Settlement process - China
Settlement cycles
QFII market | Securities: T+0; Cash: T+1 |
B-Shares | T+3 |
China Interbank Bond Market | Securities: T+0, T+1, T+2a or T+3a; Cash: SD+1 |
a. T+2 or T+3 settlement cycle is applicable when one of the trade counterparties of the bond trade is an overseas institutional investor. It is only applicable for cash bond trading, pledged repo, outright repo, and bond borrowing and lending.
Settlement flow
QFII market
CSDCC acts as central counterparty and guarantees cash and securities settlement.
QFII settlement
Due to the T+0 securities settlement environment, custodians might have to settle trades on T+0 based on the CSDCC’s and broker’s allegement and in the absence of the client’s settlement instruction.
QFII market | ||
T+0 | The QFII places an order with its designated local broker. The broker checks the availability of adequate securities or cash with the custodian bank and executes the trade upon successful provisioning. In order to prevent short selling, the trading system itself checks for the availability of the securities on the QFII’s account at the depository. At the end of the day, CSDCC transfers the securities according to the trade data provided by the exchanges. Shares are automatically registered in the name of the buyer. At around 18:00, CSDCC advises the custodian banks of details of the trades executed. Custodian banks reconcile the details with the brokers execution report. If no discrepancy is detected, the trades settle in the custodian’s books and settlement confirmations are sent to the customers. If discrepancies are detected, the custodian banks contact the broker and/or QFII and the pre-agreed error rectification process will be activated. If the QFII and its broker do not agree on the change of the settlement amount, the trade will be settled as per the records received from CSDCC. CSDCC notifies the expected cash payment by the end of T+0. | |
T+1 | A custodian with a net payable position must transfer funds to its clearing account with its domestic clearing bank by 12:00. CSDCC credits the custodians clearing account with the net receivable positions before 17:00. | |
B-share market Shanghai | B-share market Shenzhen | |
T+0 | A buy or sell order from a foreign investor is communicated via an approved foreign broker to a domestic broker, or to a foreign broker with a special trading seat, for execution. CSDCC provides daily settlement notifications electronically to the custodians at the end of the day, so that they can match the trades with their clients. | A buy or sell order from a foreign investor is communicated via an approved foreign broker to a domestic broker or foreign broker with a special trading seat for execution. CSDCC sends a trade notification to the custodian bank. |
T+1 | As stated on CSDCC’s settlement notifications, custodians and brokers match the transactions with customers’ instructions. | Customers send settlement instructions to their custodian bank for trade matching with the counterparty before 10:00 on T+2. Matching is done automatically at CSDCC. |
T+2 | If the custodian bank does not receive the customer’s instruction by 10:00 (local time) at the latest, it will be unable to provide settlement details to CSDCC for prematching. CSDCC then required the broker to initiate the transaction to settle the trade. The pre-matching report is sent from CSDCC to the custodian bank in the afternoon electronically. Any problems with the pre-matching process will be advised to clients by the custodian on T+2. Amended/cancelled instructions must reach the custodian before noon T+3. “Good funds” must reach the custodian’s designated account by 10:00 local time by telegraphic transfer. Alternatively, clients may send MT210 by 10:00 local time for value T+3. | Amended/cancelled instructions from customers should reach the custodian bank before 12:00. Trades matched on T+2 must be settled on T+3. Good funds must reach the custodian bank’s designated account by 10:00 by telegraphic transfer. Alternatively, clients can send an MT210 to the custodian bank by 10:00 for value T+ 3. |
T+3 | “Good funds” must be in the CSDCCC cash account not later than 12:00 local time. Trades are settled when instructions are matched and funds are available. CSDCC updates the stock and cash positions of the investors and a settlement confirmation is sent to the participants on the same day. Funds resulting from sales are immediately available for the investor. | After settlement takes place, CSDCC updates the stock and cash positions of the investors and settlement confirmations are sent to the participant/custodian bank on the same day. The participant/ custodian confirms the settlement to the customers. Sale proceeds are remitted by CSDCC to the participant’s/custodian’s HKD account and is then remitted to the customer. |
B-share settlement at CSDCC Shanghai
Cash settlement of securities takes place in USD. CSDCC Shanghai branch has opened a clearing account with Citibank NY for this purpose.
