Information paper

Rewiring the securities
landscape in China

Rewiring the securities landscape in China

Contents

1 A journey of transformation for China

3

2 Market infrastructures in China

4

3 A new operating model – Connect

5

4 The Way Forward– Building a scalable and international infrastructure framework

6

5 Lessons from other market transformations

7

6 Conclusions

8

7 Reference

92

Rewiring the securities landscape in China

1 A journey of transformation for China

China’s securities markets are now welladvanced on a journey of transformation. Earlyin 1993, China took its first step to liberalise
its capital market by allowing foreign investors
to invest in China B shares. In recent years,
China has been liberalising its capital markets

and providing various market access channels
to institutional investors for both inward andoutward investment. Significant milestones
along the way have included the introduction
and gradual expansion of ‘the Qs’ (QFII,RQFII, QDII, RQDII, QDLP, QDIE and QFLP),

Mutual Recognition of Funds (MRF) and ‘theConnects’ (Stock Connect and Bond Connect)– each mechanism coming with its own
unique strengths and challenges.

Figure 1: China capital markets: A remarkable transformation
Jul 2015
Mutual Fund
Recognition
Northbound

1993
B shareslaunched
2002
QFII launched

Before2010

Aug 2010
CIBM opened to
selected offshore
RMB FIs andcentral banks
Dec 2010
QFLP launched

Dec 2011
RQFII launched

2010

2011

Nov 2014
Stock
Connect(SH-HK)
NorthboundDec 2012
RQFLP
launched

2012

2013
Jul 2013
QDLP

2006
QDII
launched

Inbound Investment Schemes
Outbound Investment Schemes2014
Nov 2014
Stock Connect(SH-HK)SouthboundJul 2016
Nov 2015
Stock Connect
Government and (SZ-HK)
sovereign entities Northboundto enterlaunched
CIBM/CIFM
without quota
2016
restriction.
CIBM Direct

2015
Jul 2015
Mutual Fund
Recognition
Southbound2016

Jul 2017
Bond Connect(CN-HK)
NorthboundMar 2018
INE launched

2017

2018

Jul 2016
Stock Connect(SZ-HK)SouthboundDec 2014
QDIE
Dec 2014
RQDII

With China’s continued effort to open up its capital markets, we are seeing the gradual inclusions of Chinese stocks and bonds in major global
indexes, resulting in more securities investments flowing into China.

3

Rewiring the securities landscape in China

2 Market infrastructures in China

China started to build its securities markets 20
years ago. With late-mover advantage,
China’s domestic securities markets areoperating in a secure, scriptless and highly
efficient way, while being quite different frominternational markets. The way they manage
critical tasks – such as post-trade matchingby affirmation for interbank bonds, theabsence of failure trades for China A shares,
the lack of a need for reconciliation (given

the interconnectivity of trading platforms
with the CSDs), domestic settlement andasset servicing – is world-class. However,challenges have been felt in opening up to
cross-border transactions, since this domestic
model does not translate well into international
best practice.
There is still a multiplicity of market
infrastructures in China compared to otherjurisdictions – and many overlaps in areas of
responsibility, such as settlement of bonds.
Complexity arises from different Central
Counterparties (CCP), Central Securities
Depositories (CSD) and other intermediaries,
meaning that it is often not clear who does
what and how. In addition, each infrastructure
has different proprietary standards and market
practices, which will only be exacerbated asthese markets open up further.

Figure 2: A multiplicity of market infrastructures in China

On-exchange Traded Securities( Equity, Exchanged traded Funds, Exchanged traded bonds, etc. )Stock Connect(Equity Only)

Direct(Equity, Bond, Fund)

Mutual Fund
Recognition(Fund Only)

Overseas
Investors

Trading/Orders

Interbank Bonds and FX(Bonds and FX traded via CIBM)
Interbank FX

Direct(Bond only)

Bond Connect

Overseas Investor

PRC Broker

HK Broker

SSE/SZSE

HKEx

HKDistributor

CFFETsHK
Custodian

PRC
Settlement
Agent

International
Trading
platform

CFFETS

CFFETs

SSE/SZSE

Settlement
and Clearing

CSDC

PRC Custodian

CSDC

CMU

HKSCC

CSDC

HK Custodian

SCH(CCP Only)

