Response to SFC's the Consultation paper on proposed subsidiary legislation for implementing an uncertificated securities market in Hong Kong
Release Date: 2023-06-30
June 30, 2023
To: Securities and Futures Commission
Response to SFC's the Consultation paper on proposed subsidiary legislation for implementing an uncertificated securities market in Hong Kong
Question 1
Do you have any comments or concerns about deferring implementation of the USS option? If so, please elaborate.
HKSFPA supports the delay in implementation. The main reason is that the three key parties involved in the USM scheme - the Hong Kong Exchange, clearing or custodian participants, and investors - still do not have a clear understanding of the details and operations of the arrangement. It is possible to provide education or preliminary explanations to investors in advance, in order to avoid insufficient explanation from all parties at the initial stage of the formal launch, leading to confusion during implementation.
Question 2
Do you have any comments or concerns about the proposed concept of “authenticated message” and how it will work? If so, please elaborate.
HKSFPA supports the concept of "authenticated information". It only suggests that investors should be informed that receiving "authenticated information" in "physical form" may have a time lag, and the risks involved should be noted.
Question 3
Do you have any comments or concerns about any of the other proposed concepts discussed above? If so, please elaborate.
No comments.
Questions 4
Do you have any comments or concerns about the proposed obligations in respect of the maintenance, inspection, copying, closure, rectification or evidential value of ROMs of prescribed securities? If so, please elaborate.
HKSFPA believes the register of securities holders should be retained, so that relevant stakeholders can access information on shareholding structures. Maintaining and making the register public can strengthen transparency, improve corporate governance, help prospective investors understand investment targets, enhance stock market order, and strengthen anti-money laundering and combat manipulation of share trading and other improper activities. The media can also use the register system to understand the company's shareholding structure and whether the above-mentioned behaviors exist. Collectively, these factors help Hong Kong maintain its status as a highly international financial center.
Question 5
Do you have any comments or concerns about the proposed obligations applying in respect of prescribed securities other than shares, e.g., listed depositary receipts, stapled securities and authorized CIS (eg, listed REITs and listed ETFs) that are withdrawable from the HKEX System? If so, please elaborate.
No comments.
Question 6
Do you have any comments or concerns about the proposed arrangements for effecting transfers of prescribed securities in the USM environment? If so, please elaborate.
HKSFPA has additional comments on delisted securities. Many securities firms' clients still nominally hold such securities, but in reality, these securities have no value or existence. Securities firms are helpless and have to issue monthly statements to clients for these "wallpaper" shares, wasting a lot of administrative and compliance costs. Many securities firms want to solve the problem by representing clients to submit these "wallpaper" to the central securities depository, but the central securities depository may not be able to do so, as it may not have enough "wallpaper" in stock. If clients can submit the "wallpaper", securities firms would not need to issue monthly statements, reducing a lot of administrative and compliance costs. Promoting paperless operations at the central securities depository level is believed to be able to improve the problem of not being able to find the "wallpaper".
Other than that, the association has no further comments.
Question 7
Do you have any comments or concerns about the proposals concerning dematerialization at an investor’s request? If so, please elaborate.
HKSFPA believes that dematerialization can be done upon the request of investors. However, the association believes that in the future, it should not evolve into mandatory dematerialization. There are three reasons for this:
1) The spirit of private property rights should be respected;
2) Dematerialization must involve the deposit of the relevant uncertificated securities into a custodian institution, and the custodian institution may have the opportunity to charge various storage fees to the securities holders, so securities holders should be given the choice to hold physical securities;
3) To maintain the interests of certain investors who are collectors of physical securities and those who do not understand the measures for uncertificated securities (such as the elderly).
Question 8
Do you have any comments or concerns about the proposals concerning dematerialization at the issuer’s initiative? If so, please elaborate.
