Hong Kong Securities Clearing Company Limited (HKSCC)

Member Report

Hong Kong Securities Clearing Company Limited (HKSCC)

Clearing Services Improvement

Intra day payments through the Real Time Gross Settlement (RTGS) system

Exchange trades are settled in the Central Clearing and Settlement System (CCASS) by broker participants on T+2 under the Continuous Net Settlement (CNS) system. Under the CNS system, securities allocated to the accounts of the broker participants are put on hold until settlement of money obligations is confirmed in the morning of T+3. In order to release the on-hold securities allocated under the CNS system, broker participants can make cash prepayments to HKSCC during T+2 to take early delivery of the allocated securities. The amount of prepayments made depends on the amount of outstanding payment obligations due to HKSCC. With effect from January 2007, broker participantshave the option to receive the return of overpaid cash prepayments via RTGS payment mechanism during the same business day. Besides cash prepayments, brokers and custodians are also given the option to receive corporate action related payments such as cash dividend, refund of subscription monies, etc during the same business day upon receipt of such payments from the share registrars. Previously, these payments were settled through the overnight bulk clearing process of the interbank clearing and settlement systems and were only available on T+3.

Enhancements to Stock Segregated Account (SSA) with Statement Service

SSA with statement service is providedfor CCASS broker and custodian participants to open individual SSAs for their clients in CCASS although the brokers or custodians still have full control over the SSAs.Once the SSAs are opened,the clients, SSA users, canreceive statements of stock movements and balances of their respective SSAs as authorized by the brokers or custodian participants.

To improveoperational convenience to CCASS broker and custodian participants and provide better control and services to SSA users, enhancements to add new features to SSA with statement service were introduced in two phases, in January and July 2007 respectively.Broker and custodian participants are now provided with online functions to open SSAs themselves and maintain related profiles. The limitation previously set on the number of SSAs (i.e. 1,000)that could be opened by each broker or custodian participant has been removed.

SSA users can enquire about their stock balances and movements in the accounts electronically through the CCASS Internet System and CCASS Phone System. They can choose to receive physical statements in either English or Chinese, or electronic statements via the CCASS Internet System and opt to receive alert message through Short Message Service (SMS) and/or by email when there is any stock movement in the SSA. SSA users can also choose to affirm SSA transfer instructions before shares can be transferred in/out of the accounts, request for money settlement services and electronic voting functions. With electronic voting functions, SSA users can choose to attend meetings by themselves, appoint corporate representative or appoint HKSCC to vote on their behalf.

Auto generation of alert message on Issuer Announcements

Following the launch of Electronic Disclosure Projectin June 2007, all Hong Kong listed companies are required to post their full announcements on their own websites, in addition to the HKEx website, subject to the transitional arrangement. Paid announcements in newspapers become optional.

In order to provide timely issuer announcement information to CCASS Participants, starting from October 2007, CCASS will be updated with the issuer announcements published on HKEx website on a regular interval of around 30 minutes. Alert messages will be generated periodically to non-Investor Participants via CCASS/3 terminal to notify them of the issuance of any issuer announcements on HKEx website that are relevant toCCASS nominee services. Investor Participants and SSA users will also receive alert messages via the CCASS Internet System when there are issuer announcements on the securities that they hold.

Risk management measures

HKSCC together with the other two derivatives clearing houses under HKEx conduct stress testing on their Guarantee/Reserve Fundson a regular basis to assess the adequacy of their financial resources for meeting their obligations as central counterparties to exchange trades. With effect from July 2007, the clearing houses have harmonized their stress testing methodologies to follow the International Organization of Securities Commission (IOSCO) standards.

The insurance and guarantee facilities for the Guarantee and Reserve Funds of the three clearing houses, totaling HK$848 million, have been discontinued upon their expiry on 31 December 2006. This resulted in an annual saving of approximately HK$10 million.

Projects updates

Third Party Clearing (TPC)

HKSCC is preparing tointroduce TPC to the securities market to help ensure that the securities clearing infrastructure in Hong Kong conforms to international standards and is in line with developments in other major financial markets. Under the proposed TPC model, all trades executed by an Exchange Participant (EP) on the Stock Exchange of Hong Kong can be given up to a designated third party clearer who assumes all clearing and settlement obligations of the EP in CCASS. Effectively, this allows the EP to outsource its clearing operations to a clearing service provider. A new type of participant, General Clearing Participant (GCP) will be created, and the existing Broker Participant will be renamed as Direct Clearing Participant (DCP). With TPC, an EP will no longer be required to be a CCASS Participant as long as the EPappoints a GCP to clear trades in CCASS on its behalf. The proposed TPC model has been presented to interested clearing service providers and CCASS participants, and willbe implementedbefore end of 2007.

Electronic voting (eVoting)

At present, HKSCC provides electronic voting to CCASS participants (incl. investor participants) and SSA users. It plans to implement a neweVoting initiative in early 2008, which will provide the clients ofbrokersand custodians who have entrusted their shares with them (but not SSA users) an option to submit eVoting instructions viaa dedicated website to broker and custodians. Once abroker or custodian signs up for the eVoting service,its clients can input eVoting instructions and make related enquiries on details of the meetings and status of the eVoting instructions through the CCASS Internet System. These investors can choose to attend meetings in person, appoint representative to attend meetings on their behalf, or request their brokers or custodians to submit details of their votes to CCASS.

Shareholdings transparency in CCASS

At present, listed issuers can request HKSCC to provide Participant Shareholding Reports containing the shareholding balances of each CCASS Participant, including Investor Participants (IPs), of their respective stock on a specified date. In order to improve the transparency of shareholdings in CCASS, HKSCC plans to expand the current Participant Shareholding service to the public and free of charge. It is expected that through this new ShareholdingDisclosure service, the public can obtain the shareholding information of CCASS Broker and Custodian Participants and those IPs who have given consent to such disclosure via a Designated Issuer Website. HKSCC plans to implement this new Shareholding Disclosure service in early 2008 together with the eVoting initiative which will help improve the corporate governance regime in Hong Kong.

Fees Reduction

HKSCC has waived the SMS fee and the dormant account fee for CCASS Investor Participant (IP) account services since the services were provided. The waiver has now been extended until further notice upon its expiry on 30 June 2007.

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