Hong Kong Shanghai Stock Connect 10 March 2015
Introduction & Welcome Camille Thommes, Director General, ALFI
Hong Kong Shanghai Stock Connect Addressing Market Feedback James Fok, Chief of Staff & Head of Group Strategy, HKEx Christine Wong, Chief Counsel & Head of Legal Services Department, HKEx
Shanghai-Hong Kong Stock Connect Addressing Market Feedback February / March 2015
Important Information The information contained in this document is for general informational purposes only and does not constitute an offer, solicitation or recommendation to buy or sell any securities or to provide any investment advice or service of any kind. This document is solely intended for distribution to and use by professional investors, including certain United States ( U.S. ) institutions and other entities in the U.S. that meet specified criteria (see below for additional information for persons in the U.S.). This document is not directed at, and is not intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Hong Kong Exchanges and Clearing Limited ( HKEx ), The Stock Exchange of Hong Kong Limited ( SEHK ), Hong Kong Securities Clearing Company Limited ( HKSCC ), Shanghai Stock Exchange ( SSE ), China Securities Depository and Clearing Corporation Limited ( ChinaClear ) (together, the Entities, each an Entity ) or any of their affiliates, or any of the companies that they operate, to any registration requirement within such jurisdiction or country. No section or clause in this document may be regarded as creating any obligation on the part of any of the Entities. Rights and obligations with regard to the trading, clearing and settlement of securities transactions effected on the SSE and SEHK, including through the Shanghai-Hong Kong Stock Connect ( Stock Connect ), shall depend solely on the applicable rules of SSE, SEHK, HKSCC and ChinaClear, as well as applicable laws, rules and regulations of Mainland China and Hong Kong. Currently, access to the Northbound Trading Link of Stock Connect is only available to intermediaries licensed/regulated in Hong Kong; access to the Southbound Trading Link of Stock Connect is only available to intermediaries licensed/regulated in Mainland China. Direct access to Stock Connect is not available outside Hong Kong and Mainland China. Although the information contained in this document is obtained or compiled from sources believed to be reliable, none of the Entities guarantee the accuracy, validity, timeliness or completeness of the information or data for any particular purpose, and the Entities and the companies that they operate shall not accept any responsibility for, or be liable for, errors, omissions or other inaccuracies in the information or for the consequences thereof. The information set out in this document is provided on an as is and as available basis and may be amended or changed in the course of the implementation of Shanghai-Hong Kong Stock Connect. It is not a substitute for professional advice which takes account of your specific circumstances and nothing in this document constitutes legal advice. HKEx and its subsidiaries shall not be responsible or liable for any loss or damage, directly or indirectly, arising from the use of or reliance upon any information provided in this document or the presentation given. ADDITIONAL INFORMATION FOR PERSONS IN THE UNITED KINGDOM: This document is being distributed only to, and is directed only at: (a) persons who have professional experience in matters relating to investments who fall within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ) or (b) high net worth entities, and other persons to whom it may otherwise lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as relevant persons ). Any person who is not a relevant person should not act or rely on this document or any of its contents. ADDITIONAL INFORMATION FOR PERSONS IN THE UNITED STATES: The only persons in the U.S. to which this document is intended to be distributed are (i) broker-dealers registered with the U.S. Securities and Exchange Commission and US institutional investors that in each case qualify as qualified institutional buyers, as defined in Rule 144A under the U.S. Securities Act of 1933, as amended; and (ii) international organisations that are excluded from the definition of U.S. person for purposes of Regulation S under such U.S. Securities Act. This document is distributed to such persons for the sole purpose of generally familiarising such persons with the existence and operations of the Shanghai-Hong Kong Stock Connect, as well as the types of products that may be traded through Stock Connect. Any securities mentioned in this document are traded on the SEHK or SSE, and neither of them are registered as national securities exchanges in the United States of America. As such, their services and facilities are not directly available in the United States. The securities mentioned in this document (i) have not been registered for offer or sale with the U.S. Securities and Exchange Commission or any other governmental authority in the United States, (ii) have not been approved by any such authority, and (iii) are not subject to U.S. public disclosure requirements. 5
