International investors who trade in Chinese stocks using the Hong Kong exchange link will be monitored in real-time by regulators in both jurisdictions under a plan unveiled yesterday.
Authorities will be able to see a unique identifier for each investor or firm that uses the northbound connect, the trading link between the former British colony and the world’s second-biggest stock market. Under current rules, only the broker sending the order is visible to Hong Kong’s Securities and Futures Commission.
The changes come as mainland China and Hong Kong integrate more closely, with two equity trading links connecting exchanges in Shenzhen and Shanghai with their southern counterpart. As the markets become more entwined, their respective regulators are looking at ways to bring surveillance more in line with one another.
Traders viewed the plan positively, after earlier voicing concerns that the SFC and China Securities Regulatory Commission would impose a system requiring each fund to register separately. The details published yesterday show that IDs will be assigned to the fund ’s parent company.
“I am glad to see that the Hong Kong or international market practice was taken into account,” said Cindy Chen, head of securities services at Citi Hong Kong, a unit of Citigroup Inc.
Under details issued by Hong Kong Exchanges & Clearing Ltd., exchange participants will issue a unique identifier, known as a broker-to-client assigned number, or BCAN, to each client. All orders to buy and sell stocks via the northbound connect will be tagged with BCANs, the bourse said. The changes don’t apply to investors trading Hong Kong stocks.
The ID system will take effect in the third quarter of 2018, the SFC said in a statement. There will be a similar regime for the southbound connect after the introduction of the northbound plan, the regulator said.
Ashley Alder, SFC’s chief executive officer, said in the statement that the new rules are “critical to safeguard market integrity and to strengthen the protection of investors in both markets.”
Additional scrutiny may be not welcomed by everyone, however. Hedge funds that trade volatile small-caps stocks or take short-term positions might worry that the CSRC will accuse them of speculating, said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. Some funds sell themselves as a “black box,” and will be concerned about who else is looking at their trade positions, he said.
The plan is good news for the market and removes uncertainty, said Neil McLean, head of execution trading for Asia ex-Japan at Nomura Holdings Inc.’s wholly owned Instinet Pacific.
The Hong Kong Investment Funds Association said in an email that the new system was a “reasonable move.” It will enhance transparency, said Castor Pang, head of research at Core-Pacific Yamaichi HK.
Despite concerns among investors about increased regulatory oversight of trading in Hong Kong, Alder said last month that he sees a worldwide move by authorities for better client identification systems. In particular, he noted the incoming MiFID II rules in Europe, and efforts underway in the U.S. Benjamin Robertson, Bloomberg
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