Download HKEx to Consult Market on Infrastructure for Clearing and Settlement

HKEx always supports efforts to make Hong Kong a more cost-effective and efficient financial services centre. The
proposals for a scripless securities market and enhancement of the Investor Participant (IP) Account service were initiated
by the Government and the Securities and Futures Commission (SFC). A scripless market was proposed in the report
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of the first Steering Committee on the Enhancement of the Financial Infrastructure (SCEFI) published in September
1999 and was further elaborated in the report of the re-constituted steering committee (SCEFI II), which was published
in August 2002. Enhancement of the IP Account has been considered with a view to achieving the objective advocated
in the SCEFI II report for more efficient settlement of securities trades at the retail investor level. The Report of the
Working Group on the Business Environment of the Stockbrokers Industry (WG Report) published in April 2003 also
recommends the SFC and HKEx to develop a user-friendly and cost-effective IP account mode with straight-through
processing capability. The concept of Third Party Clearing was initiated by HKEx in 2001 and the implicit model is
now incorporated as the Clearing Participantship Structure in the SCEFI II report.
HKEx is actively reviewing these initiatives and plans to consult the market on them in the third quarter of 2003. For
the consultation, HKEx will flesh out the details of these initiatives and their implications for the market, market
participants and the investing public. HKEx believes it is essential to gauge the views of various parties concerned
before deciding on whether and how to take these initiatives forward.
Scripless Market
According to the SCEFI report and the consultation paper on scripless trading published by the SFC in February 2002,
a scripless securities market is expected to enable straight-through processing (STP), eliminate risks associated with
share certificates, reduce the cost of ownership transfer and enhance processing efficiency of securities transactions.
HKEx supports, in principle, moving towards a scripless environment. However, it is also obvious that a scripless
market or dematerialisation would have profound implications for the market as a
whole, the investing public, issuers, various market intermediaries including
stockbrokers, custodians and share registrars, and not least the Central Clearing
and Settlement System (CCASS). These implications should be examined
carefully before a decision is made on how best to achieve the stated objectives
that a scripless market is expected to bring about. The consultation paper
HKEx aims to produce will discuss this in detail.
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The Steering Committee on the Enhancement of the Financial Infrastructure (SCEFI) was first appointed by the Financial Secretary in March 1999
to study and recommend the necessary improvements to the financial structure of Hong Kong. SCEFI published its report in September of the same year.
SCEFI was re-constituted in end 2000 (commonly referred to as SCEFI II) to follow up on the work and further the objectives of the first SCEFI.
SCEFI II published its report in August 2002.
July 2003
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Enhancement of
IP Account Service
The IP Account service has always been a controversial issue because it touches upon the key functions of the Hong
Kong Securities Clearing Company (HKSCC) and those of its Participants, namely brokers and custodians. The current
IP Account, which is essentially a stock custody account, is the result of lengthy market discussion since the inception
of CCASS in 1992 and a public consultation in 1996. So far, it has had only limited success.
Since December 2002, HKEx has been working with the SFC and market participants to develop an STP model of the
IP Account. Under that model, investors could be in a better position to directly settle their trades through the IP
Account in respect of both securities and money. Such settlement services at the client level are currently provided by
brokers and custodians.
While HKEx believes that the proposed model is technically feasible, it would require considerable capital investment
and heavy recurrent operating expenses on HKEx’s part. A viable business case underpinning that model is therefore
crucial to HKEx. The success of that model is contingent upon the strong support of investors, brokers and custodians,
and the cooperation of banks. HKEx therefore believes it is important to present to the market, brokers, custodians,
banks and above all, investors, the details of how that model is expected to work. In addition, the long-term implications
of the model to HKEx’s market structure and the functions of intermediaries need to be fully understood. The market
should have the opportunity to fully debate the pros and cons of the model before a decision is made. Besides the
proposed model, the consultation paper will include alternatives for enhancing the current IP Account service and a
discussion of their different implications for the market.
The WG Report recommends that the implementation of a user-friendly and cost-effective version of the IP Account
could assist small and medium-sized brokerages in strengthening their competitiveness in the current business
environment. HKEx will prepare a detailed response to the recommendation of the Working Group after it has analysed
market comments on the consultation paper and carefully examined the business cases for the possible IP Account
enhancement models.
Third Party Clearing
HKEx put forward the implicit model for Third Party Clearing (TPC) for market comments in a consultation paper
published in July 2002. A total of 16 submissions were received, comprising seven from banks, four from Exchange
Participants and five from professional associations and groups representing the industry. While the respondents in
general welcomed the introduction of TPC, its benefits to the market were questioned by some, in particular by the
small and medium-sized brokers. Meanwhile, in response to market comments, HKEx is revisiting the explicit model
(where individual trade could be given up by one Broker Participant and taken up by another before netting, clearing
and settlement in CCASS). As a result, when the conclusions to the July 2002 consultation paper on TPC are published
the report will include a revised implicit TPC model and details of the explicit model for further market comments.