Response: Discussion Paper | Accelerated Settlement for the Hong Kong Cash Market
Release Date: 2025-08-05
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Response: Discussion Paper | Accelerated Settlement for the Hong Kong Cash Market
In principle, Hong Kong Securities & Futures Professionals Association (hereinafter “We”, “The Association” or “HKSFPA”) supports the direction of a T+1 settlement cycle, as the advantages outweigh the disadvantages. It can reduce risk, improve capital efficiency, and align with international standards. However, it is still necessary to carefully balance and address key challenges for each point.
Question 1: What do you think would be the effect of adopting a T+1 settlement cycle on the market vibrancy and competitiveness of the Hong Kong market as an international financial centre?
Response 1： Shortening the settlement cycle to T+1 can reduce market risk, enhance capital efficiency, and align with global markets. This may strengthen Hong Kong's competitiveness as an international financial center and attract more international investors. Our association supports exploring the T+1 settlement cycle as it can promote market efficiency and enhance Hong Kong's competitive position.
- Aligning with 88% of the world's major markets (such as the US, India, and Europe) in terms of settlement cycles can improve the efficiency of cross-border capital flows and attract international capital.
- It can reduce counterparty risk and margin requirements, thereby enhancing market stability.
Challenges:
- Time zone disadvantage: Hong Kong, being the earliest T+1 market to open globally (GMT+8), requires European and American investors to handle trades overnight, potentially increasing operational risks and costs.
- Foreign exchange mismatch: As the FX market largely operates on a T+2 settlement, international investors need to arrange currency exchanges in advance, increasing funding costs.
Our association suggests that HKEX should lead in coordinating cross-time-zone settlement processes and collaborate with the Monetary Authority to promote FX platforms offering T+1 services to alleviate time zone pressures. Additionally, it is recommended to extend the T-day order cut-off time.
Question 2: Do you see any effect in the implementation of T+1 on the long-term liquidity and risk management capabilities within the Hong Kong market, and in the harmonization of the settlement cycle across major exchanges across global markets?
Please give reasons for your views.
Response 2： Our association believes that T+1 settlement will align Hong Kong more closely with international standards, potentially enhancing liquidity and the efficiency of risk management. However, the challenges faced by investors in different time zones must be considered. We support the implementation of T+1 and recommend strengthening market infrastructure and process automation to adapt to the new settlement timeframe.
- Significant optimization of risk management:
- Shorter exposure time for unsettled positions, reducing counterparty risk.
- Hong Kong's existing high settlement efficiency provides a foundation for the transition.
- Short-term pressure on liquidity:
- Institutions need to restructure cross-market arbitrage strategies (such as the overnight funding gap from T+1 buys/T+2 sells).
- Global coordination opportunities:
- Enhanced synergy with Chinese concept stocks (US T+1) and A-shares (T+0/T+1), but prioritization of aligning Southbound Stock Connect settlement rules (currently T+2) is necessary.
Our association suggests a phased implementation, initially focusing on aligning the Southbound Stock Connect with the Mainland settlement mechanism to avoid cross-border settlement friction.
Question 3: How has your organisation been involved in the recent T+1 transition in India and the US / Americas and discussions in Europe?
Response 3： Our association believes that the transitions in these markets provide valuable experiences, particularly regarding operational and technological adjustments. It is important to closely monitor the implementation outcomes in these markets and learn from them to reduce transition risks.
- Negative impacts:
- Cross-market funding pressure: Selling in T+2 markets (e.g., Australia) and buying in T+1 markets (e.g., Hong Kong) creates an overnight funding requirement.
- Increased operational costs: Smaller members may need to hire additional night-time staff or invest in automated systems (currently estimated at an additional 20% cost).
- Lessons to learn:
- The US "Match-to-Instruct" platform centralizes trade allocations, thus shortening confirmation times (with confirmation rates increasing post-T+1).
Our association suggests that HKEX establish a unified settlement instruction platform to reduce compliance costs for members and provide subsidies for technological upgrades.
Question 4： From your perspective, are there any learnings from the recent T+1 transition in India and the US / Americas and discussions in Europe?
Response 4: Our association believes that automation and process optimization are critical to success, and Hong Kong can consider similar technological upgrades. Implementing advanced automation systems will ensure smooth and efficient trading processes. However, attention should be paid to the experiences of different markets.
We recommend avoiding a "one-size-fits-all" approach and designing time zone buffer mechanisms for international investors, such as extending the T-day order cut-off time by two hours.
Question 5： Do you have any views on the specific considerations laid out above for the Hong Kong market to consider in a transition to T+1?
Response 5： Our association believes that the participation of global investors and the geographical location and time zone differences of Hong Kong need to be considered. We recommend conducting an in-depth investor impact assessment to ensure that any transition does not negatively affect the market.
We support the transition, but improvements are needed in three key areas:
1. ETP (Exchange Traded Products) Ecosystem:
- The Service Agent model has low efficiency in multilateral coordination, and the creation and redemption processes need to be synchronized with the secondary market's T+1 cycle.
2. Securities Borrowing and Lending:
- The "recall notice period" for open contracts needs to be shortened from the current T+2 to T+1 (e.g., within 24 hours).
3. Uncertificated Securities Market (“USM”) Integration:
- The implementation of USM in 2026 needs to be compatible with T+1 and simplify the process for depositing non-CCASS securities.
4. Other risks not fully discussed.
Our association suggests that the high costs of system upgrades for smaller exchange participants should be addressed, and HKEX should establish a T+1 transition compensation fund.
Question 6： Do you have any views on the specific considerations laid out above for the Hong Kong market to consider in a transition to T+1?
Response 6： Our association believes that further consideration may be needed regarding the readiness of technical infrastructure and the training needs of market participants. We recommend conducting additional market surveys and technical preparations to ensure a smooth market transition. We highlight three major blind spots:
1. Southbound Stock Connect Coordination Gap:
- With northbound funds accounting for 23% of Hong Kong stock transactions, if Hong Kong adopts T+1 while A-shares remain at T+0/T+1, it will exacerbate settlement mismatches.
2. Emergency Mechanisms for Extreme Market Conditions:
Under T+1, the processing window within a single day is shortened, necessitating clear rules for settlement extensions during unforeseen events or black swan events when trading is suspended.
3. Retail Compliance Risks:
- Cash account investors selling stocks on T-day and buying on T+1 may trigger "unsettled transaction" violations during the transition period, requiring amendments to relevant rules.
Our association suggests incorporating cross-border settlement coordination and disaster recovery clauses into the transition plan, along with conducting retail investor education.
Should you have any inquiries regarding this letter, please feel free to contact me (Phone: / Email: ) or Mr. MA Tsang Kit, Martini, Council Member (Phone: / Email: ).
Your sincerely,
[Signature and Chop]
Mofiz Chan
Chairman
Hong Kong Securities & Futures Professionals Association