HKSFPA believes that it is necessary to retain the issuance of physical securities. As in the response to question 7:
1) The spirit of private property rights should be respected;
2) Dematerialization must involve the deposit of the relevant uncertificated securities into a custodian institution, and the custodian institution may have the opportunity to charge various storage fees to the securities holders;
3) To maintain the interests of certain investors who are collectors of physical securities and those who do not understand the measures for uncertificated securities (such as the elderly), securities holders should be given the choice to hold physical securities.
Question 9
Do you have any comments or concerns about the proposals concerning limited rematerialization at the issuer’s initiative? If so, please elaborate.
No comments.
Question 10
Do you have any comments or concerns about the proposals relating to the setting of deadlines to facilitate the market’s transition to full dematerialization? If so, please elaborate.
First, we opposes the proposal to implement mandatory dematerialization, but supports the dematerialization of securities held in central securities depositories to enhance the efficiency of settlement. So we only support setting a deadline for the dematerialization of securities held in central securities depositories.
Question 11
Do you have any comments or concerns about the proposed definition of “issuer”? If so, please elaborate.
Question 12
Do you agree with the proposal that, where the “issuer” comprises more than one entity, all such entities should be responsible for complying with any obligations imposed on the issuer under the USM Rules, but that compliance by any one of them will suffice? If not, please elaborate.
No comments.
Question 13
Do you have any comments or concerns about the proposal to allow joint holders to send paper instructions on the basis of which electronic instructions may be entered by the ASR? If so, please elaborate.
No comments.
Question 14
Do you agree that it is neither appropriate nor necessary for the USM Rules to provide for the sending of instructions by one joint holder on behalf of all? If not, please elaborate.
We agrees. Similar to opening a securities account, written authorization should be provided to allow one of the joint holders to issue instructions.
Question 15
Do you have any comments or concerns about the proposal to leave the matter of consolidation of holdings for entitlements distribution to issuers and their ASRs to decide? If so, please elaborate.
HKSFPA believes that issuers and their approved securities registrars should not be left to decide whether to consolidate holdings and under what circumstances. This choice should be left to the shareholders.
Question 16
Do you consider that any of the following fees (if charged to investors in the USM environment) should be standardised, and upper limits in respect of them specified somewhere, ie:
(i) any transfer fee;
(ii) any dematerialization fee; and
(iii) any fee charged for setting up a USI facility?
If yes, why? If no, why not?
Question 17
If you agree that any of the above fees should be standardised and upper limits in respect of them specified somewhere, do you agree that such limits should be specified in legislation or SFC codes, rather than in the Listing Rules? If no, why not?
The association opposes this. The association believes that if uncertificated securities are forcibly implemented, it would deprive the holders of physical securities of the rights they originally had, and any resulting fees would be fundamentally unjust.
Question 18
Do you have any other comments or concerns about the proposed USM Rules? If so, please elaborate.
No comment.
Question 19
Do you have any comments or concerns about the proposed scope of services to be regulated under the ASR Rules? If so, please elaborate.
The association's concern is that since the Hong Kong Stock Exchange has also launched the FINI system for IPO listings, the new rules should clarify whether they also apply to or should be applied to the FINI process and operations, and this should be explained to the market.
Question 20
Do you have any comments or concerns about the proposals regarding the systems requirements to be imposed on ASRs? If so, please elaborate.
The association's view is that the current application and transformation of financial technology has continuously increased the system operating costs of the industry. The association supports the new measures that can effectively reduce paper usage, and also hopes that the new rules can increase market transparency and protect investors' interests. At the same time, the association also hopes that the costs of related system upgrades or transformations can be subsidized or mainly borne by the Hong Kong Stock Exchange, which will have a positive impact on increasing the currently significantly insufficient stock market turnover.
Question 21
Do you have any comments or concerns about the proposals regarding the financial and other resources requirements to be imposed on ASRs? If so, please elaborate.
No comment.
Question 22
Do you have any comments or concerns about the operational and business requirements proposed to be imposed on ASRs? If so, please elaborate.
No comment.
Question 23
Do you have any comments or concerns about the notification and reporting requirements proposed to be imposed on ASRs? If so, please elaborate.
Appropriate reporting deadlines should be set for different reporting items.