Agenda 1 Update since launch 2 Addressing investors queries 3 Summary 4 Appendix 6
Agenda 1 Update since launch 2 Addressing investors queries 3 Summary 4 Appendix 7
What is Shanghai-Hong Kong Stock Connect? A mutual market access programme through which Hong Kong and international investors with access to SEHK and Mainland Chinese investors with access to SSE can trade and settle shares listed on each other s market via their existing exchange and clearing house Hong Kong Mainland Regulatory Co-operation Trading Links SEHK* SSE Clearing & CSD Links HKSCC* ChinaClear Note: * SEHK and HKSCC are both wholly-owned subsidiaries of HKEx 8
How Does It Compare to other China Market Access Schemes? Quotas (US$bn) Approved quota 68 55 1 49 48 30 1 Utilised quota 17 Exempt individual quota application? QFII RQFII Stock Connect Exempt lock-ups? Securities accessible? Stocks, bonds and warrants traded on exchanges Fixed income products traded in interbank bond market Funds investing in securities Stock index futures Subset of SSE-listed stocks (569 names) Trading costs 2? $$$ $$$ $ Stock Connect is the most flexible and lowest cost route to access the China onshore market 1 Based on research estimates 2 According to Standard Chartered, investors without QFII / RQFII quota have to borrow quota at 100-200bps whereas trading cost under Stock Connect is only 10-20bps 9
Regulatory Cooperation Clearing & CSD Link Southbound How Does It Operate? CSRC ChinaClear SSE SSE Members/ ChinaClear Participants Mainland investors* Home Market rules A Shares Leverage existing infrastructure HK & overseas investors Order Routin g SSE Subsidiary EPs/CPs Eligible Shares Eligible Shares Hong Kong Shares SEHK SEHK Subsidiary Order Routin g Northbound Mainland Hong Kong Clearing & CSD Link Enforcement Cooperation Gross order routing RMB Super-clearer model HKSCC Regulatory cooperation SFC Stock Connect brings together two different market structures to facilitate seamless cross-border trading * Note: Only eligible Mainland investors can participate in Southbound trading 10
What were the Initial Restrictions? Northbound Southbound Aggregate Quota RMB300bn (~US$48bn) RMB250bn (~US$40bn) Daily Quota RMB13bn (~US$2bn) RMB10.5bn (~US$1.7bn) Stock Eligibility SSE180 + SSE380 Index constituents + Dual-listed A+H shares Hang Seng Large Cap + Mid Cap Index constituents + Dual-listed A+H shares Investor Eligibility No Restrictions Retail investors must have min. RMB500k Initial restrictions imposed for risk management reasons are expected to be relaxed over time 11
How has it Fared Since Launch? Northbound Southbound Total Traded Value (Total Buy + Sell) RMB319bn (~US$51bn) HK$64bn (~US$8bn) Aggregate Quota Utilised RMB105.7bn (35.2% of aggregate quota) RMB24.4bn (9.8% of aggregate quota) Average Daily Traded Value (Daily Buy + Sell) Average Daily Traded Value / Daily Quota RMB5.1bn (~US$0.8bn) 39% HK$1.1bn (~US$0.1bn) 8% % of Total Market Turnover 0.6% 0.5% Operations have been smooth and daily quota has been hit only once (Northbound) Note: Data for 17 Nov 2014 18 Feb 2015 12
Agenda 1 Update since launch 2 Addressing investors queries 3 Summary 4 Appendix 13
What Questions have International Fund Managers Raised about Stock Connect? Beneficial ownership Do investors have beneficial ownership of SSE Securities? How do investors exercise and enforce their rights as beneficial owners? Enforcement rights Will overseas investors be able to bring legal actions in the Mainland? Asset segregation What are the asset segregation and reconciliation arrangements? Settlement pre-trade checking Can the pre-delivery requirement (from custodian to broker) be avoided? Is there flexibility to use broker of choice for entry and exit? Settlement delivery versus payment Can DVP be achieved? Overseas fund managers have raised a number of questions on the Stock Connect structure 14
Concerns of International Fund Managers UCITS Funds 1940 Act Funds Must entrust assets to depositary for safekeeping Depositary s liability not affected by entrusting assets to a third party for safe-keeping Non-US assets may be placed with Eligible Foreign Custodians (Rule 17f-5); and Eligible Securities Depositaries (Rule 17f-7) Trustee must exercise care and diligence in appointing safe-keeping agent Obligation to maintain appropriate level of supervision over agent Must maintain legal separation of non-cash assets held in custody Legal entitlement to the assets should be assured Foreign custody managers must provide reports on material change in foreign custody arrangements Contracts with an Eligible Foreign Custodian must provide for, inter alia: Indemnification / insurance; Free transferability of ownership; Adequate records identifying the Fund US and European fund managers obligations under relevant laws and regulations are capable of being met under the Stock Connect structure 15
