Stock Connect

More finessing needed for Hong Kong-China Stock Connect, says DTCC

PUBLISHED : Tuesday, 30 May, 2017, 6:48pm
UPDATED : Tuesday, 30 May, 2017, 10:40pm

Hong Kong-Shenzhen stock connect, the second mutual stock access programme linking with China markets, has been in operation for six months, but more finessing is required to reconcile post-trade complexities involving two different settlement standards inside and outside of China, according to US-based post trade financial services Depository Trust & Clearing Corporation.

After a poor debut, the Shenzhen-Hong Kong Stock Connect programme is recovering. Its northbound flow climbed 79.1 per cent from the previous month to 60.0 billion yuan in March, after a 32.5 per cent increase in February and 3.4 per cent drop in January.

The differences between global standards and China’s unique market requirements open up buyside investors to risks, especially in cases when stock allocation and settlement instructions don’t match, which may in turn, deter foreign investors from entering the A-share market.

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“We’re still finessing different parts of the stock connect as China’s market has matured in a different way after being closed for some time ,” Matthew Chan, Asia Pacific head of product & strategy post trade services at DTCC said.

Roughly 95 per cent of instructions match straight away but the remaining 5 per cent of trades fail for reasons such as having the wrong shares bought, or that the broker was given incomplete or incorrect buy or sell instructions. This will require time to rectify before actual settlement is made, Chan said.

We’re still finessing different parts of the stock connect as China’s market has matured in a different way after being closed for some time
Matthew Chan, DTCC

One example of the need to reconcile differences is that China adopts a T+0 model for the settlement of A-shares, meaning that the securities enter the stock account in the evening of the day they were traded but its funds settlement system adopts a T+1 model, where cash payment will be made 4pm the next day.

For investors in Hong Kong, both cash and stock settlement take place on a T+2 model, or two days after the execution of a transaction, which is called delivery versus payment.

“We are slowly tackling the pain points of foreign investors accessing of Chinese stocks,” Chan said.

Time zone difference is a particular hurdle for US and European investors because trade settlement occurs within the Asian time zone on the same day as the trade, which can be in the middle of their night.

All allocations and instructions must be completed and agreed within a four hour window which closes at 6:00 and 7:00 am New York time. The counter party risk with the broker may be magnified for these investors because of the complexities in managing “failed trades”outside normal trading hours. Technologies in automated matching and confirmation and allocation need to be used to reduce such risks. The Hong Kong exchange is also expected to come up with a solution to address the different standards in the delivery versus payment in funds payment by the end of the year, Chan said.