Question 24
Do you have any comments or concerns about the proposal to require ASRs to provide information and documents, as necessary? If so, please elaborate.
The association agrees with the arrangement for the regulatory authority to provide information and documents to the approved securities registrars, but the industry should be informed about the boundaries of the information provided under the new rules, and the differences from the current investigations conducted under Sections 181 and 182 of the Securities and Futures Ordinance.
Question 25
Do you have any comments or concerns about the proposals regarding the appointment of skilled persons? If so, please elaborate.
Further clarification should be provided on the responsibilities, powers, and reporting requirements for the "relevant skilled persons".
Question 26
Do you have any comments or concerns about the proposal to require ASRs to issue written confirmations and annual statements? If so, please elaborate.
In addition to the requirements to issue written confirmations and annual statements, it is also recommended that during the initial implementation, assumed to be the first year, the approved securities registrars should publicly post notices on their websites and make arrangements for the paperless approach, so that investors can understand and become familiar with the new rules and their arrangements.
Question 27
Do you have any comments or concerns about the proposed obligations and arrangements relating to handovers from one ASR to another? If so, please elaborate.
No comment.
Question 28
Do you have any other comments or concerns about the proposed ASR Rules? If so, please elaborate.
No comment.
Question 29
Do you have any comments or concerns about the proposal to require issuers of prescribed securities to have an ASR at all times, including where the securities are not yet participating securities? If so, please elaborate.
Question 30
Taking into account the discussions in paragraphs 134 and 135 above, do you have any comments or concerns about the proposals relating to suspension of trading where no ASR is appointed? If so, please elaborate.
The association's concern is that suspending the processing of transactions related to those securities may harm the interests of investors, especially small shareholders. Furthermore, if the issuer continues to be unable to appoint a suitable approved securities registrar, it will effectively result in a continuous trading suspension. This not only has the potential to harm investors' interests, but also becomes a means for the issuer to achieve special purposes through suspension at any time.
Question 31
Do you have any comments or concerns about the proposed notification requirements relating to changes in ASRs? If so, please elaborate.
The association suggests adding a requirement that if the issuer does not have a suitable reason, it should not change the approved securities registrar more than a specified number of times (e.g. once) within a designated time limit (e.g. one year), in order to maintain operational stability and reduce the impact on investors.
Question 32
Do you have any comments or concerns about the proposal to impose fines on issuers for breaches of the notification requirements? If so, please elaborate. Please also suggest what alternative sanctions might be imposed.
No comment.
Question 33
Do you have any other comments or concerns about the proposed amendments to the SML Rules? If so, please elaborate.
The association agrees with the relevant amendments, but only suggests that the part about suspending transactions related to those securities should be explained in more depth and detail, to avoid situations like the responses in paragraphs 29 and 30 mentioned above.
Question 34
Do you have any comments or concerns about the proposed amendments to the OFC Rules? If so, please elaborate.
Since the management or establishment of open-ended fund companies is mostly carried out by licensed institutions of the Securities and Futures Commission, the association suggests that the number of days for the closed-ended shareholder register of open-ended fund companies should be shortened. The implementation requirements should also be clarified, as well as the roles and related responsibilities of the fund managers and fund management companies/trustees.
Question 35
Do you have any comments or concerns about the proposal to carve out from the definition of “dealing in securities” the provision of services relating to a public offer that fall within the scope of securities registrar services? If so, please elaborate.
No comment.
Question 36
Do you have any comments or concerns about the proposals as to which decisions under the USM regime should be subject to review by the SFAT? If so, please elaborate.
The association agrees with the arrangement for review by the Appeals Tribunal, but suggests that if the matter involves the suspension of the relevant securities, a time limit should be specified to avoid prolonging the suspension period and affecting investors.
Question 37
Do you have any comments or concerns about the proposed amendments to the Companies (Winding-up) Rules? If so, please elaborate.
No comment.
The translation of the text is:
If you have any inquiries about this letter, please feel free to contact me ([phone number]) or the Industrial Relations Department Director, Mr. Wong Hoi-lok Ivan.