What is the Role of HKSCC? Within the Hong Kong Regulatory Framework Under Stock Connect Recognised Clearing House (RCH) approved by the Securities & Futures Commission (SFC) under S37(1) of the Securities & Futures Ordinance (SFO) Central Securities Depository (CSD) and Securities Settlement System (SSS) with rules approved by the SFC Protected under S45 of SFO from insolvency clawbacks due to HK participant defaults Financial Market Infrastructure (FMI) recognised by SFC, IMF and other international bodies Complies with CPMI-IOSCO s Principles for Financial Market Infrastructures (April 2012) Approved as Special Clearing Participant of ChinaClear Responsible for clearing and settling trades executed via Northbound Trading Link with ChinaClear for HK participants Provides Central Securities Depository (CSD) services to Northbound investors Holds SSE-listed securities on behalf of Northbound investors as nominee holder Role of HKSCC recognised by SFC and CSRC and embedded in relevant Stock Connect Rules and Regulations To be recognised as a Third Country CCP under EMIR HKSCC is a CSD, not a custodian/safe-keeping agent its participants include Custodian Participants HKSCC s role as a RCH, CSD and nominee are recognised under the HK regulatory framework and under Stock Connect 16
Holding Structure HKSCC as nominee holder of SSE Securities for investors Beneficial Ownership ChinaClear electronic ROM All A Shares are issued in scripless form Mainland Investor-1 Mainland Investor-2 Mainland Investor-3 HKSCC Omnibus a/c ChinaClear records = electronic registers of members of issuers HKSCC holds SSE Securities as nominee holder for its participants and their clients HKSCC CCASS CP-1 CP-2 CP-3 CP-n CP-1 s Client Records CP-2 s Client Records HK investor HK investor-1 HK investor HK investor-2 HK investor HK investor-3 CP-3 s Client Records HK investor HK investor HK investor CP-n s Client Records HK investor HK investor HK investor All SSE Securities acquired through Northbound Trading Link are held in HKSCC participants CCASS Stock Accounts HKSCC provides CSD and nominee services to participants to assert their rights in SSE Securities through facilitating: voting; dividend distribution; and corporate communications Investors interest in SSE Securities is reflected in their brokers or custodians client records HKSCC has no proprietary interest in SSE Securities Indirect holding structure recognised by CPMI- IOSCO Principles for Financial Market Infrastructures 17
Who is the Owner of SSE Securities? Beneficial Ownership Who is the shareholder on record? Who owns the shares? HKSCC is nominee holder for investors Although securities shall be recorded in the securities accounts of the securities holders themselves, if any of the laws, administrative regulations or the CSRC rules prescribes that the securities shall be recorded in the securities accounts of a nominee holder, such provisions shall prevail. CSRC s Administrative Measures for Securities Registration and Settlement Art 18 Shares bought by investors through Northbound trading shall be registered under the name of HKSCC. CSRC s Several Provisions on Shanghai-HK Stock Connect Art 13 HKSCC shall open an ordinary RMB SSE share account under its name and shall hold the securities held by overseas investors as a nominee holder. ChinaClear s Shanghai-HK Stock Connect Implementing Rules Art 6 Securities registration records issued by ChinaClear shall be valid evidence of the holding of securities. ChinaClear s Registration Rules Art 5 Investors are beneficial owners and have proprietary interest in SSE Securities Investors are entitled in accordance with the law to the rights and interests in respect of shares purchased through Shanghai-Hong Kong Stock Connect. CSRC s Several Provisions on Shanghai-HK Stock Connect Art 13 The holdings of an investor in a listed company include shares registered under such investor s name and shares not registered under such investor s name but voting rights in respect of which may be actually controlled by such investor. CSRC s Administrative Measures for Acquisition of Listed Companies Art 12 Certification on securities holding of the beneficial owner issued by the nominee holder constitutes lawful proof of the beneficial owner s holding of the relevant securities. ChinaClear s Registration Rules Art 5 HKSCC has no proprietary interest in SSE Securities (CCASS R824) HKSCC holds on trust for investors: CA Pacific s case No difference to role for HK listed securities 18
Do Investors have Beneficial Ownership? Beneficial Ownership Acid Test If HKSCC is insolvent, will SSE Securities form part of its bankruptcy assets for distribution to its creditors? Position Hong Kong law No - CA Pacific s case; shares still belong to investors Mainland China law No - investors are real owners of SSE Securities Recognise HK liquidator of HKSCC, will give effect to HK law Is bankruptcy of ChinaClear relevant? Not relevant ChinaClear has no interest in SSE Securities Post-clearing, ChinaClear acts as securities registration institution Investors hold SSE Securities through HKSCC and enjoy proprietary rights as shareholders Comparison with QFII/RQFIIs see slide 30 19
