Straight-Through-Processing (STP) forInvestor Participant Account

Securities & Futures Commission

30 April 2003

Source: HKEx

Presentation to HSBC

Agenda

SCEFI Recommendations

The Current IP Trading/Settlement Flow

Key Functionality of the STP IP Account Model

Merits of the STP IP Account Model

Model Overview

Key Features and Value-added Services

Critical Success Factors

Recommendations of the Working Group on Business

Environment of Stockbroking Industry

Opportunities for Banks

Unpopularity of RDvP

SCEFI Recommendations

Retail DvP and CCASS Cash Account are initiatives recommendedby SCEFI

The two initiatives have been revised and become the proposed STPIP Account Model

Reference to retail investor account services in Shanghai, Singaporeand Taiwan have been made

Another SCEFI initiative is FinNet which is a robust and securenetwork connecting all the financial market participants.

4

Payment System

Independent FinancialPlanners

Independent InsuranceAgents

OptionsExchange

Independent MortgageBrokers

Regulatory Bodies

Futures Exchange

Stock Exchange

SecuritiesBrokerage

HousesOverseas Systems

Overseas Systems

Banks

Law Firms

Boutique FinancialCompaniesInsurance

Companies

RTGSPvP

DvPSTP

TvP

MPF Mgrs

FinNet

FinNet – Major Applications

-FinNet is one of the shortlisted candidates for HKICL’s migration toSWIFT for RTGS-A three month in-depth feasibility study is about to finish

HKICL

-Major custodians and brokers are already connected to FinNet-Exchange e-files with key counterparts for pre-matching, some morebrokers are joining

HSBC

-FinNet is connected with STET of HKMA, banks can access STETthrough FinNet for financial returns and e-Register system-Secure emails with SFC

HKMA

-All CCASS Participants connected to FinNet-Secure emails with SFC, Initiatives to share confidential information(dual filing and disclosure of interest) are in progress

HKEx

- All SFC registrants have access to FinNet.- Monthly Financial Resource Return, Circulars Distribution,Seminars Invitation and Registration

SFC

Participants / Major ApplicationsInstitutions

The Current IP Trading/Settlement Flow (Sell Order)

Broker IP

CCASSCustodian

AMS/3

Broker InvestorSell Order

Sell OrderMatchingResult

Input ISI

Affirm ISI

Transmit trades toCCASS for settlement Designated

Banks

Investor’s

designated

bank

Broker’s

designated

bank

Prepare funding, if applicable

Moneytransfer

Order matching

Trade Settlement withBroker

!

SecuritiesClearing

1A

Move stocks from IP Accountto Broker Account

1C

1B

cheque

Key Functionality of the STP IP Account Model

Safe custody of investors’ securities and money;

Locking of fund (for buy orders) and securities (for sellorders) at order level; and

Trade settlement for both securities and payment.

Merits of the STP IP Account Model

Complete segregation of clients’ assets from executionbrokers, hence offering better protection to investors frombrokers’ default, misappropriation and fraud. If widely used,also reduces the systemic and social impact of brokers’default on the market and the society as a whole;

Protect brokers from fraudulent acts of dishonest investors;

Improved settlement efficiency for both retail investors andexecution brokers; and

Enhance competitiveness of brokers.

Model Overview - The NewCo Approach

AMS/3

Broker NewCo

CCASS

BankNew Coomnibusaccount

Matching OrderRouting

NewCo

Investor Bank

Custodian

IP a/c

! Investor places order with broker,specifying IP a/c # (IP order)

Money transferinstruction

Broker inputorder specifyingIP a/c #

!

IP orderrouted toNewCo forshare/fundlocking

!

Perform real time share/fundlocking

!

Confirmlocking result

!

Order matching!

Matchingresult

!

Send matching result toNewCo for lockingadjustment

!

AMS/3 transmits IP trades to CCASS forclearing & settlement!

Perform real time adjustment onlocked shares/fund

!

