A four-party agreement has been inked for the establishment of the Shanghai-Hong Kong Stock Connect program that will allow cross-border trading by individuals in the two cities, the Hong Kong bourse operator said in a statement Thursday.
In the initial stage, derivatives products are restricted from the scheme, according to the agreement signed by the Stock Exchange of Hong Kong Ltd. and Hong Kong Securities Clearing Co. Ltd., both wholly-owned subsidiaries of Hong Kong Exchanges and Clearing Ltd. (HKEx, 00388.HK), with the Shanghai Stock Exchange and China Securities Depository and Clearing Co. Ltd. (ChinaClear).
The rule will disappoint some derivatives issuers in Hong Kong who had been hoping to use the stock through-train to launch related warrants and callable bull/bear contracts, the Hong Kong Economic Journal noted Friday.
The master document, which was signed Thursday and which will serve as the legal basis for the Stock Connect program, is in line with the principles set out in the joint announcement by Hong Kong’s Securities and Futures Commission and the China Securities Regulatory Commission in April this year, regarding the approval, in principle, of the development of a pilot program for the establishment of mutual stock market access between mainland China and Hong Kong.
The agreement was signed by HKEx chief executive Charles Li, Shanghai Stock Exchange (SSE) president Huang Hongyuan and ChinaClear general manager Dai Wenhua. HKEx chairman Chow Chung-kong, SSE chairman Gui Minjie and ChinaClear chairman Zhou Ming also attended and witnessed the signing ceremony.
The two bourse operators cannot launch without the written approval of the counterpart any derivatives products, including options and futures, based on shares or indices in each other’s market.
Any such derivatives should be approved by both exchanges before launch and will be subject to discussions between the two bourses, according to the four-party agreement. Income generated from such products has to be evenly shared between the two parties.
The signing of the four-party agreement indicates that three important steps before the launch of the Shanghai-Hong Kong Stock Connect have been accomplished, said HKEx’s Li.
The first three steps were joint announcement of the scheme, signing a four-party framework agreement and incorporating the operating arrangements into the respective rules. The last step would be getting final approvals from the regulators.
Meanwhile, the Hong Kong bourse is said to have suggested to China’s securities watchdog to grant a six-month grace period to waive the levy on capital gains for participants in the pilot stock connect program, to lessen the burden for local brokerages and investors.
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