Multiple Counter Model for ETFs 
24/06/2016 
 

Part 1

Introduction to Multiple Counter Model for ETFs

 

1.1

What are multiple counter ETFs?

 

 

 

Units of ETFs may be denominated in any currency but for a trading counter to be eligible for clearing and settlement, it must be settled in an Eligible Currency as defined in the General Rules of CCASS in effect from time to time.  

An ETF with multiple trading counters which are eligible for clearing and settlement on Hong Kong Securities Clearing Company Limited (HKSCC) offers more than one trading counter on the Exchange in Eligible Currency (i.e. HKD, RMB and/or USD counters) to investors for secondary trading purposes.  Units traded in a HKD counter will be settled in HKD, likewise, units traded in an RMB counter will be settled in RMB and units traded in a USD counter will be settled in USD.  Although the units traded in different counters are of the same class and the net asset value per unit may be the same, the trading prices of and liquidity of trading in the units of an ETF that trade in different currencies may be different as each counter has a distinct and separate liquidity pool and they may not have a close relationship depending on factors such as supply and demand in the market and the liquidity in each counter.  Each counter also has its own stock code, stock short name and ISIN number.

Normally, investors can buy and sell units traded in the same counter or alternatively buy in one counter and sell in the other counter(s) provided their brokers provide HKD, RMB and/or USD trading services at the same time and offer inter-counter transfer services to support multiple counter trading.

 

 

1.2

What currency can be used for the purpose of creation in the primary market? Can newly issued units from creation in the primary market be designated in any of the counter(s) immediately upon issuance?

 

 

 

Creation and redemption may only be carried out in the currency in which the units of ETFs are denominated.  Subject to the agreed operating arrangement between an ETF manager and its Participating Dealer, newly issued units from creation in the primary market can be designated in any counter immediately upon issuance.  Investors should consult the Participating Dealers for more details, including any fees and other conditions involved. 

 

 

Part 2

General Questions on Multiple Counters for Trading ETFs

 

 

Information dissemination

 

 

2.1

How will the last closing net asset value (NAV) per unit and intra-day estimated NAV (iNAV) per unit of the ETF be calculated?

   

 

The official NAV per unit of an ETF is usually calculated and published in the base currency of denomination of the relevant share class (the “base currency of denomination”).  If there are multiple trading counters, the NAV per unit will be available in each of the trading currencies on the website of the relevant ETF for reference purposes.  The NAV per unit in the relevant trading currencies is calculated by converting the NAV per unit in base currency of denomination into the relevant trading currencies using the foreign exchange rate as specified by the ETF manager or its agent as disclosed on the ETF’s website. 

iNAV per unit for different counters will be calculated and published in the trading currency of the counter.  The iNAV per unit in different counters is for reference purposes only.  The iNAV per unit in one counter is calculated by converting the iNAV per unit in base currency of denomination using the foreign exchange rate as specified by the ETF manager or its agent. The calculation method and the foreign exchange rate used should be clearly disclosed on the ETF’s website.

 

 

Inter-counter transfer

 

2.2

How can an investor transfer units from one counter to another counter? 

 

 

If your broker provides HKD, RMB and USD trading services at the same time and offers inter-counter transfer services to support multiple counter trading, you can buy units traded in one counter and sell them in the other counter(s) because units traded in these counters are inter-transferable.  For example, units traded in an RMB counter of an ETF can be transferred to the HKD counter of the same ETF by way of an inter-counter transfer and vice versa on a one to one basis. 

In general, for the purpose of effecting an inter-counter transfer, you would have to instruct your broker to submit, either by itself or through its agents, an executed “Multi-counter Transfer Instruction” to HKSCC.  HKSCC will charge HKD5 for each effected Multi-counter Transfer Instruction.

You should pay attention to, and consult your broker about, the administrative process and procedures, including the time required to effect the inter-counter transfer to meet your trading needs, the related fees and the terms and conditions of multiple counter trading.

Please note that some brokers may only provide HKD trading services.  If you trade units of a multiple counter ETF through such brokers, you can only trade in the HKD counter.

2.3

Can an investor buy units of a multiple counter ETF in one counter and sell them in the other counter on the same trading day?