PRC Counterparty( Bilateral Only)

Fund House/TA
CNAPS(Domestic )Payment

CNAPS (Domestic)

CNAPS (X-border)

Offshore Entities

Through the Direct Schemes, such as QFII,RQFII and CIBM Direct, local custodiansplay a critical role in ‘normalising’ local
differences and, in turn, providing a globally4

SMI

CNAPS (X-border)

PMI

Foreign
Currency
Payment
Systems

Flows on SWIFT(mostly cross-border)

consistent experience to overseas investors.
For example, post-trade SWIFT messages
received by local custodians are then

CCDC

SCH

PRC Settlement
Agent

CCDC

SCH

CMU

HK Custodian

CNAPS (Domestic)

Trading Process

CIPS(X-border)

Clearing & Settlement(funds order) proces

converted to a proprietary standard for the
CSD. Connecting with these different market
infrastructures is costly and also poses atransformational risk.

Rewiring the securities landscape in China

3 A new operating model – The Connects

In 2014, Stock Connect was launched. Despitesome early operational challenges, uncertainties
over quotas and periods of market suspension
and volatility, Stock Connect is now winningmarket share for new inflows at lower accesscosts and with higher market efficiency. Stock
Connect may prove to be a robust and scalable
channel to invest in China A shares.
Similar to Stock Connect, Bond Connect
launched in 2017 and immediately attracted

interest from overseas investors. With asimple access filing process, investors can
get immediate access to China’s fixed income
market via their existing connectivity througha global trading platform and internationalcustodian banks.
The Connects are well-designed and innovative
frameworks, providing cross-market accessthat leverage the ‘One-Country-Two-Systems’
between Mainland China and Hong Kong’s

GlobalPractices

MarketEntry

Account
Structure

Trading

Settlement

Connects

well established market infrastructures and arealigned with international standards.
The innovation under the Connects spans allareas from market entry and trading, down tocustody and post-trade settlement. Essentially,
they bridge differences between global anddomestic market practices, improving China
securities accessibility and bringing it much closer
to international standards:

China
Practices• No registration required, or
simplified filing process• Stock Connect: No
registration required.
• Bond Connect: Simplified
filing through HK.

• QFII/RQFII: Approvals required from China
regulators through PRC custodian bank
• CIBM Direct: Registration to China regulators
through PRC settlement agent• A multi-level depository
arrangement with a nomineesystem• A multi-level depository
arrangement with a nomineesystem• Trading code/investor ID isrequired for trading.

• A single-level depository system with investor
segregation accounts opened at CSD level.
• Trading code/investor ID is required for
trading.

• Place trade orders throughinternational trading platform
directly or through brokers• Best execution.

• Place trade orders themselvesor through its international
brokers via an offshore trading
platform that is linked with
China trading platform.

• Equity: Only can execute trade orders
through a designated PRC broker.
• CIBM: Only can input trade orders through adesignated bond settlement agent .

• End-to-end STP settlement
process using STP
communications channels,
such as SWIFT.

• Offshore settlement : InvestorHK Custodian- HK CSD. ( STP
route via SWIFT)• Onshore settlement : HK CSDCN CSD ( proprietary links withcertain manual process.)• Onshore settlement starts from Investor to
PRC Custodian. ( STP route via SWIFT)• PRC custodian further settles with CN CSD
on behalf of investors which are the direct
holders of PRC securities. ( proprietary links
with certain manual process.)

China Mainland - Hong Kong Connects: bridging differences between global anddomestic market practices

While much has been achieved with theConnects, there is still some more to be done
to ensure that they can be widely accepted by
global investors. Although the Connects have
many advantages, some outstanding operational
issues are still creating operational burdens andrisk for participants, including:•

DVP. For Stock Connect, China A sharesettlement mechanism is not based on atrue delivery versus payment (DVP). And
for Bond Connect, the absence of DVP
in CCDC settlement is still an outstanding
issue to be resolved.