Best regards,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association
To: Securities and Futures Commission
Response to SFC's the Consultation paper on proposed subsidiary legislation for implementing an uncertificated securities market in Hong Kong
Question 1
Do you have any comments or concerns about deferring implementation of the USS option? If so, please elaborate.
HKSFPA supports the delay in implementation. The main reason is that the three key parties involved in the USM scheme - the Hong Kong Exchange, clearing or custodian participants, and investors - still do not have a clear understanding of the details and operations of the arrangement. It is possible to provide education or preliminary explanations to investors in advance, in order to avoid insufficient explanation from all parties at the initial stage of the formal launch, leading to confusion during implementation.
Question 2
Do you have any comments or concerns about the proposed concept of “authenticated message” and how it will work? If so, please elaborate.
HKSFPA supports the concept of "authenticated information". It only suggests that investors should be informed that receiving "authenticated information" in "physical form" may have a time lag, and the risks involved should be noted.
Question 3
Do you have any comments or concerns about any of the other proposed concepts discussed above? If so, please elaborate.
No comments.
Questions 4
Do you have any comments or concerns about the proposed obligations in respect of the maintenance, inspection, copying, closure, rectification or evidential value of ROMs of prescribed securities? If so, please elaborate.
HKSFPA believes the register of securities holders should be retained, so that relevant stakeholders can access information on shareholding structures. Maintaining and making the register public can strengthen transparency, improve corporate governance, help prospective investors understand investment targets, enhance stock market order, and strengthen anti-money laundering and combat manipulation of share trading and other improper activities. The media can also use the register system to understand the company's shareholding structure and whether the above-mentioned behaviors exist. Collectively, these factors help Hong Kong maintain its status as a highly international financial center.
Question 5
Do you have any comments or concerns about the proposed obligations applying in respect of prescribed securities other than shares, e.g., listed depositary receipts, stapled securities and authorized CIS (eg, listed REITs and listed ETFs) that are withdrawable from the HKEX System? If so, please elaborate.
No comments.
Question 6
Do you have any comments or concerns about the proposed arrangements for effecting transfers of prescribed securities in the USM environment? If so, please elaborate.
HKSFPA has additional comments on delisted securities. Many securities firms' clients still nominally hold such securities, but in reality, these securities have no value or existence. Securities firms are helpless and have to issue monthly statements to clients for these "wallpaper" shares, wasting a lot of administrative and compliance costs. Many securities firms want to solve the problem by representing clients to submit these "wallpaper" to the central securities depository, but the central securities depository may not be able to do so, as it may not have enough "wallpaper" in stock. If clients can submit the "wallpaper", securities firms would not need to issue monthly statements, reducing a lot of administrative and compliance costs. Promoting paperless operations at the central securities depository level is believed to be able to improve the problem of not being able to find the "wallpaper".
Other than that, the association has no further comments.
Question 7
Do you have any comments or concerns about the proposals concerning dematerialization at an investor’s request? If so, please elaborate.
HKSFPA believes that dematerialization can be done upon the request of investors. However, the association believes that in the future, it should not evolve into mandatory dematerialization. There are three reasons for this:
1) The spirit of private property rights should be respected;
2) Dematerialization must involve the deposit of the relevant uncertificated securities into a custodian institution, and the custodian institution may have the opportunity to charge various storage fees to the securities holders, so securities holders should be given the choice to hold physical securities;
3) To maintain the interests of certain investors who are collectors of physical securities and those who do not understand the measures for uncertificated securities (such as the elderly).
Question 8
Do you have any comments or concerns about the proposals concerning dematerialization at the issuer’s initiative? If so, please elaborate.
HKSFPA believes that it is necessary to retain the issuance of physical securities. As in the response to question 7:
1) The spirit of private property rights should be respected;
2) Dematerialization must involve the deposit of the relevant uncertificated securities into a custodian institution, and the custodian institution may have the opportunity to charge various storage fees to the securities holders;
3) To maintain the interests of certain investors who are collectors of physical securities and those who do not understand the measures for uncertificated securities (such as the elderly), securities holders should be given the choice to hold physical securities.