How do Investors Exercise Their Rights as Beneficial Owners? Beneficial Ownership Nominee holder s role under Mainland China law Nominee holders are legally entitled to the relevant rights as securities holders and shall bear corresponding obligations to the relevant beneficial owners. The beneficial owners shall exercise their relevant rights through the nominee holders. When nominee holders exercise the relevant rights as securities holders, they shall consult the beneficial owners in accordance with the instructions of the beneficial owners and shall not harm the interests of the beneficial owners. (ChinaClear Registration Rules Art 5) Rights that may be exercised through HKSCC Voting rights Rights to call and participate in shareholders meetings Right to propose matters for voting at shareholders meetings Right to subscribe for allocated entitlements Right to receive dividends and other distributions Obligations to HKSCC participants set out in CCASS Rules and Operational Procedures Obligation to seek and act on instructions from Participants HKSCC s obligations Services covering all the above - responsible for collecting and distributing dividends to its participants, obtaining and consolidating voting instructions and subsequently submitting a combined single voting instruction to issuers CCASS Rules and OPs approved by SFC, cannot be amended without SFC approval Beneficial owners exercise rights through HKSCC 20
How do Investors Enforce Their Rights as Beneficial Owners? Enforcement Rights Action in Hong Kong courts against HKSCC for failure to perform obligations In Hong Kong HKSCC Participants can directly take action Investors can directly take action or require HKSCC Participants or intermediaries in custody chain to take action Action in Mainland courts against listed issuers Availability of causes of action subject to Mainland China law Where a cause of action is available: HKSCC as nominee holder can take legal action as shareholder on record In Mainland China Mainland law does not specifically provide for or prohibit beneficial owners from taking legal action directly BUT there is legal support for beneficial owners to take legal action directly including: Article 119 of Civil Procedure Law: The plaintiff shall be an individual, legal person or any other organisation with a direct interest in the case If an investor can provide evidence to prove that it is the beneficial owner and has a direct interest, it can bring legal action in Mainland courts in its own name Beneficial owners can enforce their rights in courts as beneficial owners 21
Further Enhancements on Enforcement Rights Underway Enforcement Rights HKSCC rule amendment Proposed rule change to confirm position in March 2015 confirm proprietary interests in SSE Securities belong to investors confirm HKSCC s commitment to provide assistance to bring legal action HKSCC s assistance in enforcing rights Where an investor decides to bring legal action to enforce its rights in Mainland China, HKSCC can provide assistance as necessary, including: providing certification of relevant participant s and investor s holdings in SSE Securities assisting investor in bringing action subject to its statutory duties and satisfaction of reasonable conditions (e.g. payment of fees and cost upfront and indemnities) Article 5 of ChinaClear s Registration Rules: securities holding of the beneficial owner issued by the nominee holder constitutes lawful proof of the beneficial owner s holding of the relevant securities - this recognises HKSCC s certification of investor holdings Proof of investor s holdings HKSCC in discussion with ChinaClear on format of certification Article 3 of CSRC and SFC Joint Announcement on Stock Connect: clearing arrangements will be subject to the regulations and operational rules of the market where clearing takes place If HKSCC and HKSCC Participant s certification of an investor s interest as beneficial owner is acceptable under Hong Kong law, it will be acceptable to Mainland authorities HKSCC will provide assistance to investors if they decide to enforce their rights Comparison with QFII/RQFIIs see slide 30 22
What are the Account Segregation Arrangements? Asset Segregation ChinaClear electronic ROM Mainland Investor-1 Mainland Investor-2 Mainland Investor-3 HKSCC Omnibus a/c HKSCC holds SSE Securities in omnibus account as nominee holder for HK Clearing Participants and their clients Omnibus account segregated from the accounts of ChinaClear s other participants HKSCC CCASS CP-1 CP-2 CP-3 CP-n HKSCC Clearing Participants and Custodian Participants hold SSE Securities in CCASS Stock Accounts Participants can open one or more subaccount (Stock Segregated Accounts) to segregate clients assets CP-1 s Client Records CP-2 s Client Records HK investor HK investor-1 HK investor HK investor-2 HK investor HK investor-3 CP-3 s Client Records HK investor HK investor HK investor CP-n s Client Records HK investor HK investor HK investor Each participant s account is segregated from the accounts of HKSCC s other participants Investors interest in SSE Securities is reflected in their brokers or custodians client records HK brokers hold clients assets on trust under HK law HK brokers regulated by SFC and are required to keep separate records for each client 23
