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?	For Exchange trades settled through our Continuous Net Settlement system ("CNS"), HKSCC adopts a variant of Model 2 whereby both securities and funds are settled net during the processing cycle. For Exchange trades which are not settled through CNS are settled as Isolated Trades ("ITs"). They are processed similar to other settlement instructions ("SIs") used for non-Exchange trades where HKSCC does not act as the CCP. A variant of Model 2 is adopted whereby securities and funds are settled on gross basis. HKSCC also provides Real Time DvP ("RDP") services utilising the local RTGS payment system for funds settlement. SIs settled under the RDP basis are in accordance with Model 1.
2.	Does the market have a rolling settlement cycle of T+3 or shorter for all exchange traded instruments?	The rolling settlement cycle for Exchange traded securities is T+2.
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?	We are currently enhancing CCASS to be technically ready for T+1, which can be further improved to T+0 if the market so requires. However, the implementation of a shortened settlement cycle is a market-wide issue and the market readiness is a pre-requisite for this. We have no fixed timetable yet for T+1. Other than Exchange based trades, we provide DvP service for settlement instructions executed between two participants using our CCASS system. This service provides settlement from T day till T+10 [T day being the input date].
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?	For Exchange trades, the matching of trade details is achieved on trade date for direct market participants via the Automatic Order Matching and Execution System/3 (AMS/3) operated by the SEHK. Indirect participants can match non-Exchange trades with their counterparties by both inputting a settlement instruction ("SIs") to CCASS. As noted above, CCASS accepts the value date for SI settlements upto ten calendar days after the input date. Matching can be performed once both SIs are input with unmatched reasons fed back to participants for follow up actions.
5.	Is the depository scrip-less, and, if not, is it working to enable scrip-less settlement?	For local securities traded on the SEHK and settled by CCASS, they are immobilised. The physical certificates are kept in a vault under the custody of HKSCC on behalf of the participants. HKEx has been working closely with the SFC and other government agencies on a project for the enhancement of the financial infrastructure on Hong Kong. A key recommendation of the project is that Hong Kong should put together an "eFrastructure" to increase Hong Kong's competitiveness in terms of risk mitigation and efficiency. The "eFrastructure" includes the components of a single clearing arrangement for better risk management; end-to-end straight through processing ("STP") for improved cost-effectiveness; a scripless securities market for enhanced efficiency and legal certainty; and an open, robust, current, and scalable technology structure for local and remote connectivity and high performance.
6.	Does the market allow partial settlements?	For Exchange trades settled under the CNS basis, all trades are netted into CNS positions that are settled on settlement day. To improve the settlement efficiency during the batch processing runs, partial settlement of the CNS positions is allowed. For isolated Exchange trades i.e. ITs, they are settled on gross basis. Partial settlement is allowed if effected by the participants but only when the IT is changed to FOP basis. For non-Exchange trades, no partial settlement is allowed.
7.	Can the depository accommodate same day turnarounds?	Yes. CCASS can accommodate same day turnarounds.

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.