Scripless securities are to be introduced to the Hong Kong market by late 2013, it was announced Tuesday.

The Securities and Futures Commission (SFC), Hong Kong Exchanges and Clearing Limited (HKEx) and the Federation of Share Registrars Limited (FSR) jointly made the proposal. Scripless trading refers to the trading of shares without the physical transfer of share scrips. Orders are instead deposited in an electronic order book.

The three parties conducted a market consultation in December 2009, which elicited 44 written responses from banks, brokers, individual investors, law firms, listed companies, share registrars and professional bodies. The majority of the respondents supported the idea of the scripless securities market.

"Implementation of the scripless regime will be a significant step forward in enhancing the overall efficiency and competitiveness of the city's securities market, and in securing an appropriate and improved level of investor choice and protection," the SFC Chief Executive Officer Martin Wheatley said in the joint statement issued by the SFC, HKEx and the FSR.

Under the proposal, the dual system, in which the existing paper-based system will run parallel with the scripless system, was recommended by the Joint Working Group as the local financial regulatory bodies want to gauge market responses toward the scripless regime.

"We will conduct education work so as to make local investors more inclined to accept scripless regime. We do not want to prolong the dual system for too long as the removal of the paper-based option is our ultimate aim. However, at the current stage, we will not lay down a specific timetable for launching the scripless regime," said Rico Leung, the SFC Senior Director (Supervision of Markets).

According to the FSR estimates, there are 10 million physical share certificates currently circulating in the city.

According to the proposal, there will be two distinct implementation timelines for a scripless regime for both existing securities and initial public offerings (IPO). In both cases, volunteer companies will be invited to participate in the pilot run.

The SFC and HKEx will first focus on companies incorporated in Hong Kong as volunteers for the pilot run after the regulatory bodies have finalized all the legislative work.

However, derivative financial products and the exchange-traded funds (ETFs) listed on the local bourse will not be included in the scripless securities pilot scheme at this stage because the paperless option for the derivative and ETF products may entail taxation implications for the issuers.

Keith Lui, the SFC Executive Director (Supervision of Markets) added that HKEx is conducting a fee review to rationalize its overall fee structure under the proposed scripless securities regime.

The SFC will also conduct a subsidiary legislation consultation process in early 2011 to lay down the future regulatory frameworks for the scripless regime. If the legislative work can be finished in 2011-2012, then the first phase of the scripless regime can be expected to launch in late 2013.

China Daily

(HK Edition 09/22/2010 page3)