••

Manual processes. For Stock Connect,
there is a manual process by the HKEX
to enquire the investors’ identity withthe participants. For Bond Connect, theconnectivity between CMU and CCDC/SCH still involves manual processes, suchas manual affirmation, reconciliation against
PDF reports and faxed corporate actions by
the CMU, etc.
Inconsistent practices. Overseas
investors are now allowed to invest in China
securities across multiple channels. Given
the variety and complexity of China accesschannels, overseas investors are facing
operational difficulties when managing
different processes and compliance
controls. Misalignment of processes andregulatory requirements leads to operational
inefficiencies and risks.
Chinese infrastructures and intermediaries areaware of these challenges and are keen to show
foreign investors that they are ready to offer
international best practices, such as T+2, andembrace international standards such as ISO.

5

Rewiring the securities landscape in China

4 The Way Forward: building a scalable and international infrastructure framework

There is no doubt that China has been taking
significant steps to broaden market accessand international connectivity. China willcontinue to accelerate reforms and open up
its capital markets with the aim of making
RMB convertible for capital accounts. In global
trade, RMB is used more and more widely.
While it may still only account for around 2%of international payments, its use has been
growing steadily over the past few years.

Figure 3: Currency activity share for domestic & international payments

In September 2016, the International Monetary
Fund (IMF) announced the launch of the
new Special Drawing Rights (SDR) basket,
which included the RMB for the first time.
Since the launch, however, take-up of the
RMB internationally has been relatively low– as RMB internationalisation needs to besupported by a pervasive connectivity. Not
only payments in RMB need to be simplified,
but also access to bond and stock markets forinternational investors.
We expect that China will become much more integrated with other securities markets across the world in the following ways:
Key Trends

Initiatives

Increase of cross-bordersecurities transactions underDirect Schemes••

Expansion of cross-border links ••••Multilateral domestic links
among different onshore SMIs•

Inflow: Index inclusions and further relaxation of existing Direct Schemes will attract huge investment
inflows from overseas investors.
Outflow: China will continue to encourage overseas expansion, and it is likely to expand the scope of
QDII, RQDII and QDLP schemes.
Expansion of China mainland-Hong Kong Connect schemes including ETF connect and IPO
connect, Southbound leg of Bond Connect, etc.
More direct Connects will likely be established between China SMIs and international or other countries’
CSDs. Which ones will be first remains to be seen.
‘Belt and Road initiative’:oChina will allow domestic and foreign companies to issue ‘Belt and Road’ bonds via domestic
exchanges.
oShanghai-London Connect: China-listed companies will be able to issue Depository Receipts (DRs)on the London Stock Exchange and vice versa.
oChinese cooperation in securities market infrastructures with other countries: In 2015, China Europe International Exchange AG (CEINEX) was established by Shanghai Stock
Exchange (SSE), Deutsche Börse Group and China Financial Futures Exchange (CFFEX) to bring
China’s financial markets closer to the international investor community.
 In 2016, CFFEX, SSE and the Shenzhen Stock Exchange (SZSE) acquired 30 percent of the
Pakistan Stock Exchange.
 In 2018, SSE and SZSE secured a 25 percent stake in the Dhaka Stock Exchange in
Bangladesh.
 Chinese SMIs are also exploring cooperation opportunities with other ‘Belt and Road’ countries,
including the UK and Russia.
China Depository Receipts (CDRs): China now allows home-grown, high-tech and overseas-listedcompanies to issue CDRs on domestic exchanges.
There could be more domestic links among different CSDs and Exchanges to facilitate the development ofderivatives transactions and collateral management.

To achieve the above initiatives, China SMIs
will face challenges in controlling operationalrisk, streamlining processes and managing
costs when facing so many different
infrastructures and market practices. SWIFT’s
6view is that the ultimate adoption by China’s
regulators, clearing houses and institutions ofISO standards for clearing and settlement –and the globally established market practices
that have been developed around them –would be hugely beneficial both for China’s
investors establishing a global presence andfor international investors moving into thecountry.

Rewiring the securities landscape in China

5 Lessons from other post-trade market transformations•

Post-trade in China today is somewhat similar
to post-trade in Europe prior to the creationof ESMA and the launch of T2S. There aredifferent regulators, many different Clearing
Houses and Central Securities Depositories,
and different standards and market practices.
Key challenges include:••

Different SMIs across the market withdifferent requirements.
Different market practices.