What are the Reconciliation Procedures to Ensure Accuracy of Holdings at Different Levels of the Structure? Asset Segregation Reconciliation procedures specified in CSD and Clearing Links Agreement Reconciliation procedures specified in CCASS Rules ChinaClear HKSCC ChinaClear as host CCP & CSD of SSE Securities Provides daily files on stock movements and stock balances to HKSCC HKSCC as a participating CCP & CSD of ChinaClear Reconciles daily files provided by ChinaClear against its own records Provides daily reports / files on stock movements and stock balances + enquiry functions to its participants Major types of share movements in CCASS Settlement of Northbound trades Share transfers initiated by brokers/custodians between their CCASS Stock Accounts (i.e. Settlement Instructions or SIs) Nominee activities (e.g. bonus share payment) HKSCC Participants Participants of HKSCC Reconcile daily files / reports / enquiry results provided by HKSCC against their internal records HKSCC publishes shareholding information per stock per participant on a daily basis via the HKEx website 24
Pre-trade Checking How does it work today? Pre-trade Checking Hong Kong Brokers Place sell order CSC Passed Pre-trade Checking? Yes No Route order to SSE SSE Reject order What is Pre-trade checking? A mechanism to ensure investors will have sufficient shares to settle their sell trades Sell orders will be rejected if the investor s cumulative sell quantity in that stock for the day is higher than its stockholdings at market open Hong Kong brokers are responsible to ensure that they have in place procedures and systems to prevent their clients (i.e. investors) from day trading and overselling of SSE Securities How to ensure compliance with Pre-trade checking? Investors can transfer shares to the selling Hong Kong brokers on T-1 day, or Investors can also request their custodians to input instructions in CCASS to transfer shares to the selling Hong Kong brokers by 7:30am on T day, for settlement at 7:45am In order to comply with SSE's pre-trade checking requirements, investors holding shares with custodians must transfer shares to the execution broker before trading 25
Pre-trade Checking What enhancements are we making? Pre-trade Checking 1 Custodian SPSA 1 SPSA 2 SPSA 3 CCASS GCP 1 DCP 1 DCP 2 2 CSC Passed Pre-trade Checking? 3 Place sell order for institutional investor Hong Kong Brokers Yes No Route order to SSE Reject order SSE 4 How does it work? As an add-on to existing model: 1 2 3 4 Custodians* upon investors requests to open Special Segregated Accounts (SPSA) and CCASS will generate a unique Investor ID. The SPSAs are for keeping shareholding of investors separately CCASS will snapshot SSE Securities holdings under custodians SPSAs and replicate to CSC to facilitate Pre-trade Checking Investors should inform its designated EPs the assigned Investor IDs for Pre-trade Checking when placing sell orders Custodians transfer shares from the SPSA to the relevant Clearing Participants for settlement (based on investors instructions) Under enhanced model, investors who use custodians only transfer SSE Securities to Clearing Participants after sell order execution (post-trade delivery) * Including GCPs who are non-eps and Custodian Participants of CCASS 26
Settlement Delivery Versus Payment Delivery Versus Payment Free of Payment (FOP) Settlement A feature of the SSE market Transferring shares on T and receive cash on T+1 Note HKSCC is a Central Counterparty and guarantees performance Delivery versus Payment (DVP) Settlement DVP can be provided by brokers or custodians using Model B or Model C where the broker or custodian will extend credit or make special arrangements with investors Solutions available Some brokers and custodians have developed solutions DVP settlement solutions have been developed by the market 27
Agenda 1 Update since launch 2 Addressing investors queries 3 Summary 4 Appendix 28
Summary Stock Connect is the most flexible and lowest cost way of accessing onshore China equities Regarding outstanding questions raised by international fund managers: Do investors have beneficial ownership? YES Can investors enforce their rights? NO EXPRESS PROHIBITION ON DIRECT ENFORCEMENT, AND HKSCC WILL ASSIST WHERE NECESSARY Are assets properly segregated? YES Are investors able to avoid pre-trade transfers? YES, PRE-TRADE CHECKING ENHANCEMENT EFFECTIVE IN MARCH 2015 Are investors able to achieve DVP? YES, MARKET PARTICIPANTS HAVE DEVELOPED/ARE DEVELOPING SOLUTIONS 29
