New report: “See-through” supervision & merits of nominee system

The Investor Identification Model used for Northbound trading under Stock Connect since September 2018 is about to be expanded to cover Southbound trading, further strengthening market surveillance of cross-border trading under the scheme. In light of the coming expansion, HKEX’s Chief China Economist’s Office has just published a research report that looks around the world at other securities holding models and the recent trend of “see-through” market supervision.

Under “see-through” market supervision, the market regulator requires the identification of customers of intermediaries, in particular the end-investors involved in each order and transaction, so all trading activities can be properly monitored. The approach for investor identification would be related to the kind of securities holding system adopted in the market. The Mainland market currently adopts a “see-through” investor account model while a multi-tier depository system using nominee accounts has been adopted in the Hong Kong market.

In fact, the use of nominee accounts for securities holdings is very common in global markets, as an indirect holding system offers benefits in respect of settlement efficiency and securities safekeeping. These markets have their market structure and practices, as well as long-established rules and regulations that revolve around the nominee account system. At the same time, regulators in these markets are trying their best to achieve a balance between market efficiency and investor protection as well as maintaining market integrity.

The advancements in technology associated with securities trading, and the growing nexus of the global investing community and its trading activities across markets and product types, have made it more difficult for regulators to identify market abuse and ensure market integrity. Adoption of the “see-through” model is now a growing trend among global markets as a result, with each market customising a system for its particular market structure and practices without having to make fundamental changes. If managed properly, the nominee account system remains an extremely efficient and modern system for holding securities. Moreover, the nominee service and other services offered by custodian banks facilitate client access to, and participate in, the global financial system, interconnecting asset managers, brokers and other intermediaries, as well as financial market utilities such as central securities depositories. Their diverse service offerings in the industry have helped nurture the wide spectrum of highly efficient financial activities in the modern global financial market.

The beneficial regulatory approach for a specific jurisdiction would depend on its market structure and practices, as well as legal requirements. The investor ID regime in the Hong Kong market for Northbound trading under Stock Connect (as for Southbound trading) is considered a “see-through” approach designed to achieve a balance between the need for cross-border market supervision, and the long-established Hong Kong market structure that is different from that in the Mainland.