A new Stock Connect model for pre-trade checking accounts has been heralded by one custodian bank as making the service “there for the taking” for global institutional investors.
The new trade settlement system known as the Special Segregated Account Model (SPSA) launched this week in a bid to fix the problem of position checking when selling northbound shares.
The new model places custodian banks at the centre of the reforms. Investors are able to set up a dedicated account for their portfolios and ownership, under the custodian bank. That same account will also be used as the executing brokerage account.
The existing problem was that investors had to previously use an executing broker, which must be the same firm as their custodian, or, had to transfer those shares to the broker the day before.
Speaking at a roundtable event today, Barnaby Nelson, head, investors & intermediaries, transaction banking, Greater China & Northeast Asia, Standard Chartered, said that there were no longer any “critical points pending” in relation to the development of Stock Connect.
“One of the challenges was that there was this broker/custodian lock-in, so non-custodian and non-prime brokers weren’t able to participate and benefit from the opportunities that Stock Connect presents,” he added.
“As of yesterday there are people choosing their custodian, choosing their brokerage on a best of breed basis and now they are finally able to fulfil all their regulatory requirements including MiFID in a way there were never able to beforehand.”
Upon the investor’s request, the custodian participant and non-broker General Clearing participant can open an SPSA, and CCASS – Hong Kong Exchange’s settlement system - will assign an investor ID for that account.
Under regulations governing Stock Connect, there has to be pre-trade checking of the sell trades when the investors want to sell their positions, and the trade settlement has to be complied with on the same day of the transaction.
Tae Yoo, head of client business development and FIX development, global markets division at Hong Kong Exchanges and Clearing, described the launch as a “major milestone in further enhancing the Stock Connect program”.
“Since the launch we have been working with market to understand the issues, and we have what we do believe is, a solution which will address the market demand,” he added.
Nelson added that foreign participation should be set to rise due to the new model, with investors able to meet stringent regulations while using Stock Connect.
“In terms of market feedback, clients we have spoken to across Asia – Korea, Taiwan, Singapore, Hong Kong, Japan – in Europe and America, this best execution and choice of brokers point has been highlighted as the fundamental ‘kicker’ in terms of Stock Connect usability,” he added.