Boarding The Train To China
Chris Seabolt, Asia Head of Trading at US-based Fidelity Management & Research looks at the development of their use of the Shanghai-Hong Kong Stock Connect, and its role in gaining China exposure.
What enabled you to use the Connect more than other firms?
When the initial announcement of the Stock Connect was made, US-based Fidelity Management & Research Company (FMRCo) realised this presented a historic opportunity to invest directly in China that we needed to prepare for. We set up an internal task force across a number of functional areas such as trading, operations, compliance and legal to address the various aspects of the Connect.
This was no small task – these were new market regulations covering a new trading mechanism; we had to develop an approach that fit our needs and risk tolerance; agreements had to be reached and accounts opened with brokers and custodians; trading, compliance and custody systems were set up and tested; education and updates were provided to senior management, our investment teams and oversight groups. Ultimately, this intense focus and effort across these various functional groups allowed us to address many of the issues that many other large investors could not.
How has this been advantageous?
FMRCo was able to start building A share positions through the Connect starting November 17th, 2014 and our funds represented a substantial portion of the Northbound trading quota on the first days of the program.
Taking advantage of this early window of trading allowed us to establish substantial positions across a number of A share companies on behalf of our fund shareholders, and since then we have seen a substantial rally in the Chinese equity market. While we always take a long-term view, our timing was fortuitous and this has been a big benefit to our funds and shareholders.
Best/worst aspects – what would you change if you could?
The pre-delivery requirement and the nuances around the tight settlement cycle are the two areas that have been the most challenging for us. In order to avoid pre-delivering stock on a sale trade, we have a process with our local custodians and their brokerage arms.
Still, we are exploring alternatives to have a full suite of execution counterparties for our A share sales. In terms of the settlement cycle, the non-standard DVP process is something that’s unique to China and a departure from our standard workflow. These are the two areas we would like to see enhanced. In the meantime, we are satisfied with the process we have developed to operate effectively in the Connect and we look forward to its ongoing evolution.
Enhanced model – are you going to engage, why/why not?
Similar to the first iteration of the Connect, we are dedicating time to understanding the new model. While it could represent some improvements, such as the elimination of the pre-delivery requirement, there are still some issues we are facing relating to the tight settlement cycle. We will continue to use our current Connect process while we monitor ongoing developments.
Future of Connect – do you want more exchanges, more flow, more institutional firms involved?
We look forward to the anticipated addition of Shenzhen-listed A shares and additional Shanghai-listed companies, which should increase the investable universe of Chinese companies that we can access through the Connect.
The potential addition of A shares to key market indices, which many global asset managers use as tracking benchmarks, is also a development we will watch closely in the coming months. FMRCo views the Stock Connect as a first step in the broader opening of Chinese capital markets which presents an exciting opportunity for investors globally.