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HKEx Educates Investors On New Stock Connect

by Mary Swire, Lowtax.net, Hong Kong
14 January, 2015

Hong Kong Exchanges and Clearing Limited (HKEx) has disclosed that it has been working with overseas regulators and institutional investors to facilitate their understanding of, and address their questions about, the Shanghai-Hong Kong Stock Connect (SHKSC).

The SHKSC is a mutual market-access program that allows, for the first time, Mainland investors to trade stocks listed on the Hong Kong Stock Exchange (SEHK) directly through the Shanghai Stock Exchange (SSE) – Southbound Trading – and for Hong Kong and overseas investors to trade stocks listed on the SSE directly through the SEHK – Northbound Trading.

HKEx's efforts have included briefing relevant regulators in Europe and local and overseas fund industry associations; answering questions from the fund industry and overseas regulators regarding SHKSC's legal and regulatory structure; publishing Frequently Asked Questions on the HKEx website; providing supplementary questions and answers to technical issues that concern the fund industry; and updating and liaising with Mainland authorities on the issues it has raised.

Through the above, relevant overseas regulators have gained a clearer and better understanding of Stock Connect, HKEx noted. HKEx understands, for example, that they do not have particular concerns on funds investing in A shares (issued by Chinese companies listed on the SSE) through the new program.

One of the issues frequently raised by investors has been the beneficial ownership of A shares held through the nominee structure established under SHKSC. Initially, some investors were worried that they would not have proprietary rights in the A shares held through Hong Kong Securities Clearing Company Limited (HKSCC), a wholly owned subsidiary of HKEx, as nominee.

However, it is now accepted by investors that they do have beneficial ownership under both Hong Kong law and Mainland China law. This means that investors retain their proprietary rights in A shares even if HKSCC were to become insolvent. Furthermore, the rules of HKSCC enable investors to enjoy their rights as beneficial owners, including receiving dividends and voting through HKSCC as nominee holders.

The current arrangement also allows Hong Kong and overseas investors to hold A shares without requiring them or their fund managers to obtain licenses in Mainland China, thereby removing much of the compliance burden associated with a direct holding structure.

"We understand that the market needs time to get used to the idea of beneficial ownership in shares held through a nominee in the context of Mainland law, even though it is not a new concept under both Mainland and Hong Kong law," said Christine Wong, HKEx's Chief Counsel and Head of Legal Services. "We are committed to making this and other concepts adopted in SHKSC properly understood by investors and other stakeholders."

"We have had some very good discussions with market participants, regulators, and our Mainland counterparts so far, and will continue to work with them to develop SHKSC further," she added.

SEHK has also confirmed that it will shortly stage a system test as it seeks to make covered short-selling of A shares through Northbound Trading available to overseas and Hong Kong investors later this month. This should give investors greater flexibility in trading strategy and risk management.

In March, HKSCC will also test a new system function that will enable it to track investors' stock holdings in its custody. In turn, this should enable institutional investors that hold their A shares through custodians to comply with the Mainland's pre-trade checking requirement without transferring their shares to brokers before execution of a sale transaction.

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