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Brokers in Hong Kong brace for regulatory changes

As Hong Kong Exchange and the SFC modernize the city’s capital markets, brokers will need to keep up.



Hong Kong’s securities brokers face a slate of regulatory-driven changes to market infrastructure that will create pressures on how quickly they can adapt their systems.

“There were no changes in Hong Kong until Stock Connect, and now brokers need to focus their attention on the road ahead,” said James Marsden, managing director and head of post-trade business for Asia Pacific at Broadridge. “Modernization is good for the market in general.  The impact of these regulatory changes in the long run will mean brokers who invest to automate now will be better placed to serve their clients in the future.”

Stock Connect launched in 2014 to enable investors in mainland China and Hong Kong to trade and settle shares listed in stock exchanges located across the border.

The scheme is successful: in December 2021, “northbound” (Hongkongers buying mainland shares in Shanghai and Shenzhen) turnover exceeded Rmb2.3 trillion ($362 billion). Southbound volumes, although considerably lower at Rmb560 billion, have nonetheless been growing.

But it comes with a range of operational challenges, and both Hong Kong Exchange (HKEX) and the Hong Kong Securities and Futures Commission are now rolling out a series of interrelated initiatives to modernize the city’s markets infrastructure, both to prepare for further mainland integration as well as to remain competitive for global flows as HKEX seeks to attract new listings.

Although welcome, this represents a lot of changes that brokers must now handle, be they local or global firms, with big implications for their back and middle offices.

Three big changes

There are three major initiatives in the work: the rollout of the exchange’s Project Synapse for Stock Connect trading; the introduction of a new platform for processing IPOs; and a new mandate called HKIDR that all orders through to settlement be tagged with a client identifier.

1. Project Synapse: This is an interface to support allocations among global brokers trading and settling in mainland China’s T+0 environment. Now in testing, it is expected to roll out by summer for the initial buy-side focused pilot group, with more brokers to join later.

So far, wholesale brokers have introduced their own workarounds, and many still have manual operations with the CCASS terminal. Take up of real-time connections to the CCASS platform (HKEX’s system for book-entry settlement of transactions) is low, as few brokers have deployed the system’s “participant gateway” interface.

Brokers therefore lack real-time visibility into the settlement process, which means they have very little time to resolve any errors. In-house or manual workaround approaches also require firms keep up with rising volumes and any future changes to the rules.

Add it up, and the operational risks and costs to global securities firms participating in Stock Connect could become prohibitive. Synapse is the exchange’s solution, but firms will still need to integrate it into their other systems.

2. FINI: HKEX is developing Fast Interface for New Issuance, or FINI, to replace the current IPO management cycle, move Hong Kong settlement from T+3 to T+2, and increase the digitization of listing companies. FINI is slated to launch by the end of 2022, and it will impact both retail and wholesale brokers.

HKEX expects this new platform will shorten the time gap between IPO pricing and trading, which will give investors quicker access to new listings, reduce market risk and improve efficiency. In particular, FINI addresses a lot of “last mile” bottlenecks such as IPO subscriptions, allotments, regulatory reviews, settlement, and admission to trading.

3. HKIDR: The SFC is introducing an investor identification regime at trading level for the securities market, called HKIDR. Any orders being submitted to HKEX for execution, or any OTC trades that must be reported to HKEX, will now have to include an investor-identification code. This is designed to help SFC surveille the market and see who’s behind orders and trades.

The regulator’s motivation is a response to a number of murky market movements over the past few years involving webs of small, often interconnected companies. Brokers are uncomfortable with having to reveal their clients, and there are operational challenges with an ID scheme across both primary and secondary markets, which flow all the way to settlement.

Therefore, HKEX is syncing the launch of FINI to allow intermediaries to choose whether to identify subscribers for shares on an omnibus level, using an existing protocol called a Broker-to-Client Assigned Number (BCAN). This would give regulators the tools to spot patterns in the event of suspect market activity, without revealing actual end-investor names.

Three big integrations

This trio of regulatory moves represent a trifecta of system changes brokers must implement, be they big or small, global or local.

“Firms must focus on automation in order to deal with all of these market changes,” said Marsden. “They are reviewing the optimal changes they need to implement, and then finding the budget to make it happen.”

Global technology vendors such as Broadridge are rolling out solutions to support both global and local intermediaries. Broadridge has the scale of a global business and has already implemented services in other Asian markets to meet similar needs, such as Synapse-like real-time messages in Singapore and Japan, as well as investor identifiers in a number of markets.

Although Broadridge provides customized consulting and implementations for the world’s largest brokers, it also recently introduced Post-Trade FastStart, a software-as-a-service version that lets smaller firms pick and choose from a variety of components on the Broadridge tech stack.

“FastStart provides smaller brokers with a global set of processing tools they’ll need, it’s modular, and they can implement it quickly,” Marsden said. “Our clients would rather be chasing new business and rolling out new products and facilitate trades. They can leave it to partners to look after their middle- and back-office needs so they can focus their investment elsewhere.”

Broadridge sponsored this article.

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