Hong Kong Exchanges and Clearing Limited (HKEx) has published today (Monday) its Consultation Conclusions on a Proposed Operational Model for a Scripless Securities Market, recommending a way forward for the scripless initiative.
In light of market comments to the earlier consultation exercise, HKEx proposes modifying the originally proposed model by keeping a single Register of Members (ROM) for each listed company as at present to avoid fragmentation of the ROM. The ROM will continue to be maintained by share registrars as it is currently. It also recommends implementing the modified model progressively. Dematerialisation would be optional and investors may choose to continue to hold scrip if they so wish. Dematerialisation would begin with scrip held in the CCASS (Central Clearing and Settlement System) Depository operated by HKSCC and could start as soon as enabling legislation is passed.
HKEx received 26 submissions on its Consultation Paper on a Proposed Operational Model for a Scripless Securities Market, which was published on 24 October last year. The respondents comprised issuers, brokers, banking and brokers associations, custodian banks, professional associations, the Federation of Share Registrars, the Consumer Council and individuals including investors. (Copies of the submissions have been posted on the HKEx website at www.hkex.com.hk for public reference.)
Respondents generally supported the scripless initiative. However, there were concerns raised over certain features of the model originally proposed, which is commonly referred to as the Split Register Model, including mainly the fragmentation of the ROM, the removal of the immediate credit policy, Registrar Participantship and the Shareholder Reference Number (SRN). Some respondents also had concerns over the cost implications for the market and the timing of the implementation.
In light of these and other market comments, HKEx re-evaluated the Split Register Model and developed a modified model named - the Issuer Register Model. Under the Issuer Register Model, HKSCC will continue to operate on a nominee basis, in a manner similar to the practices of certain custodians and overseas central securities depositories. To increase shareholding transparency, HKEx proposes to make the shareholding information of CCASS Participants (excluding Investor Participants) available to the public. To minimise the up-front impact on the market, HKEx also suggests beginning the dematerialisation programme with the CCASS Depository, then gradually extending it to other registered shareholders. The first step, dematerialisation of the roughly 550,000 odd lot and jumbo certificates in the CCASS Depository, is expected to take approximately 12 to 18 months.
Implications of the Proposal for the Market
- Changes to current market structure would be limited.
- The up-front development costs and impact on operations of market intermediaries should be minimal.
- Investors may have to pay a fee if they wish to dematerialise their scrip. The exact level of the dematerialisation fee would be determined by share registrars in consultation with the Securities and Futures Commission (SFC).
- Existing CCASS fees would be reviewed in consultation with the SFC.
"We believe this initial step toward a scripless environment is an important development in further enhancing the competitiveness of Hong Kong’s securities markets through pursuing greater efficiency, shareholder transparency and lower operational costs," said Stewart Shing, HKEx’s Head of Clearing. "While the benefits will take time to be fully realised, we believe they will be long-lasting."
"A progressive approach on implementation will allow time for the investing public and other market participants to get used to the scripless environment and allow market forces to determine the pace of further development," Mr Shing added.
"Discussions with the Federation of Share Registrars, the Consumer Council, brokers associations and CCASS Custodian Participants suggest that the proposal is generally workable and acceptable, and the SFC has indicated that they support taking the proposal forward," Mr Shing explained. "We would like to express our sincere gratitude to those who have responded to the HKEx Consultation Paper. Their comments and input have been most valuable to us in considering the best way forward for the scripless initiative." We hope the proposal will gain general market support and serve as a basis for Hong Kong moving forward on the scripless inititive.
Key features of the Issuer Register Model
- Dematerialisation is optional. Investors may continue to hold scrip if they choose;
- The roles and functions of share registrars will remain largely unchanged;
- There is one ROM for each company listed in Hong Kong – the Issuer Register maintained by a share registrar;
- In addition to certificated shareholdings, the ROM will also record uncertificated shareholdings after the introduction of uncertificated shares;
- The clearing and settlement operations of HKSCC will remain largely unchanged;
- HKSCC continues to operate on a nominee basis, in a manner similar to the practices of certain custodians and overseas central securities depositories;
- To increase shareholding transparency, HKSCC will make the shareholding information of CCASS Participants (excluding Investor Participants) available to the public; and
- The immediate credit policy of HKSCC continues.