Update cash depositinformation

DepositmoneyintoNewCo’somnibusaccount

IP trades are cleared and settledbetween HKSCC & NewCo on T+2

Investor’sdesignatedbank account

!

Broker

Direct moneydeposit/transfer

IP a/cIP a/c

Key Features & Value-added Services

Clearing and Settlement

Before order matching:

Specify IP Account Number and Commission Rate during order input

Lock shares/funds in IP account

Calculate stamp duty, transaction levy, trading fee and broker commission and lockrespective amount in IP account

After order matching:

Adjust locked quantity/amount based on matching result

Support day trade by netting shares (netted quantity per stock per day) and amount (nettedamount per day)

Settle securities and money in IP accounts on T+2

HKSCC would settle IP trades with NewCo on T+2

Settle broker commission between NewCo and brokers after debiting money from IP’s cashaccount

Key Features & Value-added Services

Other Services - Day-0

Depository and Nominee Services

Share deposit and withdrawal

Corporate activities advice and handling (e.g., dividend and bonus payment, election, voting, subscription,creation & redemption)

Tendering and eIPO

Portfolio Management

Share transfer from/to market intermediaries

Cash withdrawal (and deposit update)

Account Management

IPs to specify brokers that can place IP orders on their behalf

IPs to specify brokers that can enquire their account balance

Account Information Update

On-line enquiry of stock/cash balance, movement, and position (via IVRS/Internet)

On-line enquiry of account statement

Activity Statement (electronic or by mail, opted by IPs)

Monthly statement (electronic or by mail, opted by IPs)

Key Features & Value-added Services

Stock Borrowing & Lending (SBL)

The IP account can provide lending service to IPs to generate additional revenue toinvestors who have idle shares.

The feasibility and set up cost of this service is being considered.

Potential supporting services (Non-day-0) to increase theattractiveness of the IP account services and also generaterevenue on the pooling of assets:

Critical Success Factors

Brokers’ support

Investors’ acceptance of a new relationship with intermediaries

Costs

Convenience - single instruction from investors per trade is essential

Brokers’ services vis-à-vis banks as investors use IP account mainlybecause they want to trade through brokers

Recommendations of the Working Group

Report of the Working Group on the Business Environment of theStockbroking Industry:

“The Working Group recommends the HKMA to make every effort to persuadebanks to adopt a fair and transparent pricing structure for arranging moneytransfers to the enhanced IP accounts and if necessary, to seek to provide thebasis for such a structure through a code of conduct for the banking sector.”

“…it is considered appropriate to benchmark the relevant charges againstsimilar electronic money transfers to third parties now being conducted bybanks,…”

Opportunities for Banks

Substantial increase of revenue from inter-bank transfer (subject to chargeacceptable by investors and brokers)

Many market participants and retail investors found the existing chargesfor inter-bank transfer are too high and hindered its usage at retail level.Through economy of scale, the number of inter-bank transfer generatedby STP IP Accounts may help to bring down the cost of each transfer andencourage more retail usage.

Great opportunity to promote online banking and other banking services

To become the Agent Bank of NewCo or investors’ designated bank, onemust provide an user-friendly and efficient inter-bank transfer service withcompetitive charge

Unpopularity of RDvP

As part of the Financial Sector Assessment Program (FSAP) by the InternationalMonetary Fund in Q4 2002, one of the recommended actions to improve ourobservance of CPSS-IOSCO is: “The links between the securities settlementsystem and the payment system should be improved in order to achieve DVP forall types of transactions. The use of the bulk clearing system should beabandoned and the cash settlements should be made in the RTGS systems.”

Market participants were interviewed. They suggested that the high bank charge isone of the main reasons why RDvP is not popular.

They stated that even when clients are willing to pay the high bank charge, theRTGS clearance time within a bank may depend on the client’s relationship withthe bank as, for some banks without STP, several levels of approval within a bankmay be required.

It is also common that clients prefer using RDvP only when they sell shares asthey can obtain the money without waiting for settlement at T+2.

The End