Hong Kong may be about to solve one critical step to boost its link to China’s mainland stock market, but sticky issues remain for MSCI Inc to further include the country’s stocks in its coveted indexes.
People familiar with the matter said that omnibus trading, enabling trading for multiple clients accounts through a single order in Hong Kong’s Stock Connect link, could start as early as the first quarter next year. There is less progress on the three other hurdles outlined by MSCI last week: access to hedging and derivatives, a longer settlement time and an alignment of holidays between Hong Kong and the mainland.
“Lack of A share hedging instruments like futures and short-selling is a more pressing concern for international investors,” said Fang Jian, a partner at Fangda Partners, a law firm operating in Shanghai and Hong Kong.
The futures issue is pending, but needs agreement across jurisdictions in China and Hong Kong. The MSCI and Hong Kong Exchanges & Clearing Ltd agreed on a pact to issue A share futures in March 2019. HKEX chief executive Charles Li said in July that he would not speculate on a timetable for A share futures.
Investors are also struggling with the almost instantaneous settlement time on China’s A shares, stocks that are denominated in the yuan and trade in Shanghai or Shenzhen. Most international markets allow for two or three days to settle a trade. Holidays are also an issue. Hong Kong is off for most western holidays such as Christmas and Easter and China remains open. China closes for long stretches observing local holidays, while Hong Kong is trading.
A spokesman for the Hong Kong bourse said it’s always looking at new ways to enhance Stock Connect and that it will update the market on any future developments.
For now, investors can at least look forward to the omnibus solution. It’s seen ensuring the best execution, cutting costs and time by aggregating orders for individual portfolios. Ideally, such orders will be placed at the fund manager level, broadly similar to how it’s done in the UK and the US, the Asia Securities Industry & Financial Markets Association said in a June publication. Individual accounts would then be allocated shares post-trade.
Unlike most international markets, China tags a unique identification to each investor and requires brokers to do pre-trade checks to ensure they have sufficient stocks to settle sell trades. Hong Kong’s stock exchange provides a service called Special Segregated Account for investors to hold A shares and ease trading with the mainland. But that had not supported aggregated trading, which the omnibus will.
Stock Connect has proved efficient for large fund managers handling hundreds of accounts in buying A shares, but has been more cumbersome when selling, Lyndon Chao, head of equities at ASIFMA, said in an interview. A “Master SPSA,” or omnibus, will help address that and make trading more efficient, he said.
Related Story