Question 9
Do you have any comments or concerns about the proposals concerning limited rematerialization at the issuer’s initiative? If so, please elaborate.
No comments.
Question 10
Do you have any comments or concerns about the proposals relating to the setting of deadlines to facilitate the market’s transition to full dematerialization? If so, please elaborate.
First, we opposes the proposal to implement mandatory dematerialization, but supports the dematerialization of securities held in central securities depositories to enhance the efficiency of settlement. So we only support setting a deadline for the dematerialization of securities held in central securities depositories.
Question 11
Do you have any comments or concerns about the proposed definition of “issuer”? If so, please elaborate.
Question 12
Do you agree with the proposal that, where the “issuer” comprises more than one entity, all such entities should be responsible for complying with any obligations imposed on the issuer under the USM Rules, but that compliance by any one of them will suffice? If not, please elaborate.
No comments.
Question 13
Do you have any comments or concerns about the proposal to allow joint holders to send paper instructions on the basis of which electronic instructions may be entered by the ASR? If so, please elaborate.
No comments.
Question 14
Do you agree that it is neither appropriate nor necessary for the USM Rules to provide for the sending of instructions by one joint holder on behalf of all? If not, please elaborate.
We agrees. Similar to opening a securities account, written authorization should be provided to allow one of the joint holders to issue instructions.
Question 15
Do you have any comments or concerns about the proposal to leave the matter of consolidation of holdings for entitlements distribution to issuers and their ASRs to decide? If so, please elaborate.
HKSFPA believes that issuers and their approved securities registrars should not be left to decide whether to consolidate holdings and under what circumstances. This choice should be left to the shareholders.
Question 16
Do you consider that any of the following fees (if charged to investors in the USM environment) should be standardised, and upper limits in respect of them specified somewhere, ie:
(i) any transfer fee;
(ii) any dematerialization fee; and
(iii) any fee charged for setting up a USI facility?
If yes, why? If no, why not?
Question 17
If you agree that any of the above fees should be standardised and upper limits in respect of them specified somewhere, do you agree that such limits should be specified in legislation or SFC codes, rather than in the Listing Rules? If no, why not?
The association opposes this. The association believes that if uncertificated securities are forcibly implemented, it would deprive the holders of physical securities of the rights they originally had, and any resulting fees would be fundamentally unjust.
Question 18
Do you have any other comments or concerns about the proposed USM Rules? If so, please elaborate.
No comment.
Question 19
Do you have any comments or concerns about the proposed scope of services to be regulated under the ASR Rules? If so, please elaborate.
The association's concern is that since the Hong Kong Stock Exchange has also launched the FINI system for IPO listings, the new rules should clarify whether they also apply to or should be applied to the FINI process and operations, and this should be explained to the market.
Question 20
Do you have any comments or concerns about the proposals regarding the systems requirements to be imposed on ASRs? If so, please elaborate.
The association's view is that the current application and transformation of financial technology has continuously increased the system operating costs of the industry. The association supports the new measures that can effectively reduce paper usage, and also hopes that the new rules can increase market transparency and protect investors' interests. At the same time, the association also hopes that the costs of related system upgrades or transformations can be subsidized or mainly borne by the Hong Kong Stock Exchange, which will have a positive impact on increasing the currently significantly insufficient stock market turnover.
Question 21
Do you have any comments or concerns about the proposals regarding the financial and other resources requirements to be imposed on ASRs? If so, please elaborate.
No comment.
Question 22
Do you have any comments or concerns about the operational and business requirements proposed to be imposed on ASRs? If so, please elaborate.
No comment.
Question 23
Do you have any comments or concerns about the notification and reporting requirements proposed to be imposed on ASRs? If so, please elaborate.
Appropriate reporting deadlines should be set for different reporting items.
Question 24
Do you have any comments or concerns about the proposal to require ASRs to provide information and documents, as necessary? If so, please elaborate.