More Information Available on HKEx Website Designated webpage for Shanghai-Hong Kong Stock Connect by HKEx http://www.hkex.com.hk/eng/csm/chinaconnect.asp?langcode=en Information Book and FAQ for Investors and Supplemental FAQ to fund industry http://www.hkex.com.hk/eng/market/sec_tradinfra/chinaconnect/investorinfo.htm http://www.hkex.com.hk/eng/newsconsul/hkexnews/2015/documents/issues%20concerning%20shanghai -Hong%20Kong%20Stock%20Connect.pdf General Rules of CCASS http://www.hkex.com.hk/eng/rulesreg/clearrules/ccassgr/ccassrule.htm Note: Chapters 41 and 42 are new chapters specific to Shanghai-Hong Kong Stock Connect CCASS Operational Procedures http://www.hkex.com.hk/eng/rulesreg/clearrules/ccassop/ccassoptpcd3.htm Rules of the Exchange http://www.hkex.com.hk/eng/rulesreg/traderules/sehk/exrule.htm Note: Chapters 14, 14A and 15 are new chapters specific to Shanghai-Hong Kong Stock Connect CCASS Shareholding search http://www.hkexnews.hk/sdw/search/search_sdw.asp Note: Provides CCASS shareholding information for the past 12 months, on a per stock per Clearing Participant basis Bi-Weekly Investor Newsletter http://www.hkex.com.hk/eng/market/sec_tradinfra/chinaconnect/newsletter.htm Note: Regular investor newsletter updates on trading statistics of the programme, trading calendars and economic data calendars 30
Agenda 1 Update since launch 2 Addressing investors queries 3 Summary 4 Appendix 31
RMB bn RMB bn Northbound & Southbound Aggregate Quota Usage 120 100 Aggregate Quota Usage (17 Nov 14-17 Feb 15) Northbound Quota Limit (RMB300 bn) 105,7 30 25 Aggregate Quota Usage (17 Nov 14-13 Feb 15) Southbound Quota Limit (RMB250 bn) 24,4 80 20 60 40 20 0 15 10 5 0 Source: HKEx, as of 17 Feb 2015 32
Comparison between Stock Connect and QFII/RQFII Schemes QFII/RQFII Stock Connect Northbound CSRC approval Required QFII/RQFII qualification Not required for investors SAFE approval Required - Individual quota for each QFII/RQFII Not required Stock Connect quotas applicable to all investors HK licensing requirement Required Type 1/Type 9 SFO licensing Not required for investors, brokers or fund managers Clearing ChinaClear ChinaClear (host CCP) and HKSCC (participating CCP) Broker origination China, maximum three brokers each on SSE, SZSE and CFFEX Hong Kong, theoretically unlimited number of brokers Investment scope Stocks, funds, listed and interbank bonds stock index futures Subset of SSE-listed stocks (569 names) SSE 180/380 & A+H Transfer of quota Prohibited No restrictions not subject to individual quota Cross-border remittance 1 year lock up (n/a to open-ended funds) and restrictions on fund repatriation No restrictions Block trade Allowed Not allowed subject to the non-trade transfer exemptions, generally no SSE off-exchange transactions are allowed. Currency inflow QFII - USD with onshore conversion ; RQFII - RMB (CNH) RMB (CNH) Tax Not subject to Business Tax; since 17/11/14, not subject to CGT Not subject to Business Tax and CGT Pre-trade checking and settlement method Pre-trade checking applicable to cash (buyer) and shares (seller) Delivery of shares on T, payment on T+1 Applicable to shares (seller) Deliver of shares on T, payment on T+1 Onshore account proprietary client money open-ended fund HKSCC Account type R/QFII s own account omnibus a/c - R/QFII as nominee holder for investors segregated a/c - R/QFII as nominee holder for investors with designation omnibus account at ChinaClear - HKSCC as nominee holder for investors segregated accounts of HK participants at HKSCC Special status as CSD Not applicable No No Yes Enforcement right of investors Yes, holder on record Not holder on record, R/QFII can sue, no express prohibition on direct enforcement Not holder on record, R/QFII can sue, no express prohibition on direct enforcement Not holder on record; HKSCC can sue, no express prohibition on direct enforcement 33
New Regulations on Stock Connect Hong Kong Amendments to SEHK s Trading Rules on SH-HK Stock Connect Mainland CSRC Several Provisions on the Pilot Programme of SH-HK Stock Connect Amendments to HKSCC s Clearing Rules and Procedures on SH-HK Stock Connect Amendments to SEHK s Operational Procedures on Stamp Duty Collection Amendments to SEHK s Disciplinary Procedures SSE s SH-HK Stock Connect Pilot Programme Provisions ChinaClear s Implementing Rules for Registration, Depository and Clearing Services under SH-HK Stock Connect MOF, SAT and CSRC Notice on Taxation Policy on SH-HK Stock Connect SFC s FAQ on A-share Rights Issue Prospectuses PBOC & CSRC s Notice on SH-HK Stock Connect CSRC s Filing Requirements for HK Listed Issuers Making Rights Issues to Mainland Shareholders via SH-HK Stock Connect 34
Stock Connect Legal Documentation Four-Party Agreement: SEHK, SSE, HKSCC & ChinaClear Trading Links Agreement: SEHK, SEHK SPV, SSE & SSE SPV Clearing Links Agreement: HKSCC & ChinaClear Other Agreements: Northbound order-routing services agreement: SEHK & SEHK SPV Clearing agency agreement (Northbound): SEHK SPV & HKSCC Clearing agency agreement (Southbound): SSE SPV & ChinaClear Clearing Participant Agreement (Northbound): HKSCC as participant of ChinaClear Clearing Participant Agreement (Southbound): ChinaClear as participant of HKSCC Agreements with BOC (HK & Shanghai) re RMB fund flow Regulatory MOU: SFC & CSRC 35
