Clearing system handles bulk of trades

THE introduction of the Central Clearing and Settlement System (CCASS) in June 1992 was a highlight of the stock exchange's recent history.

Operated by the Hong Kong Securities Clearing Co (HKSCC), the system works like a bank for share certificates. Scrip is lodged in a central repository, where deposits and withdrawals are made by participants.

'It was critical for market development,' the HKSCC chief executive, Richard Heckinger, said.

'The market would not have grown and would not have been considered safe without that step.' CCASS started on a trade-for-trade basis and then moved to continuous net settlement (CNS).

Under CNS, the Clearing Company is the central risk-taker in transactions handled on its network.

It took on the risk of non-delivery or non-payment between brokers and protected itself by making participants comply with its own risk management measures.

Stockbrokers also pay into a guarantee fund to be drawn from in case of broker default.

The Clearing Co is a self-regulator of CCASS participants.

The counter-party risk that CCASS assumed was exposed in the 1987 stock crash and highlighted in the Ian Hay Davison report.

In the 1991-92 HKSCC annual report, then-chairman Ronald Carstairs said the system would become 'the fulcrum on which the development of Hong Kong's securities industry will turn . . . With the introduction of CCASS, the artificial barrier to the growth of our securities industry, raised by the inability of the physical settlement system to handle large trading volumes, has been removed'.

This has proved to be the case but the Clearing Company is trying to develop further products and services.

In June, the HKSCC board decided to bring in house the depository functions currently handled by a contractor.

The exchange uses a T plus 2 settlement system, with cash settlement at 9.30 am on the third day after each transaction.

The CCASS handles about 95 per cent of all trades in active stocks.

In June, the HKSCC started providing its own system back-up following the completion of its new data centre in Quarry Bay.

Stock settlement fees were reduced by 12.5 per cent in July to 0.007 per cent.

With current clearing and settlement technology, it would be physically possible to dematerialise share scrip, replacing it with electronic records.

Mr Heckinger said this would happen only in the long term.

The clearing system was started with a $300-million development loan. It has been re-paid.

Stock trading was further streamlined by the stock exchange's automated matching system.

The use of CCASS is limited to exchange members and certain qualified institutions.

Brokers interviewed by the stock exchange recently complained of the burden involved in keeping detailed client records related to clients' CCASS holdings.

The clearing house has looked into the possibility of allowing direct investor participation, but has encountered complex problems relating to protecting the system.