Presentation to HSBC Straight-Through-Processing (STP) for Investor - - PowerPoint PPT Presentation

Straight-Through-Processing (STP) for Investor 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

SCEFI Recommendations

 Retail DvP and CCASS Cash Account are initiatives recommended by SCEFI  The two initiatives have been revised and become the proposed STP IP Account Model  Reference to retail investor account services in Shanghai, Singapore and Taiwan have been made  Another SCEFI initiative is FinNet which is a robust and secure network connecting all the financial market participants.

4

Payment System Independent Financial Planners Independent Insurance Agents Options Exchange Independent Mortgage Brokers Regulatory Bodies Futures Exchange Stock Exchange Securities Brokerage Houses Overseas Systems Overseas Systems Banks Law Firms Boutique Financial Companies Insurance Companies RTGS PvP DvP STP TvP MPF Mgrs

FinNet

FinNet – Major Applications

• FinNet is one of the shortlisted candidates for HKICL’s migration to

SWIFT 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 more

brokers are joining

HSBC

• FinNet is connected with STET of HKMA, banks can access STET

through 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 Applications Institutions

The Current IP Trading/Settlement Flow (Sell Order)

Broker

IP

CCASS

Custodian

AMS/3 Broker Investor

Sell Order Sell Order Matching Result Input ISI Affirm ISI

Transmit trades to CCASS for settlement

Designated Banks

Investor’s designated bank Broker’s designated bank Prepare funding, if applicable

Money transfer

Order matching

Trade Settlement with Broker

• 



Securities Clearing



1A

 

Move stocks from IP Account to 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 sell

• rders) at order level; and

 Trade settlement for both securities and payment.

Merits of the STP IP Account Model  Complete segregation of clients’ assets from execution brokers, hence offering better protection to investors from brokers’ 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 and execution brokers; and  Enhance competitiveness of brokers.

Model Overview - The NewCo Approach

AMS/3

Broker NewCo

CCASS

Bank

New Co

• mnibus

account

Matching

Order Routing

NewCo Investor Bank

Custodian IP a/c

• Investor places order with broker,

specifying IP a/c # (IP order) Money transfer instruction Broker input

• rder specifying

IP a/c #

• IP order

routed to NewCo for share/fund locking

• Perform real time share/fund

locking

• Confirm

locking result

• Order matching
• Matching

result

• Send matching result to

NewCo for locking adjustment

• AMS/3 transmits IP trades to CCASS for

clearing & settlement

• Perform real time adjustment on

locked shares/fund

• Update cash deposit

information Deposit money into NewCo’s

• mnibus

account IP trades are cleared and settled between HKSCC & NewCo on T+2 Investor’s designated bank account

• Broker

Direct money deposit/transfer

IP a/c IP 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 lock

respective 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 (netted

amount 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 cash

account

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 to

investors who have idle shares.

 The feasibility and set up cost of this service is being considered.

Potential supporting services (Non-day-0) to increase the attractiveness of the IP account services and also generate revenue 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 mainly because they want to trade through brokers

Recommendations of the Working Group

 Report of the Working Group on the Business Environment of the Stockbroking Industry:

“The Working Group recommends the HKMA to make every effort to persuade

banks to adopt a fair and transparent pricing structure for arranging money transfers to the enhanced IP accounts and if necessary, to seek to provide the basis for such a structure through a code of conduct for the banking sector.” “…it is considered appropriate to benchmark the relevant charges against similar electronic money transfers to third parties now being conducted by banks,…”

Opportunities for Banks

 Substantial increase of revenue from inter-bank transfer (subject to charge acceptable by investors and brokers)  Many market participants and retail investors found the existing charges for inter-bank transfer are too high and hindered its usage at retail level. Through economy of scale, the number of inter-bank transfer generated by STP IP Accounts may help to bring down the cost of each transfer and encourage more retail usage.  Great opportunity to promote online banking and other banking services  To become the Agent Bank of NewCo or investors’ designated bank, one must provide an user-friendly and efficient inter-bank transfer service with competitive charge

Unpopularity of RDvP

 As part of the Financial Sector Assessment Program (FSAP) by the International Monetary Fund in Q4 2002, one of the recommended actions to improve our

• bservance of CPSS-IOSCO is: “The links between the securities settlement

system and the payment system should be improved in order to achieve DVP for all types of transactions. The use of the bulk clearing system should be abandoned and the cash settlements should be made in the RTGS systems.”  Market participants were interviewed. They suggested that the high bank charge is

• ne of the main reasons why RDvP is not popular.

 They stated that even when clients are willing to pay the high bank charge, the RTGS clearance time within a bank may depend on the client’s relationship with the bank as, for some banks without STP, several levels of approval within a bank may be required.  It is also common that clients prefer using RDvP only when they sell shares as they can obtain the money without waiting for settlement at T+2.

The End