CONSULTATIONS ON A REVISED OPERATIONAL MODEL FOR IMPLEMENTING AN UNCERTIFICATED SECURITIES MARKET IN HONG KONG

In January 2019, The Hong Kong Exchanges and Clearing Limited (“HKEX”), the Securities and Futures Commission (“SFC”) and Federation of Share Registrars Limited (“FSR”) issued a joint consultation paper (“Consultation Paper”) titled “A Revised Operational Model for Implementing an Uncertificated Securities Market in Hong Kong”.

Currently, the law of Hong Kong requires the use of paper documents to evidence and transfer the legal title to certain securities. Most investors hold and transfer their listed securities through the Central Clearing and Settlement System (“CCASS”). Under this arrangement, CCASS is the legal owner of the securities, while investors hold beneficial interest in the securities.

In the Consultation Paper, the regulators jointly proposed to introduce the Uncertificated Securities Market (“USM”) which the regulators said could (i) enable investors to hold and transfer securities in their own names without share certificates or other paper documents and (ii) enhance post-trade settlement and servicing.

The market was previously consulted (in 2009/2010) on a possible operational model for uncertificated or paperless securities transaction (the “2010 Model”). The feedback in 2009/2010 consultation was said to be positive, but the market raised concerns about its limitations. The model was therefore revised with various features proposed.

The Law Society has reviewed the Consultation Paper. We in general welcome the initiative to implement a paperless securities market, but we receive different views on the revised model. There are views that the abovementioned revised model could improve settlement efficiency and eliminate paper certificates in phases. There are however contrary views on whether the revised model could provide a solution better than the 2010 Model. Some members consider that under the revised model, the listed company shareholders are still unable to enjoy the full benefit of legal title to their shares (in relation to voting and issuer communication in particular). It is said that that could be a significant step back from the 2010 Model.

The Law Society in its submission urges the regulators to resolve the problems of existing legal ownership issues of shares in CCASS as soon as possible.

The full submission of the above is at:

http://www.hklawsoc.org.hk/pub_e/news/submissions/20190507.pdf

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