 

Yes, but investors who engage in inter-counter day trades (i.e. buy units traded in one counter and sell them in the other counter on the same trading day) should note that there is no inter-counter netting as the ETF units traded under the different counters are cleared and settled separately under HKSCC’s Central Clearing and Settlement System (CCASS).  This means that investors have to transfer units bought in one counter to the other counter to settle the sell orders in the other counter on a T+2 basis. 

In general, your broker needs to submit, either by itself or through its agent, an executed “Multi-counter Transfer Instruction” to HKSCC before 3:45 pm on the second business day following the day on which your broker placed the sell orders for you and the orders were executed (T+2).  HKSCC will charge HKD5 for each effected Multi-counter Transfer Instruction. 

Investors should note that inter-counter day trades might lead to settlement failure of the sale trades at the CCASS on T+2 if the stocks of the buy trades are only delivered by CCASS at the last settlement run on T+2, leaving not enough time to transfer the stocks to the other counter(s) to settle the sale trades on the same day.  Although under the circumstances and provided that the concerned CCASS Participants (CP) could provide necessary documentary evidence to HKSCC, HKSCC may grant T+3 buy-in exemption.  If so, the investor may still be subject to other handling fees imposed by his/her broker, and the consideration of the sale trades may not be available to the investor from his/her broker until T+3 or even later.

Investors who wish to conduct inter-counter transfers is advised to consult their brokers and fully understand the procedures and the services provided by the broker as well as the associated risks and fees.

Investors should note that some brokers may not provide inter-counter day trade services.

 

Corporate Actions

 

2.4

Will holders of the units of an ETF in different counters be treated differently?

 

Under the constitutive documents of the ETF, the units traded in the different counters are of the same class, holders of the units of ETF in different counters shall be entitled to identical rights and therefore are treated equally.

 

2.5

How will the market capitalisation of the multiple counter ETFs be calculated?

 

HKEX will calculate the market capitalisation of a multiple counter ETF by multiplying the total number of issued units of different counters with the price of the HKD counter.

 

2.6

Will the multiple counter ETFs pay dividends only in HKD, RMB or USD, or in all currencies?

 

Dividends of a multiple counter ETF are declared and paid in the currency(ies) as disclosed in the offering documents.  Investors should refer to the offering documents for details of dividend payments and if in doubt, consult the ETF manager or their brokers.

Depending on the distribution policy of individual multiple counter ETF, an investor with units traded in one counter (e.g. HKD counter) may receive dividends in another currency such as RMB, USD or the base currency of denomination.  In such circumstances, if the investor does not have an account in the relevant currency, the investor may have to bear the fees and charges for conversion of the dividends into HKD or any other currency in which the investor has an account.

  

Part 3

Trading Arrangement for multiple counter ETFs

 

 

3.1

How can investors distinguish between different counters of a multiple counter ETF?

 

An investor can distinguish between different trading counters of a multiple counter ETF by their stock codes and their stock short names.

Separate and unique stock codes will be assigned to the HKD, RMB and USD counters.  The last four digits of the stock codes for the HKD and RMB counters will be the same and between 2800 and 2849 or 3000 and 3199, while the stock code for RMB counter will be a 5-digit number starting with an “8”, in line with the existing allocation arrangement.  For the USD counter, the stock code will be a 4-digit number starting with a “9” and the last three digits will be the same as that for HKD or/and RMB counters.

- HKD counter: 2800 - 2849 or 3000 - 3199 (XYYY)
- RMB counter: 82800 - 82849 or 83000 - 83199 (8XYYY)

- USD counter: 9800 - 9849 or 9000 - 9199 (9YYY)

The stock short name will also be different.  For the RMB counter, the stock short name will end with “-R” to indicate that the ETF is traded in RMB, while the stock short name of the USD counter will end with “-U” to indicate that the ETF is traded in USD.  There will be no specific marking in the stock short name of the HKD counter.

The following is an illustrative example of the stock short names:
- HKD counter: “XYZ ETF”
- RMB counter: “XYZ ETF-R”
- USD counter: “XYZ ETF-U

 

3.2

Will the different counters have a single International Securities Identification Number (ISIN)?

