CCASS and the eIPO
2 November 2000
When Hong Kong's MTR Corporation, the monopoly underground railway system, went public last month, there was a large spotlight on the share application process, following the chaotic scenes in March when half a million people queued up to apply for bubble-stock Tom.com.
For the first time in a major IPO, the receiving bankers promoted a so-called "eIPO" system, whereby the public could submit applications through the internet. That's good as far as it goes - but what did you get in return?
- First, a paper share certificate through "snail-mail" post. Some people even got two with the same serial numbers - but that's an old story.
- Second, a few days later, a paper refund cheque for the difference between the final offer price and the amount applied for.
- Finally, a letter from Central Registration, the company registrar (which is 50% owned by HSBC), asking you to mail in a sample of your signature because otherwise there would be no way to recognise your signature on a transfer form if you ever sell.
So much for a paperless process. What you probably don't know is that Hong Kong Securities Clearing Company Ltd (HKSCC) has since Nov-99 been offering a much more paperless type of eIPO which avoids all of the above problems, for investor participants of CCASS.
What is CCASS?
The Central Clearing Automated Settlement System (CCASS) is run by HKSCC, which is now a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Ltd (HKEx).
HKSCC used to be a not-for-profit independent entity which invested surpluses in its infrastructure and in reducing the fees charged to its users (stock settlement fees were cut by 80% from 1992 to 1999). However, this all changed when HKSCC was gifted to HKEx to increase the value of the small brokers' memberships and persuade them to vote in favour of the merger with the Futures Exchange last year (but that's another story).
Pass the Parcel
Hong Kong does not have a "scripless" trading system - CCASS is one step back from that, a demobilised system.
In the years BC (Before CCASS), as shares were sold and re-sold, messengers would run around town in a "pass the parcel" fashion between brokers and custodians. Indeed, you could not be an SEHK member firm without an office in Central.
The messengers carried share certificates attached to a "transfer deed" with the signature of the original owner and a blank transferee. That made them effectively bearer documents until a dividend was declared, then whoever still held the parcel would rush it to the registrar, and get onto the share register in time to collect the dividend. Otherwise, the cheque would be sent to the previous owner. The registrar would issue a new share certificate in the name of the new owner.
Nowadays, almost all trades are settled through CCASS. The shares are registered in the name of HKSCC Nominees Ltd, and the certificates are held in a giant vault. CCASS then keeps a "book entry" (actually, a computer entry) system which records which "participants" own what. Trades between participants are settled by debiting one account and crediting another.
Brokers liked this system for several reasons:
- They made a nice profit holding on to your certificates for you (often registered to their own nominee company) and charging you collection fees on dividends and mark-ups on "scrip fees" which are charged by registrars whenever new share certificates are issued.
- When you decided to sell, they've got your certificates, so they get the commission.
- Depending on the client agreement, they asked you to put up cash for future settlements, and benefit from the interest on cash balances.
- Finally, a lot of clients had signed "margin account" agreements which would allow brokers to pledge the client's stock as collateral for the broker's own financing, even when the client had little or no borrowings against the stock. This is one of the things that made the 1998 collapse of C A Pacific such a nightmare for liquidators to unravel.
Many of these motives still exist under the CCASS system - just substitute "shares in broker's CCASS account" for "certificates".
Keeping the Clients Out
So when CCASS was set up in 1992, you can imagine the brokers' concerns. If the public were given their own accounts, then they would be in direct charge of their own shares - good for clients, bad for brokers.
This calamity was avoided by initially limiting membership of CCASS to brokers and custodians. It was several years before even a "Stock Segregated Account" was launched. This service, still available, allows the beneficiary to get his broker to hold stocks in a special CCASS sub-account with the client's own name on it. At the very least, you should make sure this happens. For just HK$10 per month, you will get a written statement with your own name on it and a list of your shareholdings, plus mailed confirmation of each movement in the account. If your broker ever goes bust, at least you'll be able to show the judge which shares belong to you.