HKSCC s role: CSD, custodian or safe-keeping agent? HKSCC s role CSD, not custodian or safe-keeping agent HKSCC complies with CPMI-IOSCO s Principles on Financial Market Infrastructures Regulated by SFC and recognised by IMF Will be subject to HK s resolution regime for financial market infrastructures Is nominee holder s role consistent with CSD s functions? Yes, the indirect nominee holding structure is recognised by CPMI-IOSCO s Principles CPMI-IOSCO s description: What is a CSD? A CSD provides securities accounts, central safe-keeping services, and asset services, which may include the administration of corporate actions and redemptions. A CSD can hold securities in physical form or in dematerialised form. The activities of a CSD may vary depending on whether it operates in a jurisdiction with a direct or an indirect holding arrangement or a combination of both. An indirect holding system employs a multi-tiered arrangement for the custody and transfer of ownership of securities in which investors are identified only at the level of their custodian or intermediary. In many countries, a CSD also operates a securities settlement system which enables securities to be transferred and settled by book entry according to a set of predetermined multilateral rules. HKSCC acts as a CSD; nominee holder s role is consistent with its CSD functions 36
Panel Shanghai and Hong Kong Stock Connect Martin Dobbins Senior Vice President, Managing Director, State Street Bank Luxembourg, and Chairman of ABBL/ ALFI Depositary Forum
Panel Shanghai and Hong Kong Stock Connect Yvan De Laurentis Head of Depositary and Fiduciary Services, BNP Paribas Securities Services Sonia Biraschi General Manager, State Street Bank Luxembourg Hermann Beythan Partner, Linklaters LLP Johan Schreuder Managing Director, Investec Asset Management, Lux.
Introduction Yvan De Laurentis, Head of Depositary and Fiduciary Services, BNP Paribas Securities Services
Agenda 1. Introduction 2. Timeline 3. Which Stock Connect models exist? 4. Stock Connect as of today 5. Benefits of Stock Connect 6. Matters for consideration 7. Future outlook 8. An asset manager case-study 9. Q&A from the audience 40
2. Timeline Enhanced model expected live date SFC and CRSC jointly annouced the launch of the Stock Connect Platform Shanghai and Hong Kong Stock Connect phase 1 is officially live Initial quotas for overseas investors are set both at daily and aggregate levels Enhanced model presented March 2015 A southbound and a northbound models have been presented As expected, during the first sessions, quotas are reached within a few hours Dec 2014 Jan-Feb 2015 The latter opens the door to China A-shares to overseas investors, in addition to the (R)QFII framework 10 Apr 2014 10/03/2015 Jun-Oct 2014 The Depositary working Group at Alfi starts analysing the impacts for the funds industry of the new set-up Preferred model is chosen 17 Nov 2014 Nov-Dec 2014 The Depositary Working Group presents to the Regulator its final analysis on the platform on the 24th Nov 2014 Alfi issues a press release on the 2 nd Dec 2014 confirming the support of the Lux market place to the new initiative ahead of every other European market. Alfi meets with SFC and HKEx in Hong Kong Follow up conf-call is held between the Group and HKEx representatives in order to discuss regulatory and operational challenges posed by phase 1 and and further improvements brought by the enhanced model. 41
3. Which Stock Connect Models exist? Model 1 Standard market practice model (Agency Broker Model) Depositary affiliated or non affiliated to sub custodian and/or broker Account Sub-Fund 1 Most common set-ups Not supported for Lux domiciled funds Broker type 1 Affiliated to HK sub custodian &/or depositary Broker type 2 Not affiliated to HK sub custodian &/or depositary Broker type 3 Not affiliated to HK sub custodian &/or depositary HK Sub custodian & GCP Sub-custody Depository omnibus or by sub-fund Broker Account @ GCP Broker 1 account Broker Account @ GCP Broker 2 account Other GCP Broker Account @ GCP multiple client a/c Broker type 4 & DCP Not affiliated to HK sub custodian & depositary 1 1 Account HK Sub custodian with multiple sub omnibus accounts that segregate securities by product: - proprietary assets - brokerage assets - HK sub-custody assets - Stock Connect assets - etc Account GCP / Broker 3 account Account DCP = broker 4 account HKSCC Hong Kong securities clearing company 1 1 CSDCC China Securities depositary and clearing corporation Limited ( ChinaClear ) Account 1 jumbo HKSCC Nominee account Segregation client assets segregated from proprietary assets & daily reconciliation (verbal confirmation only for HKSCC to CSDCC) 42