After market consultations and a decisionby the ECB’s Governing Council, the T2S
project was launched in 2008, with theplatform becoming operational on 22 June
2015. T2S is a single, pan-European platform
for securities settlement in central bankfunds. The single platform is operated by the

Inefficient cross-border post-trade
processes.

European Central Bank (ECB) and it enables
CSDs in Europe to outsource their settlement
operations to the ECB. The implementationof T2S was really the starting point for the
standardisation of securities post-trade in theEuropean Union. This large scale post-trade
initiative was implemented with the objectiveof harmonising settlement processes andreducing intermediate costs, while increasing
competition and improving risk management.

Figure 4: Past vs. New: EU Settlement Landscape

Past EU Settlement Landscape*

New EU Settlement Landscape with T2S*
Market ParticipantsMarket Participants

CSD A

CSD C

CSD B

Custodians

CSD E

CSD D

Indirect access

CSD A

CSD B

Indirect access

CSD C

Direct technical accessCustodians

Custodians
CSD x

Value-Added Network (VAN)

CSD x

TARGET2-Securities
Links* Graphic source: European Central Bank presentationT2S

Similar outcomes can be expected fromstandardisation and automation in China’s
cross-border transactions. A similar recipe tothat applied in Europe could be consideredin China to bring operational efficiency to thelevel expected for cross-border flows.
Adoption of the same international standards
and harmonised market practices by all
securities market infrastructures involvedin equity and fixed income clearing andsettlement will allow for better inter-operability
and tighter settlement timelines for Chinese
markets with their international counterparts
going forward.

ISO 20022 business standards andother ISO data standards, such as ISIN
(International Securities Identification Number)
implementation, need to be at the coreof this harmonisation effort, following the
adoption trends taking place in most major
market infrastructures globally. The adoption
by all securities infrastructures in China of
ISO 20022 – as is already the case with
CNAPS and CIPS for payments – will help
promote a common language, so that market
infrastructures inside and outside China caninteract. This will require the establishment
by an all-encompassing body of harmonised
market practices for all infrastructures andtheir participants. We believe that the National

Market Practice Group (NMPG) can be thatbody, benefitting as it does from the expertiseof the global Securities Market Practice Group(SMPG).
The leveraging of international communication
platforms, such as SWIFT, will provide therails to exchange ISO 20022 standardised
information between Mainland infrastructures
and their cross-border counterparts in Hong
Kong and elsewhere. The same will apply
between the infrastructures and their market
participants, many of whom are eager to
re-use the secure, reliable, resilient andstandardised platforms that they are using
today for their cross-border interactions and,often, their domestic flows in other markets.

7

Rewiring the securities landscape in China

6 Conclusions

More coordination among China SMIs
and offshore SMIs will be required in orderto improve cross-border investments inthe long term. Through harmonisation ofmarket practices to facilitate access andinteroperability, China can further improve its
market access and reduce operational risks
and costs for both overseas and domestic
investors.

The implementation of a neutral cross-borderand domestic network such as SWIFT
would further strengthen the operating
model through the automation of processes
and systems, and allow it to deliver thefull potential of China’s capital markets to
the rest of the world in a cost-efficient andoperationally risk-free way.
SWIFT is working with all market
infrastructures and intermediaries involved
today and tomorrow in the opening of China’s
capital markets in order to deliver that visionof standardised, automated and efficient
access to Chinese equities, bonds, funds andcurrency.

In order to implement the multilateral crossborder settlement links, standardisationof message flows and data is essential.
Standardisation of message formats is key tomaintaining a low initial cost for all involved
parties.

Figure 5: China Domestic and Cross-Border market infrastructure links and SWIFT

CSD3

CSD2

The SMPG is focused on enhancing current
securities industry practices. The grouprealizes the benefit of industry utilities and ofother industry groups in dictating conformity
to standards and market practices. As such,there is active dialogue between the SMPG
and other industry groups/organizations(i.e. SWIFT, ECSDA, ACSDA, ISITC, ISSA,ASIFMA, etc.)
China SMPG
The 1st China SMPG meeting was held in
2008. The China SMPG has developed intoa well-functioning and effective platform.
Through the platform, important Chinese
securities participants have been working
together to address the industry requirements
for higher STP benefits and to align bestpractices in the Chinese market.