The Stock Segregated Account does not, however, give you direct control over the movement of your shares. In short, they could still be stolen. For that reason, we recommend the Investor Participant account
Investor Participation in CCASS
In May-98, after much twiddling of thumbs, HKSCC finally launched a direct public participation system under which any individual or Hong Kong company (and more recently, BVI company) can open a direct Investor Participant (IP) account in CCASS.
We've been using an IP account ever since - it ain't perfect, but it works. We stopped paying a broker 0.50% to send us a dividend cheque, and instead pay CCASS 0.12% to put them straight into our bank account. We stopped paying a broker $2.50 per board lot of scrip fees, and pay $1.50 per lot to CCASS instead. With many small-caps having a board lot valued at around $500 or less, that $1 makes a saving of 0.2% on each purchase, certainly worth having. And with CCASS, we sleep well at night.
CCASS charges IP account holders the same fees it would charge your broker, so unless you broker is willing to subsidise, you can be sure that you don't pay more at CCASS.
An IP account holder gets an account number and a personal identification number (PIN). He or she designates a HK bank account which will be used to pay for shares and receive proceeds of sales and dividends. Whenever a trade is done, the broker gives CCASS details of the trade, and then the client has to "affirm" the trade using the CCASS phone system. After that, the settlement is automatic, and you get a printed statement from CCASS telling you what happened.
It's just like phone banking, except that it's not open 24 hours a day. Remember, we are dealing with a monopoly here. The system is only open for settlements from 10 a.m. to 3.45 p.m., Monday to Friday. That makes 28.75 hours a week, or just 17% availability.
You must remember to affirm your trades within 2 days, because if you don't, then your trade will "bounce" under the "T+2" settlement rule, and any stock you were buying will be dumped in the market, while anything you were selling will be bought back by CCASS.
Clearly, making CCASS available on a 24-hour basis would make it less likely that you would fail to affirm a trade. Your broker would have more time to contact you and remind you to press the button.
CCASS eIPO
Despite all the excitement about the "eIPO" of MTRC, CCASS has been operating a more paperless eIPO system of its own since the IPO of T S Telecom on GEM in Nov-99. Under this system, you can instruct CCASS to apply for IPOs on your behalf, and have the stock credited directly to your CCASS IP account. All this can be done without pen or paper, just use the phone system.
Great, we thought - if we apply for the MTRC, we'll do it through our IP account. But again remember, we're dealing with a monopoly here. HKSCC wrote to all IPs and told us that if we applied through CCASS, we would not be entitled to the loyalty shares or the retail discount on the IPO. You will recall that if you hold your stock in MTRC for a year, you get bonus shares, and some more after 2 years.
We suspect that they simply didn't have the software in place to track whether we had held the stock continuously for the 1st and 2nd year needed to get the bonus shares. HKSCC had plenty of time to figure this out as the MTRC trundled down the IPO track, and it would have been possible to use the MTRC offer to promote wide scale adoption of the Investor Participant system, but instead they let the opportunity pass, and we all ended up with printed certificates.
Central Registration, which is half owned by HSBC, the sponsor of the IPO, gets lots of work out of this but it does the public no good and runs risks of certification errors. That is exactly what happened when 1508 duplicate certificates were dispatched.
CCASS on the Internet
After over 2 years of operation, at 31-Aug-00 CCASS still has only 7,345 Investor Participants. We attribute this to:
- Brokers do not want to promote the service and make investors more independent, for the reasons stated above
- Inadequate marketing and investor education by HKSCC
- Restrictive operating hours of CCASS (17% availability)
- A cumbersome telephone interface
CCASS will not truly "fly" until an easy, graphical interface is available, 24 hours a day, on the net. Internet banking in HK is taking off at a rapid rate and CCASS can be the same. In tomorrow's article, we'll tell you about their first over-cooked attempt to make it happen.
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