The association agrees with the arrangement for the regulatory authority to provide information and documents to the approved securities registrars, but the industry should be informed about the boundaries of the information provided under the new rules, and the differences from the current investigations conducted under Sections 181 and 182 of the Securities and Futures Ordinance.
Question 25
Do you have any comments or concerns about the proposals regarding the appointment of skilled persons? If so, please elaborate.
Further clarification should be provided on the responsibilities, powers, and reporting requirements for the "relevant skilled persons".
Question 26
Do you have any comments or concerns about the proposal to require ASRs to issue written confirmations and annual statements? If so, please elaborate.
In addition to the requirements to issue written confirmations and annual statements, it is also recommended that during the initial implementation, assumed to be the first year, the approved securities registrars should publicly post notices on their websites and make arrangements for the paperless approach, so that investors can understand and become familiar with the new rules and their arrangements.
Question 27
Do you have any comments or concerns about the proposed obligations and arrangements relating to handovers from one ASR to another? If so, please elaborate.
No comment.
Question 28
Do you have any other comments or concerns about the proposed ASR Rules? If so, please elaborate.
No comment.
Question 29
Do you have any comments or concerns about the proposal to require issuers of prescribed securities to have an ASR at all times, including where the securities are not yet participating securities? If so, please elaborate.
Question 30
Taking into account the discussions in paragraphs 134 and 135 above, do you have any comments or concerns about the proposals relating to suspension of trading where no ASR is appointed? If so, please elaborate.
The association's concern is that suspending the processing of transactions related to those securities may harm the interests of investors, especially small shareholders. Furthermore, if the issuer continues to be unable to appoint a suitable approved securities registrar, it will effectively result in a continuous trading suspension. This not only has the potential to harm investors' interests, but also becomes a means for the issuer to achieve special purposes through suspension at any time.
Question 31
Do you have any comments or concerns about the proposed notification requirements relating to changes in ASRs? If so, please elaborate.
The association suggests adding a requirement that if the issuer does not have a suitable reason, it should not change the approved securities registrar more than a specified number of times (e.g. once) within a designated time limit (e.g. one year), in order to maintain operational stability and reduce the impact on investors.
Question 32
Do you have any comments or concerns about the proposal to impose fines on issuers for breaches of the notification requirements? If so, please elaborate. Please also suggest what alternative sanctions might be imposed.
No comment.
Question 33
Do you have any other comments or concerns about the proposed amendments to the SML Rules? If so, please elaborate.
The association agrees with the relevant amendments, but only suggests that the part about suspending transactions related to those securities should be explained in more depth and detail, to avoid situations like the responses in paragraphs 29 and 30 mentioned above.
Question 34
Do you have any comments or concerns about the proposed amendments to the OFC Rules? If so, please elaborate.
Since the management or establishment of open-ended fund companies is mostly carried out by licensed institutions of the Securities and Futures Commission, the association suggests that the number of days for the closed-ended shareholder register of open-ended fund companies should be shortened. The implementation requirements should also be clarified, as well as the roles and related responsibilities of the fund managers and fund management companies/trustees.
Question 35
Do you have any comments or concerns about the proposal to carve out from the definition of “dealing in securities” the provision of services relating to a public offer that fall within the scope of securities registrar services? If so, please elaborate.
No comment.
Question 36
Do you have any comments or concerns about the proposals as to which decisions under the USM regime should be subject to review by the SFAT? If so, please elaborate.
The association agrees with the arrangement for review by the Appeals Tribunal, but suggests that if the matter involves the suspension of the relevant securities, a time limit should be specified to avoid prolonging the suspension period and affecting investors.
Question 37
Do you have any comments or concerns about the proposed amendments to the Companies (Winding-up) Rules? If so, please elaborate.
No comment.
The translation of the text is:
If you have any inquiries about this letter, please feel free to contact me ([phone number]) or the Industrial Relations Department Director, Mr. Wong Hoi-lok Ivan.
Best regards,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association