounding securities borrowing and lending have been ‘largely resolved’ and details are pending.

HKEx’s internal system development has been completed and the exchange is now conducting a four-party test with the Shanghai Stock Exchange and ChinaClear. A functionality test for market participants is taking place until mid-August and a market rehearsal will be carried out from the end of August until mid-September.

A connectivity test takes place on 23 August, with market rehearsals on 30 August and 13 September, a third rehearsal will take place in late-September, if needed. Li said that, “a smooth and steady launch is more important than a big bang,” and predicted this was the beginning of a historic opening up. At this stage, the Stock Connect looks to be a must-have access for Hong Kong’s buy-side.

“Stock Connect is important to me as a trader, as well as for our investment staff,” added Christine To. “We have a QFII quota, but as everyone knows, there are limitations when using QFII. We definitely want to participate in the Stock Connect and it is on our radar screen. Our internal committee is looking closely at implications for trading, back-office, legal/compliance, risk and portfolio modelling.”

HKEx said that draft amendments to the Rules and Operational Procedures are being finalised and will be published in due course, with various approvals being sought with related authorities.

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