 

Separate and unique ISINs shall be assigned to the HKD, RMB and USD counters to allow clear identification between different counters in post-trade settlement and position management. The list of ISINs is published on the HKEX website.

 

3.3

Must there be a Securities Market Maker (SMM) for each ETF counter?

 

 

 

Same for all ETFs, each ETF counter must have at least one SMM.

 

 

3.4

If an ETF with one counter is already a Designated Security eligible for short selling, will the corresponding counters in other Eligible Currencies be eligible for short selling too?  What about holding/borrowing of units in one counter followed by selling in the other counter(s)?  Will these transactions be treated as a normal sale/covered short sale? 

 

In principle, if one counter is already a Designated Security eligible for short selling, the other counters are expected to be eligible for short selling subject to the approval of the SFC.

For holding/borrowing of units in one counter followed by selling in the other counter(s), the transactions would normally be treated as a normal sale/covered short sale.

 

3.5

How will the market turnover be calculated and disseminated?

 

 

 

Same as other securities traded on SEHK, the market turnover information of multiple counter ETFs will be disseminated by HKEX via its market data system HKEX Orion Market Data Platform – Securities Market (OMD-C) to the market via information vendors and other clients directly subscribing to the relevant service and it is also available on HKEX website. 

OMD-C disseminates the turnover of individual counters.  As the current practice, the total market turnover (excluding the turnover of overseas trades) for all securities regardless of trading currency on a given market segment will be provided in HKD equivalent.

Investment Service Centre (ISC) on HKEX website also disseminates the intra-day turnover by individual counters.  As for the Top 20 ranking by turnover, ISC provides a ranking by security (i.e. ranked by aggregated turnover of all counters) and a ranking by counter (i.e. ranked by individual counters).

 

 

3.6

Currently HKEX’s securities trading system the Automatic Order Matching and Execution System (AMS) performs different checks before an order can be accepted to the central order book (e.g. the order price cannot deviate for more than 9 times from the current nominal price).  How will such checking be performed for the RMB and USD counters?

 

AMS will apply checking on the trade prices denominated in RMB and USD at the order level, irrespective of the stock counter.

    

3.7

Do brokers need to enhance their systems or processes to support the multiple counter model?

 

Single-counter trading

There are no additional requirements to brokers for trading within the HKD counter.  For trading the RMB and USD counters, brokers must ensure their own readiness for trading and settlement in RMB and USD counters.

Inter-counter trading

Brokers who opt to provide the services should review and ensure that their front and back office systems as well as operations are ready to support such trading activities.

Broker may consider if there is a need to automate their systems such that inter-counter trading as well as transfer of securities between the counters can be done automatically. 
 
In any case, if brokers’ systems cannot handle automatic inter-counter trading and transfer, brokers should have a set of guidelines advising their clients how inter-counter trading could be processed manually and clearly communicate to their clients how these trading activities could be supported and if any additional charges are imposed.

 

3.8

Will the Trading Support Facility (TSF) support the trading of the RMB counter for ETFs?

 

 

 

Yes, the TSF will support the trading of the RMB counter if the particular ETF is eligible for the TSF.  For details about the TSF, please refer to the RMB Equity Trading Support Facility page on the HKEX website.  The “List of TSF Stocks” will be updated on the HKEX website upon admission of any RMB stocks eligible for the TSF.

 

 

Part 4

Clearing Arrangements for multiple counter ETFs

 

4.1

How does the clearing and settlement of multiple counter ETFs work? Are there any differences to the existing settlement mechanism?

 

 

Exchange trades executed under the respective HKD, RMB or USD counters will be cleared and settled in CCASS as separate individual stocks.  There is no inter-counter netting for multiple counter trading.  After netting under the Continuous Net Settlement (CNS) System, one CNS stock position will be netted for each counter, i.e. HKD counter, RMB counter and/or USD counter.

CPs should settle their CNS stock position on the basis of T+2 per stock, i.e. per counter basis, which is in line with the existing settlement mechanism.

 

 

4.2

How are “inter-counter” day trades settled? 