While CSDCC Shanghai handles the local clearing and settlement under the principle of delivery versus payment, trades are not settled on a true DVP basis due to the time difference between Shanghai and New York.
Actual payments are made by telegraphic transfer between the clearing participants accounts in USD. As the actual USD paid by CSDCC Shanghai’s clearing bank in “good funds” in New York is 12 to 13 hours behind Shanghai time, defaults will not be detected until early on SD+1 Shanghai time.
CSDCC Shanghai transfers the stocks electronically in its records on SD, pending receipt of funds with “good value” (good funds) on the day following SD. DVP is, therefore, on clearing at participant level with intraday cash risk.
The settlement period will be extended if it falls on a public holiday in either China or New York. On a Chinese public holiday, trading is stopped and settlement postponed to the next business day. On a U.S. public holiday, trading is not affected, but settlement is postponed. For example, if TD is on Monday and Tuesday is a U.S. public holiday, the trade settles on Friday instead of Thursday.
B-share settlement at CSDCC Shenzhen
Cash settlement of securities takes place in HKD. CSDCC Shenzhen has opened a HKD clearing account with Standard Chartered Bank in Shenzhen for this purpose. Settlement funds must be deposited and withdrawn through this account by all clearing participants.
If the settlement date falls on a public holiday in China or Hong Kong SAR (Special Administrative Region), the SD will be extended accordingly. On Chinese public holidays, there is no trading activity and settlement is postponed until the next business day. (For example, if a trade on Monday is due for settlement on a Thursday that is a public holiday in China or Hong Kong SAR, settlement will take place on Friday).
CSDCC Shenzhen handles clearing and settlement on the principle of DVP. However, the market does not operate on a true DVP basis since payments are made by telegraphic transfer between the clearing participants accounts in HKD. The clearing participants transfer the “good funds” to the CSDCC account by noon Shenzhen time on SD. However, CSDCC will not be able to locate this amount in its account until the afternoon. As CSDCC transfers the stocks electronically in the morning of SD, pending receipt of the funds with “good value” from the participants in the afternoon, any defaults are not detected until 17:00 on SD.
China Interbank Bond Market settlement at CCDC and SCH
CCDC and SCH acts as the central counterparty (CCP) in the China Interbank Bond Market (CIBM). CCDC acts as CCP for bonds traded in the CIBM whereas SCH acts as CCP for bonds deposited by SCH in the CIBM.
Cash settlement of securities takes place in onshore CNY only. If the settlement date falls on a public holiday in China, the SD will be extended accordingly. On Chinese public holidays, there is no trading activity and settlement is postponed until the next business day. (For example, if a trade on Monday is due for settlement on a Tuesday which happens to be a public holiday in China, settlement will take place on Wednesday).
Cash settlement
Cash management
The Chinese Renminbi (RMB) is not freely convertible. Investors interested in the Chinese market must apply for QFII status and receive an investment quota (amount they are allowed to invest). This amount must be converted into RMB and registered with the State Administration of Foreign Exchange (SAFE).
However, investors in the B-share market can invest and repatriate their investments freely since the investments are carried out in either HKD or USD.
Payment systems
- Cashier order
Cashier orders are security documents that are controlled centrally at the banking branch. They have a same-day value if presented before the banking cut-off time15.00 (local time). - RMB local clearing by the PBC Shanghai Clearing House
This payment mode is still paper-based. Banks prepare “credit advices” and “mica-codes” for these advices. These are collected by the PBC to effect fund transfers via their clearing system. This payment mode is used to credit funds to account holders in other banks.
