HK-Shanghai through train tweak expected to boost foreign investors’ interest
More large institutional investors in developed markets are expected to take a more active role in the Hong Kong-Shanghai stock connect programme, after the market participants launched a new solution to ease concerns over the pre-trade checking requirement.
The Hong Kong stock exchange rolled out the special segregated account system (SPSA) on Monday at a time when turnover of the stock market has turned robust since the stock through-train scheme was launched in November last year.
Under the revised scheme, investors and institutions can now set up their own SPSA account number that is dedicated to their portfolio and their ownership under their custodian bank, using the unique account to communicate with their services providers like custodians and execution brokers.
“The unique account is completely recognised and utilised by the custody and execution brokers,” Yoo Tae Seok, head of fixed income currency development and client business development at HKEx, said in a briefing yesterday. He expects a wider range of investors will participate in the stock-connect programme after responding to the market demand.
Three of 10 of the largest investment firms in Hong Kong have traded mainland stocks through the stock connect, according to a December survey conducted by the Hong Kong Investment Funds Association (HKIFA), highlighting investors concerns over the pre-trade system that might potentially expose price sensitive information because investors need to move their shares a day before selling the stocks.
The survey, the first of its kind that tracked 41 of the biggest fund houses that manage US$20 trillion globally, showed international big players were in no rush to use the scheme to invest in the mainland, with 65 per cent of the responding members pointing to the pre-trade checking as one of the major problems after beneficial ownership.
“The SPSA model enables managers to use multiple execution brokers anytime and is conducive to best execution,” said HKIFA chief executive Sally Wong.
The industry association welcomes the amendments, which should encourage more investors in different jurisdictions to take part in the stock connect scheme.
Before the adjustment, intuitional investors had to move their shares to the brokerage accounts from custodian banks the day before they want to sell the shares, one of the challenges in stock connect.
“The pre-trade settlement was a key decision point for many institutional investors to consider investing and participating in the programme,” Yoo added.
Under China’s trading rules, there has to be a pre-trade checking of the sell order when investors want to sell their positions, while trade settlement has to be compiled within the same day of the transaction.
It is a major milestone for the stock connect programme, said Yoo, since it allows the HKEx’s cash clearing system and trading system to recognise and verify that shares are in the SPSA accounts for selling.
Barnaby Nelson, Standard Chartered’s regional head of investors and intermediaries for Northeast Asia and Greater China, said this is an extremely positive step in terms of market feedback from global investors. “This is a fundamental kicker in terms of stock connect usability.”
As of last Friday, northbound trade had a net buying of US$16.4 billion in 96 trading days, roughly a full year of foreign net buying of Indian equities, according to Kenneth Kok, an executive director in the securities division at Goldman Sachs.
