Progress towards a paperless securities market for Hong Kong

On 19 March 2021, the Hong Kong Government gazetted the Securities and Futures and Companies Legislation (Amendment) Bill 2021 (the Bill). The Bill provides for an uncertificated securities market (USM) regime which will allow investors to hold securities in their own names without paper documents.

The Government, the Securities and Futures Commission (SFC), the Hong Kong Exchanges and Clearing Limited (HKEX) and other industry stakeholders have worked for a number of years towards a scripless regime. This work includes legislation which was enacted in 2015. The Bill proposes a revised USM model based, according to the Legislative Council Brief of 17 March 2021, on “feedback from the industry and the continuous evolvement of the market”.

The Bill, when enacted, will amend the following Ordinances:

• the Securities and Futures Ordinance will cover the broad framework of the USM regime and the regulation of securities registrars
• the Companies Ordinance will cover the allotment and transfer of shares in listed companies in uncertificated form; and a process for dealing with lost share certificates for companies that are dematerialising their shares
• the Stamp Duty Ordinance will provide for a new stamping method for the collection of ad valorem stamp duty involving shares in uncertificated form.

Under the proposed operational model of the USM regime, investors will have two options as to how to hold legal title in uncertificated form: either through a new feature provided within the HKEX system and managed by a sponsoring clearing / custodian participant; or through a new feature provided by the issuer’s share registrar. Under either feature, investors who wish to conduct transactions on the Stock Exchange of Hong Kong (SEHK) will need to move their securities into (to settle sell transactions on the SEHK) or out of (to register shares in their own name) the clearing and settlement system. This requires a transfer of the legal title in the relevant securities to, or from, HKSCC Nominees Limited: the investor only retains beneficial title. To ensure efficient transfers, an electronic interface will be created between the systems of the share registrars and the HKEX clearing and settlement system, with the expectation that transfers between the systems will take place intraday.

The Government plans to implement the USM regime in phases: in terms of products, priority will be given to listed shares of Hong Kong companies; in terms of processes, the Government will first focus on IPOs. The SFC will be empowered to make rules providing for various technical, operational and detailed regulatory matters under the USM environment.

The Legislative Council’s first reading of the Bill took place on 24 March 2021.