PBC collects the credit advice from all the RMB clearing member banks in two batches, at 10:00 and 16:00. For same-day value, the credit advice must reach PBC either by 17:30 on the previous day or by 11:30 on the same day. - PBC real-time payment system
The PBC launched a real-time payment system, the China National Advance payment System (CNAPS), on 14 April 2005 for bank-to-bank electronic fund transfer.
Repatriation of funds
Principal repatriation
A QFII open-ended fund is allowed to conduct injection and repatriation on daily basis according to its net subscription and redemption need. For the repatriation of the cumulative profit that is not related to subscription and redemption, QFII must provide tax clearance and audit report on investment profits before repatriation. The repatriated principal amount is allowed to be remitted.
Except for the Open-Ended China Fund, for other QFIIs who need to repatriate realised profit, their custodian can process the repatriation based on the QFII's instruction, together with the audit report on investment profits issued by certified public accountants in the PRC and tax clearance certificate etc.
For QFIIs’ liquidation (including product liquidation), the custodian must process the repatriation and the account closure based on the QFIIs’ instruction, together with the audit report on investment profits issued by Certified Public Accountants in the PRC and tax clearance or tax filing certificate etc.
Profit repatriation
The custodian shall act on behalf of the QFII to perform the procedures for the purchase of foreign exchange and the repatriation of profits upon compliance check in accordance to local regulatory restrictions.
CIBM fund repatriation
Repatriation can be done either in RMB or foreign currency (FCY). The ratio of FCY and RMB in the accumulated outward remittance must basically be in-line with that of the accumulated inward remittance, and the fluctuation should be within plus or minus 10%. The first repatriation can be conducted without following such ratio, however, the FCY or RMB amount to be repatriated may not exceed 110% of the RMB or FCY amount remitted into China in aggregate.
Central banks, SWFs and International Financial Organisations
Such investors can directly enter into China’s Interbank FX market via three channels for repatriation:
- Entrusting the PBOC as their agent;
- Using inter-bank FX market members as their agent(s); and
- Directly participating in the interbank FX market as foreign members.
Overseas Institutional Investors
There is no need to open a special foreign currency (FCY) account if the foreign institution only remit-in/repatriate funds in Renminbi (RMB). The ratio of FCY and RMB in the foreign institution's accumulated outward remittance shall basically be in line with that of the accumulated inward remittance, and the fluctuation should be within +/-10%. For ease of control SAFE encourages foreign institutions to remit in RMB or FCY, and stick with the same currency for repatriation. Foreign institutions shall only convert RMB into FCY when there is a need for repatriation.
Similarly, SAFE expects foreign institutions to start CIBM investment soon after the FCY is converted into RMB.
Foreign exchange controls
Foreign exchange controls are applied to foreign investors who have obtained QFII status.
QFIIs may, according to the investment plan etc. and within 30 business days prior to their actual investment, notify the custodian to convert the foreign currency needed for the investment into RMB and credit into their RMB accounts. The amount remitted must not exceed the amount registered or approved by SAFE.
For CIBM, FX can be conducted either onshore or offshore. Injection and repatriation can be done in CNY and/or FCY subject to relevant regulations.
Registration
Equities
The A-share market is fully dematerialised. Settlement occurs in CSDCC’s electronic book-entry system and transfer of title occurs simultaneously with the settlement.
B-shares are automatically registered under the name of the ultimate investor upon settlement in CSDCC.
For B-share nominee accounts opened in Shenzhen, CSDCC requests a quarterly disclosure of the end beneficiary information (name and holding) by the account holder via the subcustodian.
Bonds
The CIBM is fully dematerialised and registered automatically upon Settlement in CCDC/SCH. The securities accounts are opened in the name of the investor at CCDC/SCH.