 

 

As always, CPs should ensure they have sufficient units available to fulfil their CNS short positions on T+2.  For inter-counter day trades, if a CP relies on units received from a long position in one counter to settle its short position in another counter, CPs should submit a “Multi-counter Transfer Instruction” to HKSCC through CCASS Terminals before 3:45 p.m. on T+2 to transfer the units from one counter to another counter.  In cases where the units received from the long position are subject to the on-hold mechanism, CPs should effect cash prepayment to release the CNS allocated units before effecting the inter-counter transfer.  All activities related to “Multi-counter Transfer Instructions” are recorded in a CCASS report which is available to CPs for reconciliation purposes. 

Likewise, investors need to instruct their brokers to execute inter-counter transfer of their units on T+2 in order to settle their “inter-counter” day trades described above.

 

4.3

Will buy-in exemptions be granted for the settlement of “inter-counter” day trades?

 

 

Buy-in exemptions will be considered for applicants that fulfil the defined conditions.  Where a CP has an unsettled short position in one counter and has sufficient units and/or long position in the other counter to settle the short position on T+2, the CP can submit an “Application Form for Exemption of Buy-in” to HKSCC not later than 8:00 pm on T+2.  The CP is required to provide HKSCC a copy of a CCASS report that shows the units and/or long position are available to cover the short position on T+2; evidence that the CP has submitted a “Multi-counter Transfer Instruction”, which is either cancelled by the system after the batch transfer run and/or a system message is returned as there is an insufficient stock balance upon input of the “Multi-counter Transfer Instruction” after the batch transfer run; and effected cash prepayment, if applicable. 

 

4.4

How will marks be calculated for multiple counter ETFs?

 

 

Marks calculation for multiple counter ETFs will be on a per counter basis.  HKSCC will mark-to-market the CNS stock positions of the CP and collect marks from the CP.  Marks will be computed and collected in the Eligible Currency in which that ETF counter is traded unless the CP has maintained a Preferred Single Settlement Currency or the marks are to be collected from a Clearing Agency Participant.

 

4.5

How is a “Multi-counter Transfer Instruction” for multiple counter ETFs effected in CCASS?   

 

CPs should submit their “Multi-counter Transfer Instruction” electronically via CCASS online.  After a CP inputs a “Multi-counter Transfer Instruction”, the instruction will be effected immediately if the number of units to be transferred is available in the CP’s delivering stock account in CCASS.  Otherwise, the instruction will be processed in the next batch transfer run.  If the number of units to be transferred is subsequently available at or before the commencement of batch transfer run, the instruction will be effected during the batch transfer run.  Any outstanding instruction will be automatically cancelled by the system after the last batch transfer run on the same day.

 

4.6

After a “Multi-counter Transfer Instruction” is effected in CCASS, will the transferred units be subject to any on-hold / earmark mechanism?

 

 

No, inter-counter transfers are not subject to any on-hold / earmark mechanism.  Units are freely transferable after they are “transferred” from one counter into another counter.

However, for clients who have bought units of ETFs using the TSF and wish to transfer or redeem such units, TSF CCASS Participants should, on behalf of their clients, arrange a TSF stock release (via the Stock Release Function in CCASS) before proceeding with the transfer or redemption through the Participating Dealer.  Clients are advised to consult their brokers about its service schedule to effect a TSF stock release although the specified TSF shares can be released in CCASS immediately upon the submission of the TSF stock release request in CCASS by the TSF CCASS Participant (assuming there are sufficient earmarked shares in the TSF account).

 

4.7

Can inter-counter transfer of units be effected in CCASS during suspension of creation/redemption or secondary trading of a multiple counter ETF?

 

 

 

Yes, the inter-counter transfer service in CCASS is still available to CPs during suspension of creation/redemption or secondary trading of a multiple counter ETF.

 

 

4.8

What is the cost of effecting a “Multi-counter Transfer Instruction” in CCASS?

 

HKSCC will charge HKD5 for each effected Multi-counter Transfer Instruction.

 

4.9

For multiple counter ETFs, what is the cost of CCASS nominee service?

 

CCASS fees for nominee services for multiple counter ETFs are the same as those for other CCASS stocks.

 

Part 5

Additional FAQs for ETF market participants

 

 

 

ETF managers

 

 

5.1

How can the ETF managers launch multiple counters?

