Scripless Securities Market

Last week SFC announced the plan to introduce a scripless securities market in Hong Kong after the consultation. The key features of the proposed scripless model are summarized below:

• Dual system : The existing paper-based system will be retained for the time being so that it runs in parallel with the proposed scripless system. Investors will be allowed to dematerialise securities held in paper form into uncertificated form and also to rematerialise them back into physical form, as long as the dual system exists. The duration of maintaining the dual system will be kept open for now.
• Full dematerialisation ultimately : Dematerialisation will be made compulsory eventually i.e. the paper-based option will be removed altogether.
• Phased approach : Existing securities will be dematerialised in batches starting with shares of companies incorporated in Hong Kong.
• Register to comprise two parts : The register of holders will consist of a certificated sub-register which is maintained by the share registrar and an uncertificated sub-register which is maintained by HKSCC. To facilitate inspection, corporate action processing and corporate entitlements calculation, HKSCC will provide the respective share registrars with a day-end record of the uncertificated sub-register. The day-end record will also allow share registrars to reconcile the two sub-registers.
• Removal of the immediate credit arrangement : One of the consequences of the register of holders comprising two sub-registers is the removal of the immediate credit arrangement by HKSCC.
• Account types to hold uncertificated securities : Investors will be able to hold their uncertificated securities through four different account types. Only one of these, namely the Issuer Sponsored Account (ISA), is a new account type under the proposed model. The other three are essentially modified versions of the existing CCASS Participant Account (CPA), Stock Segregated Account and Investor Participant Account (IPA).
• Name on register : Investors will be able to hold securities in CCASS in their own names i.e. they will have the option of becoming the legal owner of the securities and of enjoying the full benefits of legal ownership.
• Unique identification numbers : Currently, investors who hold securities within CCASS are required to provide an identity proof (such as their HKID) during the account opening process with a broker/bank/custodian or HKSCC, as the case may be. Building on this practice, we propose that investors' identification numbers be made available to both HKSCC and the relevant share registrar.
• Attending and voting at shareholders' meetings : The Working Group is keen to preserve the status quo of allowing beneficial owners to attend and vote at shareholders' meeting and considers that the better way to achieve this may be to simply allow the appointment of multiple proxies. This way, brokers / banks / custodians who hold shares on behalf of clients will be able to appoint their clients as proxies to attend and vote at meetings. For clients who merely wish to vote but not to attend the meeting, their interest can be represented by brokers / banks / custodians through appointing the chairman of the meeting as a proxy to vote on their behalf.
• Disseminating corporate communications and providing corporate action services to securities holders : As HKSCC Nominees will no longer be the registered holder of uncertificated securities in CCASS, there will be changes in the dissemination of corporate communications and provision of corporate action services to holders of uncertificated securities. Accordingly, we propose that share registrars will disseminate corporate communications to all registered holders (both certificated and uncertificated) and HKSCC will continue to provide additional services like providing receivable notices to uncertificated holders who hold their securities through a CPA, Participant Sponsored Account (PSA) or IPA.
• Regulation of share registrars : Share registrars will be able to become a new category of participants in CCASS (if they meet the admission criteria). This will allow them to use the existing CCASS infrastructure to communicate electronically with other CCASS Participants and to handle instructions relating to uncertificated securities. Additionally, in view of their more active and involved roles and functions in the scripless environment, share registrars will be more directly and robustly regulated.
• IPOs : In the scripless environment, the existing four ways to apply for an IPO (applications via a white form, a white form eIPO, a yellow form and CCASS eIPO) will remain largely unchanged. The main difference will be that applicants under the white form and white form eIPO options will be able to choose if their securities should be issued in uncertificated or physical form.
• Scope : Pending resolution of certain practical issues, the scripless proposals will be implemented in relation to shares of listed companies - starting first with those incorporated in Hong Kong and then those incorporated overseas.
• Shares and debentures of companies incorporated overseas and listed in Hong Kong : We will focus first on companies incorporated in Bermuda, Cayman Islands, Mainland China and UK mainly because companies incorporated in these four jurisdictions make up the vast majority of overseas companies listed on the SEHK and will therefore have a greater impact on the scripless initiative.
• Roll-out plan for implementing a scripless securities market : There will be two distinct implementation timelines which are independent of one another - one for existing securities and the other for IPOs. In both cases however, there will first be a pilot run.

Jack's comment: There are so many advantages of the scripless model. It should have been implemented since ten years ago!