Stamp duty
Security type | Amount | Payable by | Remark |
A-share | 0.1% on consideration | Seller only | Upon settlement, collected by CSDCC for further transferring to the State Administration of Taxation |
B-share | 0.1% on consideration | Seller only | Upon settlement, included in the settlement amount. |
Failed trades and buy-in regulation
A-share market
Failed trades are not allowed. Upon trade execution, the settlement becomes mandatory. If an erroneous trade is executed, the custodian must first settle the trade and then seek an adjustment through a non-trade transfer on an ex post facto basis.
According to the QFII regulations, a non-trade transfer is only allowed to correct an erroneous transaction. The matter must be resolved among the QFII, custodian and the broker. An application must be filed to CSDCC via the custodian to adjust the trade.
Sell-out/buy-in rules do not exist for the A-share market.
B-share market: Shanghai Stock Exchange
The following procedures apply when unmatched trades are reported to CSDCC or if CSDCC Shanghai’s clearing account has not been funded by noon on T+3:
- If a sale trade is unmatched, CSDCC will stop the payment and enter a negative record to the corresponding broker. The trade must be settled by T+5. If it is still pending, CSDCC will force a buy-in on T+6.
- If there are insufficient funds for a purchase, the guarantee fund will be used to settle the trade and the relevant shares will be frozen. For the use of the guarantee fund, a handling fee of 0.5% per day will be charged on the amount used. If the fund is not covered by T+5, CSDCC enforces a sell-out on T+6.
Any transaction that remains unsettled on T+3 must be settled by T+5 otherwise CSDCC enforces a buy-in/sell-out on T+6.
Short sales are not possible in the Shanghai market. If the securities account of the seller with CSDCC does not have sufficient shares, the trading system of the Shanghai Stock Exchange rejects the sale orders.
B-share market: Shenzhen Stock Exchange
Customers will be advised of any discrepancy discovered in the matching process on the same day. CSDCC Shenzhen will report to the participants any trades that are unsettled on T+3.
If unmatched trades are reported to CSDCC Shenzhen or if CSDCC Shenzhen’s clearing account is not funded by noon on T+3, the CSDCC applies the following procedures:
- It stops payment and freezes the transaction of the shares;
- It enforces a buy-in/sell-out on T+6 if the trades remain unsettled at that time. The defaulting party must bear all the losses and penalties incurred.
Long purchases are prohibited, and if any are detected, CSDCC freezes the amount of shares to be settled and uses the guarantee fund. The clearing participant is required to arrange payment by T+5. Otherwise, CSDCC will force a sell-out of the shares on T+6.
CSDCC imposes a fine of 0.5% on any clearing participant that buys long against the value of the trade for each day that the settlement is delayed. In addition, daily interest on the value of the trade will be charged.
Short selling is not allowed and, if it occurs, CSDCC freezes the cash payment for the transaction. The clearing participant must cover the short position at the latest by T+5, otherwise, CSDCC forces a buy-in on T+6.
CSDCC imposes fines for short selling, as follows:
- HKD 100 per 100 short sold shares;
- A higher fine will apply for a short position not covered on the record date of the shares for which a corporate event takes place.
If there is a corporate event on the short-sold shares and the short position is not covered on the record date, the clearing participant must:
- Buy back the short-sold shares;
- Buy any bonus share and rights derived from the short-sold shares on the next business day
following the record date; - Pay CSDCC the dividend and the distribution commission on the third business day following the record day.
Non-trade transfers can be executed off-exchange if the investor submits convincing documentation to CSDCC showing that no change in beneficial ownership is involved. A charge of HKD 100 per line is applied
China Interbank Bond Market
Failed trades are allowed in the China Interbank Bond Market. Trades are considered failed if not affirmed in CCDC/SCH system by either the buyer’s or seller’s settlement agent before 17:00 China time or being affirmed in CCDC/SCH system but does not settle on SD. Even though fail trades are allowed, CCDC/SCH expects the investor to provide an explanation letter relating to the fail trades.
Buy-in is not applicable for China Interbank Bond Market.