Consultation on Paperless Securities Market

On 28 January 2019, the Securities and Futures Commission (SFC), Hong Kong Exchanges and Clearing Limited (HKEx) and Federation of Share Registrars Limited (FSR) began to consult the public on the implementation of an uncertificated securities market regime in Hong Kong. The proposed operational model is intended to provide investors with the option of holding securities in their own names in electronic form and is expected to be implemented in early 2022.

THE EXISTING MODEL

Under the existing model, most investors use the Central Clearing and Settlement System (CCASS) to hold their securities, which are all registered in the name of the same nominee, HKSCC Nominees Limited (HKSCC-NOMS). Investors therefore hold and transfer only the beneficial interest in the securities but not the legal title. In CCASS, securities can be held through a custodian participant (CP) account, through a stock segregated account (SSA) or through an investor participant (IP) account. A CP account holds multiple investors’ securities and is managed by a clearing or custodian participant. An SSA has a statement service that holds securities of a specific investor. An IP account is opened and managed by an investor that has been admitted by Hong Kong Securities Clearing Company Limited (HKSCC) as an investor participant.

Outside of CCASS, investors may hold securities in their own name in paper form. A register of securities holders is kept and maintained by the security issuer’s share registrar only. Since there is no electronic interface between CCASS and share registrars’ systems, deposits and withdrawals into and out of CCASS are paper-based processes. Stamp duty on securities transactions on the Stock Exchange of Hong Kong (SEHK) is collected and paid electronically through the SEHK. Transactions outside the SEHK require stamp duty to be collected and paid to the Stamp Office; instruments of transfer and contract notes are stamped physically.

THE PROPOSED MODEL

Under the proposed paperless model, the HKEx will replace CCASS with a new system (HKEx System) that will keep the same account types, but also introduce “USS” accounts. Securities held with intermediaries through the HKEx System will still be registered in the name of HKSCC-NOMS. For a limited time, investors can still choose to hold securities in certificated form, but eventually all securities will be held in uncertificated form in one of three ways:

  • through a CP account, SSA or IP account, registered in the name of HKSCC-NOMS;
  • in the investor’s own name and managed through an account opened with the issuer’s share registrar (USI account); or
  • in the case of institutional investors, in their own name and managed through an account within the HKEx System (USS account) opened with a clearing or custodian participant who will “sponsor” the account.

Registers of securities holders will still be maintained by issuers’ share registrars, the systems of which will be responsible for evidencing and effecting transfers of legal title to securities without paper documents. A new category of participants called “registrar participants” will be introduced in the HKEx System to establish an electronic interface between HKSCC and share registrars’ systems so that uncertificated securities can be transferred into and out of the HKEx System electronically.

The Securities and Futures and Companies Legislation (Uncertificated Securities Market Amendment) Ordinance 2015 introduced amendments to the Stamp Duty Ordinance to facilitate the stamping of off-exchange securities transactions in the Uncertificated Securities Market environment. Although the details have yet to be finalised, it is expected that stamp duty will be paid and collected through share registrars and/or intermediaries. This will require declarations to be made as to whether any ad valorem stamp duty is chargeable, and if so, whether the stamp duty has been paid. The declarations will be made by the intermediaries and/or share registrar, specifically:

  1. where transfers involve moving securities into or out of a CP, an SSA or USS account, the declarations should be made by the intermediary that opened the account;
  2. where transfers involve moving securities into or out of a USI account, the declarations should be made by the relevant share registrar; and
  3. where transfers involve moving securities into or out of an IP account, the responsibility for making declarations will depend on where the securities are moved from or to.

Solicitor, Charltons Law, Hong Kong

With a background in banking and debt capital markets in London and Hong Kong, Kim joined boutique corporate law firm, Charltons, in 2003 and focuses on Hong Kong corporate finance regulation, including IPOs, listed company regulatory compliance, SFC licensing, funds, and debt capital markets.  Her main interest is the development of Hong Kong regulation to facilitate Hong Kong’s continued growth as Asia’s premier international finance centre.  Key areas of interest currently include continued broadening of access to Hong Kong’s stock exchange, crypto assets, crowd-funding, fintech, virtual banking and green banks.