Overcoming the T+0 Settlement Cycle in China

Overcoming the T+0 Settlement Cycle in China

By Peter Oellers, Director of Trading Services at BNY Mellon’s Pershing

As China continues its economic ascent, investor interest in allocating a portion of their assets towards this market continues to rise along with it.

The establishment of China’s two Stock Connect mechanisms, HK-Shanghai in 2014 and HK-Shenzhen in 2016, marked an important milestone in the evolution of China’s capital markets as it removed many regulatory and structural barriers that were impediments for foreign investors. Investor interest was further stoked earlier this year when index provider MSCI announced that it would quadruple the weighting of the country’s mainland shares in its emerging markets indexes. 

While great strides have been made easing the barriers to entry—especially for foreign investors—there remain structural challenges which market participants need to carefully consider.

One particularly daunting issue is the T+0 settlement cycle requiring trades to settle on actual trade date, often within hours of execution. No other major equity market has a similar settlement cycle and, given the time difference between China and Europe and North America, this settlement convention can pose operational challenges for investors based in those regions.

In order to solve for these challenges, clients must have access to live trading and operational support during Chinese business hours allowing them to complete the lifecyle of the trade including trade instruction, cash funding, etc.

Acknowledging the challenge, in October 2018 the Hong Kong Stock Exchange confirmed it was developing a blockchain-powered solution intended to enhance the efficiency of the settlement process.

In the meantime, investors can take advantage of services available to help them navigate this terrain. Here are three key services in trade operations, which investors can leverage in order to solve for these challenges:

* Live Trading Coverage 

It is vital that investors are able to access trading desk personnel and operational support any time of day during the week. For clients who do not have real-time Asia Pacific coverage, there are services that investors should seek out which can provide order placement, trade confirmation, foreign exchange (FX) funding and, crucially, settlement.

* Bespoke Settlement Solutions

To access the market in a more seamless way, it is important for investors to have a partner that can offer all aspects of the settlement cycle on your behalf—whether it be the transmission of instructions to your custodian or FX requests to fund the account in real-time.

* End-to-End Coverage

With respect to the settlement lifecycle, investors should leverage available end-to-end services that bridge the myriad operational tasks required for successful trade settlement.  These services can include having your execution partner instruct your custodian on your behalf thereby eliminating the need for the client to do so.

As China’s capital markets continue to evolve and create opportunities for foreign investors, it is essential that market participants have solution providers that understand the unique challenges presented by the region’s market structure, and the necessary partners to help them address their specific needs.

Lastly, as always, the best partner will be one who can anticipate and proactively develop ways to ease the trade implementation process, so that investors can make investment decisions and place orders with confidence.

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