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HK brokers' complaints over obstacles to Stock Connect raised in Beijing

The China Securities Regulatory Commission (CSRC) - the mainland's stock markets watchdog - may consider removing a requirement that's seen by many Hong Kong stockbrokers and investors to have inhibited the flow of investment under the Shanghai-Hong Kong Stock Connect program, according to a Hong Kong delegate to the two sessions in Beijing.

Christopher Cheung Wah-fung, a Chinese People's Political Consultative Conference National Committee member and Hong Kong lawmaker representing the financial sector, told China Daily in an interview that a CSRC official he met agreed that the issue needs to be addressed before the launch of a similar program linking the Hong Kong Stock Exchange (HKSE) with Shenzhen's.

If the mainland's stock market watchdog scraps the deposit requirement for Hong Kong stockbrokers, their participation in the stock cross-trading link will pick up and boost the sentiment of retail investors. Asia News Photo

Under the Shanghai-Hong Kong Stock Connect program, clearing members participating in the northbound trading are required to provide the HKSE with a Mainland Settlement Deposit (MSD) at a rate of up to 20 percent of buy turnover and any overdue short positions.

All deposits, marks and collateral provided to the stock exchange have to be in cash in renminbi (RMB).

Clearing members are also required to contribute to the Mainland Clearing Risk Fund for their northbound trading.

Hong Kong stockbrokers and some institutional investors have complained that the deposit requirements have locked up a large chunk of their investment funds from earning what they considered reasonable returns in Shanghai's A-share market.

Cheung said his contact at CSRC told him that the deposit requirement was introduced out of concern over possible foreign exchange risks of trades under the stock connect. "They (CSRC) may consider lowering the deposit ratios or even canceling the requirement altogether," Cheung said.

Since its launch in November last year, the Stock Connect program has been operating smoothly without a hitch despite its complicity. But the lower-than-expected utilization of the daily investment quotas has disappointed stockbrokers in both cities.

"The deposit requirement is a burden to many stockbrokerage firms which are prevented from deploying their entire resources in developing businesses under the program," said Nelson Chan Kai-fung, chief executive officer of Bright Smart Securities International (HK) Ltd.

Wilson Hui Yee, group executive director of Haitong International Securities Group Ltd, said the deposits have made it impossible for many small stock brokerage firms to participate in the program.

To many smaller firms, the deposits represent a heavy cost of capital, said Cheung. Unsurprisingly, only about 110 out of 500 stockbrokers in Hong Kong are active in the Stock Connect program. Limited participation by stockbrokers has dampened the interest of retail investors, he added.

However, taking in account the size of Hong Kong's market, the cross-trading program's volume of transactions may not be big enough to distort the offshore RMB's exchange rate to a big extent, stock market analysts believe.

A spokeswoman for Hong Kong Exchanges and Clearing Ltd (HKEx) said the MSD is a risk management requirement by the mainland clearing house ChinaClear.

She added that HKEx is "just collecting the deposit from the clearing participants for ChinaClear", which has a similar risk management requirement for brokerages on the mainland.

Contact the writer at [email protected]

(HK Edition 03/12/2015 page8)