Straight-Through-Processing (STP) forInvestor Participant Account
Securities & Futures Commission
30 April 2003
Source: HKEx
Presentation to HSBC
Agenda
SCEFI Recommendations
The Current IP Trading/Settlement Flow
Key Functionality of the STP IP Account Model
Merits of the STP IP Account Model
Model Overview
Key Features and Value-added Services
Critical Success Factors
Recommendations of the Working Group on Business
Environment of Stockbroking Industry
Opportunities for Banks
Unpopularity of RDvP
SCEFI Recommendations
Retail DvP and CCASS Cash Account are initiatives recommendedby SCEFI
The two initiatives have been revised and become the proposed STPIP Account Model
Reference to retail investor account services in Shanghai, Singaporeand Taiwan have been made
Another SCEFI initiative is FinNet which is a robust and securenetwork connecting all the financial market participants.
4
Payment System
Independent FinancialPlanners
Independent InsuranceAgents
OptionsExchange
Independent MortgageBrokers
Regulatory Bodies
Futures Exchange
Stock Exchange
SecuritiesBrokerage
HousesOverseas Systems
Overseas Systems
Banks
Law Firms
Boutique FinancialCompaniesInsurance
Companies
RTGSPvP
DvPSTP
TvP
MPF Mgrs
FinNet
FinNet – Major Applications
-FinNet is one of the shortlisted candidates for HKICL’s migration toSWIFT for RTGS-A three month in-depth feasibility study is about to finish
HKICL
-Major custodians and brokers are already connected to FinNet-Exchange e-files with key counterparts for pre-matching, some morebrokers are joining
HSBC
-FinNet is connected with STET of HKMA, banks can access STETthrough FinNet for financial returns and e-Register system-Secure emails with SFC
HKMA
-All CCASS Participants connected to FinNet-Secure emails with SFC, Initiatives to share confidential information(dual filing and disclosure of interest) are in progress
HKEx
- All SFC registrants have access to FinNet.- Monthly Financial Resource Return, Circulars Distribution,Seminars Invitation and Registration
SFC
Participants / Major ApplicationsInstitutions
The Current IP Trading/Settlement Flow (Sell Order)
Broker IP
CCASSCustodian
AMS/3
Broker InvestorSell Order
Sell OrderMatchingResult
Input ISI
Affirm ISI
Transmit trades toCCASS for settlement Designated
Banks
Investor’s
designated
bank
Broker’s
designated
bank
Prepare funding, if applicable
Moneytransfer
Order matching
Trade Settlement withBroker
!
SecuritiesClearing
1A
Move stocks from IP Accountto Broker Account
1C
1B
cheque
Key Functionality of the STP IP Account Model
Safe custody of investors’ securities and money;
Locking of fund (for buy orders) and securities (for sellorders) at order level; and
Trade settlement for both securities and payment.
Merits of the STP IP Account Model
Complete segregation of clients’ assets from executionbrokers, hence offering better protection to investors frombrokers’ default, misappropriation and fraud. If widely used,also reduces the systemic and social impact of brokers’default on the market and the society as a whole;
Protect brokers from fraudulent acts of dishonest investors;
Improved settlement efficiency for both retail investors andexecution brokers; and
Enhance competitiveness of brokers.
Model Overview - The NewCo Approach
AMS/3
Broker NewCo
CCASS
BankNew Coomnibusaccount
Matching OrderRouting
NewCo
Investor Bank
Custodian
IP a/c
! Investor places order with broker,specifying IP a/c # (IP order)
Money transferinstruction
Broker inputorder specifyingIP a/c #
!
IP orderrouted toNewCo forshare/fundlocking
!
Perform real time share/fundlocking
!
Confirmlocking result
!
Order matching!
Matchingresult
!
Send matching result toNewCo for lockingadjustment
!
AMS/3 transmits IP trades to CCASS forclearing & settlement!
Perform real time adjustment onlocked shares/fund
!
