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Governance Outlined For HK-Shanghai Connect Trading

by Mary Swire, Lowtax.net, Hong Kong
16 May, 2014

In reply to questions in Hong Kong's Legislative Council, the Secretary for Financial Services and the Treasury, Professor K C Chan, addressed the problems of cross-boundary regulation and the establishment of an effective anti-money laundering regime within the pilot for mutual stock market access between Hong Kong and Shanghai.

Last month, the China Securities Regulatory Commission (CSRC) and Hong Kong's Securities and Futures Commission (SFC) approved, in principle, the development of Shanghai-Hong Kong Stock Connect (SHKSC), a pilot program for establishing stock market trading links through local securities firms or brokers.

For the first time, the pilot program will allow eligible Mainland investors to trade stocks listed on the Stock Exchange of Hong Kong (SEHK) directly through the Shanghai Stock Exchange (SSE). At the same time, it will also allow Hong Kong and overseas investors to trade for the first time stocks listed on the SSE directly through the SEHK. The preparatory work to launch SHKSC will take approximately six months.

It was announced that SHKSC would be founded on the existing rules and regulations and operational models. Trading and clearing arrangements will be subject to the regulations and operational rules of the market where trading and clearing take place.

In addition, it was said that the CSRC and the SFC would each take all necessary measures to establish, in the interests of investor protection, an effective regime under SHKSC to respond to all misconduct in either or both markets on a timely basis.

Chan has now specified that the CSRC and the SFC will upgrade their bilateral agreement to strengthen enforcement co-operation in respect of the referral and information exchange mechanisms concerning: improper activities; and investigatory co-operation in relation to cross boundary illegal activities, including disclosure of false or misleading information, insider dealing, and market manipulation.

There will be a dedicated SHKSC liaison mechanism to deal with any issues that may be encountered during the pilot program that may require joint resolution. The launch of SHKSC will only occur when relevant trading and clearing rules and systems have been finalized and all regulatory approvals have been granted.

Therefore, with regard to possible increased money laundering risks arising out of SHKSC transactions, Chan was able to assure his questioner that its cross-boundary trading will be conducted within closed settlement and clearing arrangements, and will be subject to comprehensive risk management measures.

Within such arrangements, SHKSC will ensure the money that flows into its system can only be used for trading eligible Mainland A-shares or Hong Kong shares. Upon the sale of shares, the funds obtained will flow back to their originating market through the respective clearing system, and will not be able to remain in the other market or be used to buy other asset classes therein.

He added that the existing Guideline on Anti-Money Laundering and Counter-Terrorist Financing provides specific guidance to assist licensed corporations, registered intermediaries, and their senior management in Hong Kong to formulate and implement their own anti-money laundering and counter-terrorist financing policies, procedures, and controls.

The requirements in the Guideline are the same for dealing in local shares or shares listed on markets outside Hong Kong (including A-shares to be traded via SHKSC), and the SFC can take enforcement actions against licensed corporations or registered intermediaries failing to comply with the customer due diligence and record-keeping requirements.

Furthermore, when Mainland brokers receive orders from clients to trade Hong Kong shares via SHKSC, they will be required to take appropriate measures to handle such clients' transactions in accordance with the Mainland laws and relevant regulations.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp

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