A study commissioned by DTCC (the industry-owned Depository Trust & Clearing Corporation) has provided an interim report card on progress with the Shanghai-Hong Kong Stock Connect cross-border investment reform. It suggests there are still several hurdles to overcome.
The study, by independent researcher Celent, says that while Stock Connect has paved way for the rise of cross-border exchange initiatives involving China, Asia and beyond, it is currently hampered by a number of idiosyncratic features that restrict trading strategies, create operational complexity, and introduce risk. These include:
> Hybrid settlement cycle
> No day trading and limited support for short selling
> Requirement to settle in RMB
> Asset fungibility issues
> Shareholder risk and reporting
Regulators are devising ways around these obstacles, which include the unique requirement to “predeliver” shares for sell orders. Such improvements should enable greater participation by institutional investors, hasten the inclusion of China A shares in the major indices and, ultimately, open up the market to advanced trading strategies, including high frequency trading.
Matthew Chan, the head of strategy for Omgeo in Australia (a DTCC subsidiary), said: “What’s driving demand for [Stock Connect] 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…
“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…”