ICSD
CSD1

CSD

Domestic Institution

Directly connected participant

Indirectly connected participant

Investor

Flows on SWIFT(mostly cross -border)

Potential flows on SWIFT

8

What is the SMPG?
The SMPG was created in July 1998 and,since its inception, has established a local
presence in more than 35 countries throughNational Market Practice Groups (NMPG).
These groups are comprised of broker/
dealers, investment managers, custodianbanks, central securities depositories andregulators. The SMPG has been extremely
successful in creating globally agreed,harmonised market practices which –
integrated with ISO standards – have brought
the securities industry closer to achieving
Straight Through Processing (STP).

What is ISO 20022?
First published in 2004, ISO 20022 is a single
standard that covers all business domains andend-to-end business processes. A global andopen standard, ISO 20022 is not controlled bya single interest: it can be used by anyone in
the industry and implemented on any network.
It has fully established processes for its
maintenance, evolution and governance.
ISO 20022 remains the choice of Chinese
market infrastructures due to the richness of
its financial messaging. It allows, for example,
longer beneficiary fields and the transmissionof Chinese and other double-byte characters.

Rewiring the securities landscape in China

7 Reference

Glossary
CCP

Central Counter Party

CDR

China Depository Receipt

CEINEX

China Europe International Exchange AG

CFFEX

China Financial Futures Exchange

CIBM

China Inter-bank Bond Market

CIFM

China Inter-bank Foreign Exchange Market

CIPS

the RMB Cross-border Interbank Payment System

CNAPS

The China National Advanced Payments System

CSD

Central Securities DepositoryDR

Depository Receipt

DVP

Delivery versus payment

ECB

European Central Bank

INE

Shanghai International Energy Exchange

MRF

Mainland-Hong Kong Mutual Recognition of Funds

QDIE

Qualified Domestic Investment Entity

QDII

Qualified Domestic Institutional Investors regime

QDLP

Qualified Domestic Limited Partner

QFII

Qualified Foreign Institutional Investors regime

QFLP

Qualified Foreign Limited PartnerRQDII

RMB Qualified Domestic Institutional Investors regime

RQFII

RMB Qualified Foreign Institutional Investors regime

SDR

Special Drawing Right

SMI

Securities Market Infrastructure

SMPG

Securities Market Practice Group

SSE

Shanghai Stock Exchange

STP

Straight Through Processing

SZSE

Shenzhen Stock Exchange

9Rewiring the securities landscape in China

About SWIFT

Copyright

Contacts

SWIFT is a global member-owned cooperative
and the world’s leading provider of secure
financial messaging services. We provide ourcommunity with a platform for messaging,standards for communicating and we offer
products and services to facilitate access andintegration; identification, analysis and financial
crime compliance. Our messaging platform,
products and services connect more than
11,000 banking and securities organisations,market infrastructures and corporate
customers in more than 200 countries andterritories, enabling them to communicate
securely and exchange standardised financial
messages in a reliable way. As their trusted
provider, we facilitate global and local financial
flows, support trade and commerce all aroundthe world; we relentlessly pursue operational
excellence and continually seek ways tolower costs, reduce risks and eliminate
operational inefficiencies. Headquartered in
Belgium, SWIFT’s international governanceand oversight reinforces the neutral, global
character of its cooperative structure. SWIFT’s
global office network ensures an active
presence in all the major financial centres.

Copyright © SWIFT SCRL, 2018 — all rights
reserved.

For more information about this paper, contact

For more information about SWIFT, visit
www.swift.com

Disclaimer

Whikie Liu
Head of Securities & FX Markets, China, SWIFT
Whikie.LIU@swift.com

SWIFT supplies this publication for information
purposes only. The information in thispublication may change from time to time.
You must always refer to the latest available
version.

Lisa O’Connor
Managing Director, Securities,
Treasury and Standards, APAC, SWIFT
Lisa.OCONNOR@swift.com