Update cash depositinformation
DepositmoneyintoNewCo’somnibusaccount
IP trades are cleared and settledbetween HKSCC & NewCo on T+2
Investor’sdesignatedbank account
!
Broker
Direct moneydeposit/transfer
IP a/cIP a/c
Key Features & Value-added Services
Clearing and Settlement
Before order matching:
Specify IP Account Number and Commission Rate during order input
Lock shares/funds in IP account
Calculate stamp duty, transaction levy, trading fee and broker commission and lockrespective amount in IP account
After order matching:
Adjust locked quantity/amount based on matching result
Support day trade by netting shares (netted quantity per stock per day) and amount (nettedamount per day)
Settle securities and money in IP accounts on T+2
HKSCC would settle IP trades with NewCo on T+2
Settle broker commission between NewCo and brokers after debiting money from IP’s cashaccount
Key Features & Value-added Services
Other Services - Day-0
Depository and Nominee Services
Share deposit and withdrawal
Corporate activities advice and handling (e.g., dividend and bonus payment, election, voting, subscription,creation & redemption)
Tendering and eIPO
Portfolio Management
Share transfer from/to market intermediaries
Cash withdrawal (and deposit update)
Account Management
IPs to specify brokers that can place IP orders on their behalf
IPs to specify brokers that can enquire their account balance
Account Information Update
On-line enquiry of stock/cash balance, movement, and position (via IVRS/Internet)
On-line enquiry of account statement
Activity Statement (electronic or by mail, opted by IPs)
Monthly statement (electronic or by mail, opted by IPs)
Key Features & Value-added Services
Stock Borrowing & Lending (SBL)
The IP account can provide lending service to IPs to generate additional revenue toinvestors who have idle shares.
The feasibility and set up cost of this service is being considered.
Potential supporting services (Non-day-0) to increase theattractiveness of the IP account services and also generaterevenue on the pooling of assets:
Critical Success Factors
Brokers’ support
Investors’ acceptance of a new relationship with intermediaries
Costs
Convenience - single instruction from investors per trade is essential
Brokers’ services vis-à-vis banks as investors use IP account mainlybecause they want to trade through brokers
Recommendations of the Working Group
Report of the Working Group on the Business Environment of theStockbroking Industry:
“The Working Group recommends the HKMA to make every effort to persuadebanks to adopt a fair and transparent pricing structure for arranging moneytransfers to the enhanced IP accounts and if necessary, to seek to provide thebasis for such a structure through a code of conduct for the banking sector.”
“…it is considered appropriate to benchmark the relevant charges againstsimilar electronic money transfers to third parties now being conducted bybanks,…”
Opportunities for Banks
Substantial increase of revenue from inter-bank transfer (subject to chargeacceptable by investors and brokers)
Many market participants and retail investors found the existing chargesfor inter-bank transfer are too high and hindered its usage at retail level.Through economy of scale, the number of inter-bank transfer generatedby STP IP Accounts may help to bring down the cost of each transfer andencourage more retail usage.
Great opportunity to promote online banking and other banking services
To become the Agent Bank of NewCo or investors’ designated bank, onemust provide an user-friendly and efficient inter-bank transfer service withcompetitive charge
Unpopularity of RDvP
As part of the Financial Sector Assessment Program (FSAP) by the InternationalMonetary Fund in Q4 2002, one of the recommended actions to improve ourobservance of CPSS-IOSCO is: “The links between the securities settlementsystem and the payment system should be improved in order to achieve DVP forall types of transactions. The use of the bulk clearing system should beabandoned and the cash settlements should be made in the RTGS systems.”
Market participants were interviewed. They suggested that the high bank charge isone of the main reasons why RDvP is not popular.
They stated that even when clients are willing to pay the high bank charge, theRTGS clearance time within a bank may depend on the client’s relationship withthe bank as, for some banks without STP, several levels of approval within a bankmay be required.
It is also common that clients prefer using RDvP only when they sell shares asthey can obtain the money without waiting for settlement at T+2.
The End