Hong Kong’s Progress towards a Paperless Securities Market

Background

Proposals for implementing a paperless securities regime in Hong Kong have a long history. Hong Kong’s securities regulator, the Securities and Futures Commission (SFC) conducted its first consultation on moving to scripless shares in 2002, followed by another consultation by the Stock Exchange of Hong Kong Limited (HKEx) in 2003. Both of these consultations failed to drum up sufficient support from investors and brokers for the operational model proposed.

Then, in 2009, a working group from the SFC, HKEx and the Federation of Share Registrars was formed to put forward new proposals. A public consultation on these proposals was conducted from December 2009 to March 2010 and, according to the consultation conclusions[1] published in September 2010, there was general support for the revised operational model. Hong Kong was ready to join the many other jurisdictions around the world (including Mainland China) to go scripless.

Brief legislative history

Finally, on 27 March 2015, the Hong Kong government published the Securities and Futures and Companies Legislation (Uncertificated Securities Market Amendment) Ordinance 2015 (Amendment Ordinance), which provides a broad legal framework to enable the introduction of an uncertificated (i.e., paperless) securities market regime and is mainly based on practice in the U.K. and Australian stock markets. Under the Amendment Ordinance, investors will be able to hold and transfer securities without paper documents and register the securities in their own names, thus enjoying the full benefits of legal ownership. The Amendment Ordinance mainly amends the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) (SFO) and the Companies Ordinance (Cap. 622, Laws of Hong Kong) (CO) to stipulate the broad framework for the regulation of the uncertificated securities market. Its main provisions will commence operation on a date to be determined by the Secretary for Financial Services and the Treasury of the Hong Kong government.

According to the Hong Kong government’s press release dated 27 March 2015, the SFC will set out the details of the operation and regulation of the paperless securities market regime in new subsidiary legislation (Rules), and the initial stage of the uncertificated securities market regime is intended to cover only shares of Hong Kong companies that are listed or to be listed on HKEx. The proposed regime would allow the existing paper-based system to continue in parallel with the paperless system although no specific period was set for the operation of the dual system before the paper-based system is terminated completely. It also preserves a significant role for Hong Kong’s share registrars whose eligibility for appointment by Hong Kong listed companies requires them to be a member of the Federation of Hong Kong Share Registrars. An application for membership of the federation requires the applicant to be proposed by two existing federation members.

In 2016, according to the then Deputy Secretary for Financial Services and Treasury (Financial Services) of the Hong Kong government, a working group among the SFC, HKEx and share registrars (Working Group) had been established to work out the operational details of the regime and the necessary Rules. It was envisaged that implementation of the regime would require the making of up to 10 pieces of subsidiary legislation.

Current status

Notwithstanding the gazettal of the Amendment Ordinance back in 2015 and the setting up of the Working Group in 2016, the Secretary for Financial Services and the Treasury of the Hong Kong government has not yet determined the operation date of the main provisions of the Amendment Ordinance. As a result, currently, the securities market in Hong Kong is still largely paper-based. For instance, the CO requires the issue of paper certificates and the use of paper instruments of transfer in respect of shares and debentures. Investors can hold and transfer securities in listed companies in electronic form through the Central Clearing and Settlement System (CCASS). However, the existing immobilised securities system has its shortcomings. The securities are still in paper form and held by the operator of CCASS in a central depositary linked to CCASS. First, it is not completely electronic. Some transactions still require the use of paper — such as, to some extent, the IPO process. In addition, the paper securities deposited into the CCASS depository are registered in the name of HKSCC Nominees Limited (HKSCC) and legal title to them remains vested in HKSCC, meaning that investors only hold a beneficial interest and must exercise their voting rights by submitting instructions indirectly via their broker/bank/custodian.

To date, there has been no indication from the Hong Kong government, the SFC or HKEx as to whether or when the further steps necessary to implement a paperless securities regime will be taken. This would require the SFC to publish and hold a public consultation on new subsidiary legislation (i.e. the new Rules) setting out the details of how the new paperless system will operate and how those playing a major role in its operation will be regulated. Recently, HKEx has discussed general plans to introduce new technology to increase automation into its processes, but has not specifically discussed this in terms of uncertificated securities. It is therefore almost impossible to tell whether the plans for a paperless system have been shelved indefinitely or simply delayed. The only indication that the plans are still alive is a statement by Gary Cheung Wai-kwok, the chairman of industry body, the Hong Kong Securities Association, who said in December 2018 that the Hong Kong government is planning to consult the market in January 2019 about a paperless securities market regime in Hong Kong.[2]