Success of Shanghai-Hong Kong Stock Connect Hinges on Removing Barriers to Participation - According to Study
Launched in November, this path-breaking initiative provides international investors with direct access to China’s A shares market for the first time
Continued participation among investors, brokers and custodians is a key focus area to ensure program achieves its goals
Market participants need to ensure their post-trade systems and operations can scale up to meet increased volumes and that best practice is employed to minimize operational risk
New York/London/Singapore/Hong Kong/Tokyo/Sydney, June 10, 2015 – A comprehensive whitepaper published by Celent and commissioned by The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, reveals that the long-term success of the Shanghai-Hong Kong Stock Connect (SHSC) hinges on removing the many barriers to participation, including features of the program that restrict trading strategies, introduce risk and create operational complexity.
Institutional investors continue to cite issues such as limited support for short selling, using Renminbi (RMB) as the sole settlement currency and the hybrid (T+0/T+1) settlement cycle as obstacles to increased usage of SHSC. This hesitancy is compounded by remaining uncertainty over asset fungibility, shareholder rights and reporting. Despite this, the paper notes that the initiative, which is supported by the China Securities Regulatory Commission (CSRC) and Securities and Futures Commission (SFC), has achieved significant in-roads in the gradual opening up of China’s capital markets to international trading.
Regulators and the Hong Kong and Shanghai stock exchanges are working to resolve these complex issues as well as to address a unique requirement to ‘pre-deliver’ shares for all sell orders. The paper explains that improvements in these areas should enable greater participation; pave the way to more A share representation in global equity benchmark indices (maintained by MSCI and FTSE Russell), which will in turn unleash substantial further investment in A shares longer term; and ultimately open up this significant market to more trading strategies and investors globally.
“We estimate these ‘workarounds’ will drive international holdings of A shares to US$428 billion by 2017. Because they are committed to opening China’s capital account, regulators can be expected to expand quotas to meet investor demand,” said Dr. Neil Katkov, Senior Vice President in Celent’s Global Asian Financial Services Group. “The success of the SHSC, despite the challenges, is inspiring a wave of cross-border exchange initiatives involving China, Asia and beyond. Already, a Shenzhen-Hong Kong Stock Connect is slated to start later this year. Observers debate the extent to which this will be followed by links between Shanghai or Shenzhen and Taiwan, Singapore, Tokyo, New York and London. SHSC has also inspired a number of proposals for links between Asian markets outside of China.”
Last month, Shanghai Stock Exchange, China Financial Futures Exchange and Deutsche Börse AG agreed on a strategic cooperation to launch a joint venture. It has the objective to develop and to market financial instruments based on Chinese underlyings to international investors outside mainland China, therefore, products will be offered in RMB.
Matthew Chan, Head of Strategy at DTCC’s subsidiary Omgeo, the global standard for institutional post-trade efficiency, said, “What’s driving demand for SHSC is the fact that it opens up a market previously difficult to access. Links providing access to other relatively new or untapped markets are likely to be the most successful ones. We look forward to today’s challenges being resolved, and to SHSC achieving its potential. Over the next few years, as China becomes a core market for mainstream institutional investors, participants need to ensure their post-trade systems and operations can scale up to meet increased volumes and that best practice is employed to minimize operational risk. And that’s where Omgeo, an established player in Asia and in automating and streamlining post-trade operations for more than a decade, can play a significant role.”
With over 40 years of experience, DTCC is the premier post-trade market infrastructure for the global financial services industry. From operating facilities, data centers and offices in 16 countries, DTCC, through its subsidiaries, automates, centralizes, and standardizes the post-trade processing of financial transactions, mitigating risk, increasing transparency and driving efficiency for thousands of broker/dealers, custodian banks and asset managers worldwide. User owned and industry governed, the firm simplifies the complexities of clearing, settlement, asset servicing, data management and information services across asset classes, bringing increased security and soundness to the financial markets. In 2014, DTCC’s subsidiaries processed securities transactions valued at approximately US$1.6 quadrillion. Its depository provides custody and asset servicing for securities issues from over 130 countries and territories valued at US$64 trillion. DTCC’s global trade repository maintains approximately 40 million open OTC positions and processes roughly 280 million messages a week. To learn more, please visit www.dtcc.com or follow us on Twitter @The_DTCC.
Formed in 2001, Omgeo automates trade lifecycle events between investment managers, broker/dealers and custodian banks, enabling 6,500 clients and 80 technology partners in 52 countries around the world to seamlessly connect and interoperate. By automating and streamlining post-trade operations, Omgeo enables clients to accelerate the clearing and settlement of trades, and better manage and reduce their counterparty and credit risk. Omgeo’s strength lies within its global community and its ability to create solutions to enable clients to realize clear returns on their investment strategies, while responding to changing market and regulatory conditions. Across borders, asset classes, and trade lifecycles, Omgeo is the global standard for operational efficiency across the investment industry. Omgeo is a subsidiary of The Depository Trust & Clearing Corporation (DTCC). For more information follow us on Twitter @Omgeo.