3. Which Stock Connect Models exist? Model 2 Single broker solution (Broker affiliated to sub-custodian which acts as GCP) Depositary affiliated or non affiliated to sub custodian and/or broker HK Common set-up Broker type 1 Affiliated to sub custodian HK &/or depositary Account Sub-Fund HK Sub custodian & GCP Sub-custody Depository omnibus or by sub-fund Broker Account @ GCP Broker 1 account 1 1 Account HK Sub custodian with multiple sub omnibus accounts that segregate securities by product: - proprietary assets - brokerage assets - HK sub-custody assets - Stock Connect assets - etc OMNIBUS HKSCC Hong Kong securities clearing company 1 CSDCC China Securities depositary and clearing corporation Limited ( ChinaClear ) Account 1 jumbo HKSCC Nominee account Note: HK sub custodian offering model 2 may also offer model 1. 1 Segregation client assets segregated from proprietary assets & daily reconciliation (verbal confirmation only for HKSCC to CSDCC) 43
3. Which Stock Connect Models exist? Model 3 Multiple external brokers with sub-custodian acting as GCP Depositary affiliated or non affiliated to sub custodian and/or broker Account Sub-Fund HK Sub custodian & GCP 1 Account CSDCC China Securities depositary and clearing corporation Limited Common set-up 2 Broker type 1 Affiliated to HK sub custodian HK &/or depositary Broker type 2 Not affiliated to HK sub custodian & depositary Sub-custody Depository omnibus or by sub-fund Broker Account @ GCP Broker 1 account Broker Account @ GCP Broker 2 account 1 HK Sub custodian with multiple sub omnibus accounts that segregate securities by product: - proprietary assets - brokerage assets - HK sub-custody assets - Stock Connect assets - etc HKSCC 1 ( ChinaClear ) Account 1 jumbo HKSCC Nominee account 2 Brokers to give up their self clearing license and for the HK sub custodian to act as GCP Note: HK sub custodian offering model 2 may also offer model 1. 1 Segregation client assets segregated from proprietary assets & daily reconciliation (verbal confirmation only for HKSCC to CSDCC) 44
Stock Connect as of today Sonia Biraschi, General Manager, State Street Bank Luxembourg
4. Stock Connect as of today Quota Information Northbound 9 March 2015 Quota usage (RMB) (%) Aggregate Quota - Opening Balance 190,268 Mio 63% Daily quota balance (as of 15:01) 12,335 Mio 94% Turnover Northbound 9 March 2015 (15:55) Buy and Sell Trades Buy Trades Sell Trades RMB 3,823 Mio 2,206 Mio 1,617 Mio Source: Hong Kong Exchanges and Clearing Limited (HKEx) 46
4. Stock Connect as of today 1. Where are we? Live on Stock Connect Regulatory filing with CSSF completed and awaiting approval Interest raised and starting Stock Connect project No interest raised 2. Which interest? Asset managers following passive and active investment strategies Mainly UCITS and also non UCITS & segregated accounts Different investment weightings (from 100% to below 5%) Mix of RQFII and Stock Connect or RQFII/Stock Connect on stand alone basis New versus existing UCITS with different base currencies (e.g. EUR, USD, RMB) Different share classes (e.g. EUR, USD, GBP, RMB) 47
Benefits of Stock Connect Hermann Beythan Partner, Linklaters LLP
5. Benefits of Stock Connect 1. RQFII brought greater flexibility compared to QFII 2. Stock Connects brings even greater flexibility in terms of a. Market access no need to request a quota b. Time to market few weeks versus 6 months to start investing into China A shares c. Liquidity of the investment possibility to enter/exit the market at any time d. Investment strategies possibility to rebalance portfolio easily (asset allocation) 49
Matters for consideration Yvan De Laurentis, Head of Depositary and Fiduciary Services, BNP Paribas Securities Services
6. Matters for consideration 1. Counterparty risk vis-à-vis the broker the operating model for trading on the Shanghai and Hong Kong stock Connect Platform foresees a pre-trade delivery of the shares in T-1 to the broker account 2. Role of HKSCC in the custody chain CSD, market infrastructure and/or sub-custodian 3. Enforcement of rights of the nominee holder the PRC law authorizes only recognized beneficial owners to bring legal actions into Chinese courts 4. Market liquidity the authorities have set a quota mechanism, both at daily and aggregate level, for SSE securities traded through the Stock Connect platform 51
Future outlook Sonia Biraschi, General Manager, State Street Bank Luxembourg
7. Future Outlook Phase 2 of the Platform 1. Stock Connect Phase 2 enhancements Creation of Special Segregated Accounts (SPSA) and unique Investor ID Multiple broker model Some considerations Settlement process and counterparty risk Single sided settlement process 2. Shenzhen-HK Connect expansion with potential launch in Q3 2015 3. Short selling of China Stock Connect securities (new circular posted 26 Feb - to be analysed) 53
An asset manager case-study Johan Schreuder, Managing Director, Investec Asset Management, Luxembourg
8. An Asset Manager Case-study 1. Daily and aggregate quotas 2. Pre-funded purchasing 3. Beneficial ownership 4. T-1 delivery on sale 5. Risk disclosure 55
Thank You!