8 December, 2017
On 30 November 2017, the Securities and Futures Commission (SFC) announced that it had reached an agreement with the China Securities Regulatory Commission (CSRC) on proposals to introduce an investor identification (investor ID) regime for Northbound trading under the Mainland-Hong Kong Stock Connect schemes1. The regime is intended to improve Mainland-Hong Kong cross-border market surveillance and is scheduled to be implemented by the third quarter of 2018.
The Hong Kong Exchanges and Clearing Limited (HKEX) has published a circular, information paper and FAQs to provide further details on the proposed regime (which can be accessed from a dedicated HKEX webpage). The regime involves the following (among other things):
Exchange Participants (EPs) assign a unique number known as the "Broker-to-Client Assigned Number" (BCAN) to each of their clients in Stock Connect's Northbound trading and provide "Client Identification Data" (CID)2 to The Stock Exchange of Hong Kong Limited (SEHK), which will forward the information to the Mainland exchanges. EPs have to obtain investors' prescribed consent before using their personal data for this purpose. The SFC will work with the SEHK to facilitate the collection, use and transfer in accordance with all applicable data privacy laws and principles.
EPs tag all buy and sell orders they submit with the appropriate BCAN.
BCANs and CID are for regulators’ market monitoring and surveillance only. They will not be used in clearing and settlement nor be available for public viewing.
Why the investor ID regime?
Regulators globally are gradually developing investor ID requirements in line with the International Organisation of Securities Commissions' three objectives of securities regulation, namely, (a) protecting investors, (b) ensuring that markets are fair, efficient and transparent, and (c) reducing systemic risk. The Australian Securities and Investments Commission has since March 2014 required market participants to provide investor ID data in orders, transactions and trade reports. The European Securities and Markets Authority and the US Securities and Exchange Commission are currently in the process of implementing investor ID regimes as part of their plans for the Markets in Financial Instruments Directive II and the Consolidated Audit Trail.
The Mainland securities markets adopt a trading and clearing see-through model, where all orders submitted to the Mainland exchanges must bear securities account numbers linking to the corresponding investors, which will be further carried to the clearing end. As this is not available under the Stock Connect, a manual broker enquiry process is currently in place. The proposed investor ID regime will provide both Mainland and Hong Kong regulators direct, real-time line of sight into cross-market trades at the client level.
What's next?
As soon as possible after the investor ID regime for Northbound trading has been implemented, a similar regime for Southbound trading will be introduced, as part of the SFC and the CSRC's plan to further strengthen regulatory collaboration in combatting market misconduct. In the longer term, the SFC intends to implement an investor ID regime covering all trading on the SEHK.
1 The Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect.
2 For an individual investor, the CID refers to the investor's full name as shown on the identity document, the issuing jurisdiction of the identity document, the identity document type and the identity document number. As for an institutional or corporate investor, the CID refers to the entity's name as shown on the identity document, the place of incorporation, the identity document type and the identity document number. The certificate of incorporation and the Legal Entity Identifier are acceptable identity document types.
For further information, please contact:
William Hallatt, Partner, Herbert Smith Freehills
William.Hallatt@hsf.com
