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Get to know how you should settle your trades and the different ways in which you can keep the share certificates safe.

Carl was furious when Kate's firm demanded he pay for his trades immediately instead of waiting for two days. Since the brokerage didn't allow clients to sell share certificates received in initial public offerings (IPOs), Carl couldn't sell his IPO shares to settle up. To make matters worse, leaving his IPO shares at the brokerage meant Carl had to pay a custody fee and handling charges on dividends paid and rights issues proposed. For a while, Carl thought the brokerage was ripping him off. But after checking with market players, he found that he had just misunderstood the settlement process and the different ways shares are kept.

What are the settlement rules?

  • At the end of each trading day (T), the Central Clearing and Settlement System (CCASS), which is operated by Hong Kong Securities Clearing Company Limited (HKSCC), "nets" all buy orders against sell orders for the same stock handled by each brokerage. What's left is a single net position.
  • Settlement at the brokerage is on a T+2 basis. The brokerage's CCASS account is updated electronically without any transfer of physical shares. For instance, if brokerage A has a net buy position of 5,000 shares in stock C, these shares will be added to its CCASS account and the net purchase cost deducted from its bank account.
  • At the investor level, payment terms are part of the client / brokerage arrangement. This depends on your relationship with your brokerage and on its risk management policy. Some brokerages ask for cash upfront for buy orders. Others may ask for payment on T or on T+2. Similarly, some brokerages may need prior delivery of stocks for sell orders. Others may let you deposit shares after your order is executed. So when you open an account, read the terms and conditions in your client agreement carefully.
  • All settlements should be made directly with your brokerage. Do not make cheques payable to your account executive. Don't give blank signed cheques to anyone or deposit money directly into your account executive's bank account.

Since trading and settlement are electronic, do investors receive physical scrips?

  • Unless you specifically ask, you won't take physical delivery of your shares. Brokerages usually keep clients' shares at CCASS, where the shares are registered in the name of HKSCC Nominees Limited. HKSCC does not recognise you as the direct holder, and only your brokerage can execute sell orders for those shares. Dividends or other benefits are paid to the nominee company, which passes them back to your brokerage for a fee. Some brokerages charge their clients for these nominee services.
  • If you want to monitor movements in your shares kept in your brokerage's CCASS account, you can open a CCASS stock segregated account with statement service through your brokerage. Here, your shares are separated from the brokerage's and its other clients'. Whenever there is a movement in your account, you receive a daily movement statement from CCASS. But be aware that this arrangement still leaves your brokerage with full control over your shares.
  • Opening a CCASS investor participant account gives you direct control over your shares. HKSCC sends you account activity statements and monthly statements so you can keep track of your stock movements. You still need to trade through your brokerage, but HKSCC will only transfer your stocks to your brokerage when it gets confirmation from you. Presently, the service of investor participant account is available for Hong Kong and Macau residents only.

Why can't physical share certificates delivered to brokerages be traded immediately?

  • Brokerages usually deposit share certificates with CCASS, where shares are re-registered in the name of HKSCC Nominees Limited. Some brokerages ask clients to wait for a while before trading their shares so that there's time for ownership to be authenticated and re-registered. This is what Kate's brokerage did with Carl's IPO shares. Others may allow trading to take place, but defer payment of sale proceeds to their clients.
  • Before you sell your shares, check if the certificate is still valid. The listed company may have changed its name, or consolidated or sub-divided its shares. If this has happened, you can ask the share registrar to issue a replacement certificate, or ask your brokerage to do the same thing via CCASS.
  • Remember to keep the receipt issued by your brokerage for any share certificates you deposit. A brokerage is obliged to issue you such a receipt by the second business day after receiving your scrips unless a contract note, daily statement or a consolidated contract note with daily statement it issues expressly states it also serves as a receipt and lists out all the details about the stocks you deposit.

Should investors avoid holding certificates?

  • This is a matter of choice. If you decide to keep your physical stock certificates, make sure they are registered in your name. That way the share registrar can send you dividends, shareholder's circulars and any other corporate documents. Also, take good care of your certificates. If you lose them, getting a replacement is time-consuming and costly.

How does the SFC regulate how brokerages hold clients' money and stocks?

  • Clients' money must be kept separate from the brokerage's own funds, and deposited in a separate trust account at a licensed bank within one day of receipt. Brokerages must maintain full records of transactions through the trust account, together with the names of the clients. This stops brokerages from using clients' money held in trust for their own business.
  • As soon as is practical, brokerages must either register securities held in Hong Kong in the client's name or in the name of the brokerage's nominees, or they should deposit them in safe custody in a bank, another brokerage or in CCASS.
  • The brokerage must keep proper records of movements in clients' shares and money for at least seven years.