(Pictured: Tony Freeman)
China goes live today (November 17) with its latest initiative to boost the level of institutional investment, particularly from foreign investors, in the main Shanghai share market – the Shanghai-Hong Connect, known as the ‘through train’.
Tony Freeman, the head of global industry relations for the industry-owned Omgeo trading services group, says it is probably the “most operationally challenging” environment that his firm has ever seen.
On a regular visit to Australia last week, he said, however, that, for once Australia would be advantaged by its time zone if the initiative takes off as many people are expecting. One bank – BNP Paribas – has predicted that Shanghai trades would rise by 38 per cent in volume next year as a result of the through train.
China is a different market in so many respects. While the rest of the world, for instance, moves towards a settlement cycle of T+2, China is already at T+0. What this means is that there is just a 30-minute window for trades to take place and all accounts have to be aligned beforehand, including the broker and custodian delivering or accepting the stock.
Freeman says that this will take place with a cut-off at 7.45am Shanghai time (9.45am Sydney time) each day. Penalties for missing the deadline with a trade are onerous.
“Australia is time-zone advantaged for a change,” he says. “Any firm that is resident in both Shanghai and Hong Kong and is a both a broker and custodian has a distinct advantage.”
The through train is a more open version of the old QFII program whereby foreign investors needed to apply for a quota to invest in Shanghai. It allows both ‘northbound’ trading, where Hong Kong brokers get access to Shanghai, and ‘southbound’, where Shanghai brokers can access Hong Kong.
“Some of the estimates of the potential are mind-boggling,” Freeman says. “But we think the implementation phase will be quite cautious.”
Meanwhile, both he and Australian Omgeo head, Matthew Chan, are confident that the Australian market should move to T+2 as planned in early 2016.
“In the conversations we’ve had,” Chan said, “people are saying that the technology is already in place. There should be just some procedural issues to iron out.”
Freeman said that Australian participants were probably buoyed by the smooth transition made by European markets to T+2, where they went live just last month.
The US is the holdout in the trend, with vague plans to move from T+3 to T+2 sometime over the next two or three years.