Hong Kong Exchanges and Clearing Limited (HKEx) published today (Friday, 24 October) its Consultation Paper on a Proposed Operational Model for a Scripless Securities Market to invite market input and comments.
The proposed operational model is mainly based on the scripless market model set out in a consultation paper issued in February 2002 by the Securities and Futures Commission (SFC). The SFC in its consultation conclusions indicated its preference for a split register scripless model as proposed in its consultation paper. Under that model, a complete register of members will comprise the Issuer Register and the Central Clearing and Settlement System (CCASS) Register to be maintained respectively by issuers or their appointed share registrars and Hong Kong Securities Clearing Company Limited (HKSCC), a wholly-owned subsidiary of HKEx.
In developing the proposed operational model, HKEx considered the characteristics of Hong Kongs securities market and the current market arrangements with a view to preserving market flexibility and investor choices as far as possible, while gaining maximum efficiency and cost-effectiveness. The proposed model is also aimed at bolstering investor protection, reducing the risk of misappropriation, upholding market integrity, maintaining current system reliability and ensuring the fair allocation of costs through the user-pays principle.
The consultation paper issued today focuses mainly on the details and key issues of the operational model for a scripless securities market. It also highlights the security issues relating to the handling of uncertificated shares, especially transfers from the Issuer Register to the CCASS Register - for example, for trade settlement - and discusses certain risk issues relating to deposits of physical scrip into the CCASS Depository.
The implementation of the proposed scripless securities market model is subject to legislative amendments, which are being worked on by the Government and the SFC and, as noted in the SFCs consultation conclusions, will be the subject of a separate consultation. HKEx will provide its input to the Government and the SFC on these issues.
Implementation of the proposed scripless securities market model would have a significant impact on the securities market and the operations of its participants, said HKEx Chief Executive Paul Chow. Our consultation paper includes issues that are directly relevant to CCASS Participants, issuers, share registrars, other market intermediaries and investors.
Market participants input is very important because it will help us finalise our operational model for a scripless securities market and our suggestions for the best way forward on the scripless initiative before submitting them to the Government and the SFC for their consideration, Mr Chow added.
Copies of the consultation paper are being despatched to issuers and market practitioners today. Copies are available for collection at HKEx office at 2/F, Vicwood Plaza, 199 Des Voeux Road Central, Hong Kong. The consultation paper can also be viewed at or downloaded from the HKEx website at www.hkex.com.hk. The consultation period ends on 23 December, 2003.
Attached is a brief overview of some major topics discussed in the consultation paper.
Some of the major topics discussed in the consultation paper
Issuer Register and CCASS Register
A complete register of members of a Hong Kong-listed company will comprise two registers V the Issuer Register to be maintained by the issuer itself (or its appointed share registrar) and the CCASS Register maintained by HKSCC. The two registers will not overlap. The Issuer Register records shareholdings in uncertificated form and certificated form, so long as scrip exists. The CCASS Register records only uncertificated shareholdings deposited into the CCASS Depository.
The CCASS Depository will continue to accept deposits of physical certificates which will be dematerialised automatically. Since the CCASS Depository will no longer be holding certificates, shares deposited into CCASS can only be withdrawn in electronic form by transferring them to the Issuer Register.
Complete register of members
HKSCC will at day end copy the CCASS Register to the share registrars who will then produce complete registers of members on the basis of the CCASS Register and the Issuer Register. This process will require reconciliation by HKSCC and the share registrars to make sure that inter-register transfers and other processes such as distribution of bonus shares, share consolidation and stock splits are properly recorded on both registers. The share registrars will create complete registers of members available for public inspection as at present, thus obviating the need for the CCASS Register to be open directly to public inspection at the premises of HKSCC.
New CCASS Participant and account type
There will be a new account type on the CCASS Register called the CCASS Participant Sponsored Account. Holders of the CCASS Participant Sponsored Accounts will have to be sponsored by CCASS Participants (other than Investor Participants). Shares deposited into the CCASS Participant Sponsored Accounts will be registered directly in the names of the holders of these accounts on the CCASS Register but the sponsoring CCASS Participants will have full control over the operation of the CCASS Participant Sponsored Accounts.
We also propose adding a new category of CCASS Participant V Registrar Participant. For the implementation of a scripless securities market, a mechanism is needed to facilitate future technical development relating to the scripless market infrastructure with the share registrars and establish the applicable electronic linkages with them.
Settlement of trades and registration of shares
Current settlement services provided by HKSCC in CCASS to CCASS Participants will remain unchanged, except that some of the settlement transactions will, in a scripless environment, result in a change of legal title at the CCASS Participant level on the CCASS Register. Settlement and changes of legal title will take place simultaneously. Registration of shares after settlement of Stock Exchange trades at the beneficial owner level will continue to be optional depending on the wishes of the investors involved.
New transaction types
Based on the proposal from the Federation of Share Registrars to use Shareholder Reference Numbers for uncertificated shareholdings registered on the Issuer Register, HKEx will add new transaction types to support electronic transfers of uncertificated shares between the CCASS Register and the Issuer Registers. Transfers of uncertificated shares into and from the CCASS Register will be equivalent to electronic deposits and withdrawals of shares into and out of the CCASS Depository.
Dematerialisation
The CCASS Depository will be dematerialised gradually, which will be phased in over a period of approximately six to 12 months. The major advantage of this approach is that it can gradually prepare the market and its users for the scripless environment. Under the proposed model, physical scrip when deposited into the CCASS Depository will become dematerialised. Such scrip may also be dematerialised directly at the share registrars. Shares dematerialised at the share registrars will be registered on the Issuer Register.
Rematerialisation
It is proposed that rematerialisation (converting uncertificated shares into physical scrip) will be allowed, though not encouraged, after the implementation of a scripless securities market. Rematerialisation requests may be submitted to HKSCC for shares registered on the CCASS Register and to the share registrars for shares registered on the Issuer Register. In both cases, physical scrip will be issued by share registrars. Rematerialised shares will be registered on the Issuer Register.
Corporate communications and corporate action services
It is proposed that share registrars will continue to send corporate communications to all registered shareholders on the registers of members. To maintain its current level of service to the market, it is proposed that HKSCC will continue to provide corporate action services to the CCASS Participants in respect of their shareholdings registered on the CCASS Register. The shareholders registered on the Issuer Registers will continue to be served by the share registrars.
Initial public offerings
The initial public offering (IPO) process is expected to remain largely unchanged upon implementation of the scripless securities market model. However, new issuers will be required to offer a scripless option to the IPO applicants. During the transitional period, new issuers will be able to choose to offer a certificate option.
Implications for market operations and key issues for further consideration
Whilst the SFCs consultation paper discussed the objectives for and the benefits of a scripless market in detail, the HKEx consultation paper focuses on the main implications of the proposed scripless securities market model for market operations. The consultation paper also briefly discusses shareholder reference numbers and protection for investors, dematerialisation costs and fees and charges under the scripless securities market model. These issues deserve further consideration by all market participants including the investing public.