Recommendation 1 Recommendation 2 Recommendation 3 Recommendation 4

Recommendation 5 Recommendation 6 Recommendation 7 Recommendation 8

Market selection

Recommendation 5

The major risks in Securities Systems should be mitigated by five key measures:

• the implementation of real delivery versus payment
• the adoption of a trade date plus one settlement cycle in a form that does not increase operational risk.
• the minimisation of funding and liquidity constraints by enabling stock lending and borrowing, broad based cross collateralisation, the use of repos and netting as appropriate
• the enforcement of scrip-less settlement
• the establishment of mandatory trade matching and settlement performance measures.

1.	Does the market use DvP settlement procedures in accordance with one of the recognised BIS models? If so, which one? If the model is not BIS model 1, are there plans to move to this model?	CSDCC Shanghai and Shenzhen branches handle the local clearing and settlement under the principle of DVP. However, the market is not on a true DVP basis. Actual payment is made by telegraphic transfer between the clearing participants' accounts in USD/HKD. However, due to the time difference, default by the CSDCC Shanghai and Shenzhen branches will not be detected some 12 or 13 hours later (Shanghai) and 5 hours later (Shenzhen) respectively.
2.	Does the market have a rolling settlement cycle of T+3 or shorter for all exchange traded instruments?	The B share was settled on a T+3 basis. However, the government has studied the feasibility to shorten the settlement cycle from T+3 to T+2/T+1.
3.	Could the market reduce the current settlement period to T+2 or below, without increasing fails rates? If so, how would this be achieved, and what plans are there to shorten the existing settlement cycle?	Please refer to above. In addition, due to the time difference, foreign market participants have limited time to send instruction for pre-matching. The fail rates will increase if the settlement cycle reduces to T+2 or below.
4.	Is matching of trade details achieved on trade date, at least for direct market participants; and by trade date plus one for indirect participants?	Matching is achieved on T+2 in China B-share market for direct and indirect participants.
5.	Is the depository scrip-less, and, if not, is it working to enable scrip-less settlement?	Yes. In China market, all listing securities including B shares operate on a scripless basis.
6.	Does the market allow partial settlements?	No. Partial settlement is not allowed in China B share market.
7.	Can the depository accommodate same day turnarounds?	Yes. The depositories accommodate same day turnarounds. Same-day turnaround transactions are possible in Shanghai and Shenzhen are settled on a "first in, first out" basis. The settlement cycle is the same as that of a normal trade (T+3). However, according to Shanghai and Shenzhen Stock Exchanges' guidelines promulgated on August 31, 2001, same day turnaround transactions will be prohibited. As a result, the earliest that the B-shares can be sold is on the trading day following the purchase. The new guideline will become effective on December 1, 2001.

Bank of International Settlements (BIS) Settlement Models

Model 1:	Systems that settle transfer instructions for both securities and funds on a trade-by-trade (gross) basis, with final (unconditional) transfer of securities from the seller to the buyer (delivery) occurring at the same time as final transfer of funds from the buyer to the seller (payment).
Model 2:	Systems that settle securities transfer instructions on a gross basis, with final transfer of securities from the seller to the buyer (delivery) occurring throughout the processing cycle, but settle funds transfer on a net basis, with final transfer of funds from the buyer to the seller (payment) occurring at the end of the processing cycle.
Model 3:	Systems that settle transfer instructions for both securities and funds on a net basis, with final transfers of both securities and funds occurring at the end of the processing cycle.