Hong Kong regulator aims for 'northbound' China investor ID system in 2018

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‍Hong Kong’s securities regulator plans to implement a real-time investor identification system around mid-2018 for “northbound” trading under the Stock Connect program with China, its chief said, a move aimed at detecting potential misconduct.

“Northbound” trading means foreign investors from Hong Kong buying and selling shares in Shanghai and Shenzhen under the "Connect" scheme, as part of Beijing’s efforts to open its markets more widely for foreign investors.

The move to monitor such trading is in line with global efforts to mitigate market volatility through greater transparency, and it comes as China seeks to woo foreign institutions to invest more in its stock markets.

Ashley Alder, CEO of Hong Kong’s Securities and Futures Commission (SFC), said on Tuesday that the identification system would be developed in conjunction with the China Securities Regulatory Commission.

Ashley Alder, CEO of Hong Kong's Securities and Futures Commission, speaks during the Sohn Hong Kong Conference in Hong Kong, China, June 1, 2016. /VCG Photo

“The SFC and the CSRC are now working on a new system with Stock Connect that would give both regulators a direct, real time line of sight in cross-border trades,” he said.

“This is expected to begin for northbound trade around the middle of next year and at about the same time we expect the mainland regulator will provide an equivalent level of transparency for us for southbound trading.”

To help detect potential market misconduct, investor identification processes that let securities regulators track stock trades in real time are already used by some markets in Asia, such as China and S. Korea.

Alder also said the SFC saw “enormous” potential for trading of risk management products in Hong Kong.

“This is because larger, more diverse capital flows will demand better overall risk management tools subject to a world class regulatory environment,” he said.

Weighted voting rights

At the same event, David Graham, chief regulatory officer and head of listing at Hong Kong Exchanges and Clearing Ltd, said weighted voting rights need to be adopted to lure so-called new economy firms to list on a planned third trading board.

Graham said having weighted voting rights “is a feature that we need to adopt. The question is how you adopt it, what are the safeguards, what’s the investor protection.”

HKEX, which operates the stock exchange, unveiled a proposal in June for the board that would allow companies with share structures providing special voting rights, and let firms that have not yet made a profit get listed.

The Hong Kong Exchange, Asia’s third-biggest equity bourse by market value, is eager to increase its exposure to high-growth sectors to remain among the world’s top destinations to list shares.

Public consultation for the new board ended in August.

Last month, HKEX CEO Charles Li said that there might be a need for another round of consultation to decide how the new board and weighted voting rights would be implemented.

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Source(s): Reuters