 

 

 

An ETF manager may adopt a multiple counter model for its ETF upon its initial listing or introduce an additional counter(s) at a later date after its initial listing.

An ETF manager wishing to launch an additional counter(s) should contact the Exchange.  The ETF manager would be required to revise the offering documents and Product Key Facts Statement (KFS) to incorporate the additional arrangements, issue an announcement and give a reasonable period of notice to investors.  The existing signed documents with HKSCC by the ETF manager will also have to be revised.  The ETF manager and other relevant parties (e.g. trustee, participating dealers) will need to sign amended agreements and the trustee will need to sign a new CCASS application form.

 

 

5.2

Guidance for ETF managers on daily dissemination of closing NAV-related information through the HKEXnews website

 

 

For the daily dissemination of the end of day NAVs and related information to the market through the HKEXnews website, the ETF manager must submit the information for all of the counters separately although they may be in the same Excel template.

 

 

5.3

Guidance for ETF managers on payment of dividends

 

 

 

Any dividend policy (and for that matter other corporate actions) will have to be consistent with the fact that units traded in different counters are of the same class and unit holders of different trading counters must be treated equally.  A manager may decide to pay dividends in one currency (which may or may not be the Eligible Currency) for all counters.  Alternatively if an ETF manager chooses to set a different default currency for dividend payment for each counter (e.g. pay dividend in HKD for HKD counter, RMB for RMB counter and USD for USD counter), the ETF manager must offer an election investors in all the counters to choose the currency in which they would like to receive the dividend.  This means that investors in all the counters can elect to receive dividend in any of the default currencies (i.e. holders of units traded in HKD counter, RMB counter and USD counter can elect to receive dividends in HKD, RMB or USD).  There should be adequate disclosure in relation to dividend payment and currency options (if any) in the offering documents, KFS and announcements issued by the ETF manager.

 

 

5.4

Can an ETF manager remove one of the counters?

 

 

 

While it will be the ETF manager's decision as to whether and when a particular counter should be removed, an ETF manager who wishes to remove a counter is advised to consult the SFC and the Exchange as soon as practicable.  In addition, ETF managers should note the Exchange may introduce criteria for removal.

 

 

5.5

As the inter-counter transfer of units is done in CCASS only, how can an ETF manager know the final unit holding under each counter in CCASS on each day?

 

 

 

Units of ETFs are normally issued in scripless form and the inter-counter transfer of units is done in CCASS only.  If required by the ETF manager, HKSCC can provide the net transfer quantity of units or the day end balances of units in each counter in CCASS to the unit registrar.

 

 

 

Securities Market Makers

 

 

5.6

Can an Exchange Participant (EP) apply to be a SMM for one counter only?

 

 

 

Yes, an EP can apply to make markets in one counter only.

 

 

5.7

For multiple counter ETFs, should a prospective SMM apply through one or more application forms?

 

 

 

An applicant can use one form to apply for market making permits for more than one counter at the same time.  However, if it applies for the permits for the counters at different times, then it should apply for the permits for each counter separately.

 

 

5.8

Are there any special requirements for the SMM for USD and/or RMB counters?

 

 

 

The procedures for applying for SMM permits for ETFs traded in HKD, RMB and USD are the same. Applicants need to undertake that they will inform the Exchange immediately if any of the firm’s market making activities is affected by any kind of disruption.  For example, for ETFs traded in RMB, the applicants have to inform the Exchange if they do not have sufficient RMB to settle RMB products. In addition, the applicants need to ascertain their readiness for conducting market making activities for securities traded and settled in RMB by providing the following information:

  • Confirmation of the applicant’s readiness for trading and/or clearing in an RMB counter by referring to the Checklist to facilitate Participants’ review of readiness for Listed Renminbi ("RMB") Securities Business issued by the Securities and Futures Commission on 17 March 2011 (Checklist); and
  • Arrangements and/or controls to source sufficient RMB to meet the settlement obligation to the clearing houses (where the applicant is a Non Clearing Participant, the applicant should also provide confirmation by its General Clearing Participant (GCP) of the readiness of the GCP for clearing securities in RMB listed on the Exchange by reference to the Checklist)

For details of SMM application procedures, please refer to the webpage here.  For the Checklist, please refer to the webpage here.