Shanghai-Hong Kong Stock Connect is a Breakthrough for Direct Access

to China Stocks

The Shanghai and Hong Kong stock exchanges agreed to launch the Shanghai-Hong Kong Stock Connect on 10th of April. Stock Connect is an innovative

mutual market access scheme that represents a historic development for China to internationalize RMB and integrate its capital markets with the rest of the world. The program is expected to go live on October, 2014. The People’s Bank of China believes this is a strategic

opportunity to open up the country’s capital account. It allows Hong Kong and mainland investors to mutually access to each other’s stock markets via their own brokers. For market participants and service providers it presents unique execution challenges between the two exchanges operating in two completely different regulatory and legal jurisdictions.

BNP Paribas offers clients a wide range of in house services and products to take advantage of the Stock Connect program for those interested in Northbound trades. They include trade ideas, brokerage execution, synthetic security products, and clearing and custody.

According to Stéphanie Marelle, Head of BNP Paribas Securities Services, Hong Kong, “Given that the participants had only six months to develop systems and be ready for the new program; most fund managers might not be ready from day one. BNP Paribas has made significant efforts to offer execution and clearing/custodian services. Everyone urgently worked together to establish Stock Connect.”

She added, “This is the first time I have seen custodians, brokers and fund managers intensely cooperate together. BNP Paribas offers a truly innovative solution to structure integrated accounts and systems after working closely with the Hong Kong Stock Exchange to ensure our model meets the requirements of the Hong Kong Securities Clearing Company (HKSCC).”

While other market participants are still trying to set

up execution and clearing operations, BNP Paribas will be ready to offer synthetic security products such as P-notes and equity swaps on the first day of Northbound Trading of Stock Connect. “This is a smart way for investors to tap into this exciting market without too much investment at the beginning,” said Sebastien Mailleux, Executive Director, Head of Forward Trading, Asia ex-Japan, Global Equities and Commodity Derivatives, BNP Paribas. “As a powerful derivatives trading platform, we are able to offer Delta One products with competitive prices and liquidity. Our hedging portfolios will benefit by integrating services from execution to custodian, which will make us more efficient and timely while trading and offering synthetic

access to our clients.” Mailleux emphasized, “BNP

Paribas has made a strong team effort to develop and offer an alternative solution from day one via synthetic access through Delta One products. This offer is particularly interesting for those who are not ready to trade stocks, and also concerns a large number of investors who prefer to trade synthetics in order to benefit from its advantage (leverage,

operational efficiency, and cross margining).” Foreign investors and asset managers seeking to

buy Shanghai-listed A shares through Stock Connect are considered ‘northbound investors’. Hong Kong and overseas investors are eligible to buy and sell constituent stocks of SSE 180 index and SSE 380 index plus listed A shares which have corresponding H shares listed on Hong Kong Stock Exchange, except those which are not traded in RMB and under risk alert.

Southbound investors such as mainland institutional and individual investors with at least RMB500,000 in securities and cash accounts can buy and sell constituent stocks of the Hang Seng Composite LargeCap index, Hang Seng Composite MidCap index plus listed H shares which have corresponding A shares listed in Shanghai Stock

BNP Paribas is uniquely positioned to meet the challenges and deliver opportunities to its clients.

Shanghai-Hong Kong Stock Connect is a Breakthrough for Direct Access to China Stocks

BNP PARIBAS OFFERS AN EFFICIENT SYSTEM TO ACT AS AN INVESTOR’S

CUSTODIAN AND BROKER

Delivery stocks FOP Position Snapshot Pre-Trade

Checking

Client A’s Custodian

BNP Paribas Securities Asia

Client A

House Assets

Investor’s Assets

Client A’s Assets

BNP Paribas Securities Services

Client A’s Asset

Custodial moved to BNP Paribas Securities Services

Hong Kong Stock Exchange

* BNP Paribas Securities Services provides Custody and Clearing service. It is a General Clearing Participants of Hong Kong Securities Clearing Company limited. BNP Paribas Securities (Asia) Ltd is a licensed broker under Securities and Futures Commission.

Exchange , except those which are not traded in HKD. For Northbound Trading, a daily trading net buy quota

of RMB13 billion (USD2 billion) with an aggregate quota of RMB300 billion (USD48 billion) will be made available in initial stages. Sell orders will be allowed. Investors also need to observe presale stock check requirements.

Securities brokerage services for Northbound Trading of Stock Connect will be provided by Hong Kong licensed brokers. Furthermore, relevant Hong Kong and PRC rules and regulations should apply. Stock Connect rules set total trading turnover (both north and southbound) at RMB550 billion, and this represents less than 2% of both Hong Kong and Shanghai listed market capitalization. There are estimated 263 Hong Kong listed and 568 A-share stocks tradable under the scheme as of April 2014.

Carrie Cheung, Managing Director, Head of Electronic Trading, Asia-Pacific, Global Equities and Commodity Derivatives, BNP Paribas observes, “One of the hurdles for investors and brokers in Northbound Trading of this program is a pre-trade check requirement before placing selling orders. Investors are required to transfer their stocks from their custodians to their brokers one day before (T-1) or on the morning of (T-Day) the day when the sell trade is executed.”

The pre-trade checking rules represent a substantial challenge for all trading participants. She highlights that the pre-trade stock movement creates counterparty risk (as it is done Free of Payment), operational burdens, potential trade information disclosure and cumulative transaction costs.

Marelle believes, “Fund Managers are operationally challenged in contrast to the usual Delivery vs. Payment (DVP) structure. These challenges come with credit risk and a cost to re-align operational processes.”

BNP Paribas offers an efficient system to act as an

investor’s custodian and broker. If the investor’s assets stay in custody with BNP Paribas Securities Services, there is no need to further deliver securities before selling via BNP Paribas Securities (Asia) Ltd. since BNP Paribas Securities Services is also acting as clearing agent of BNP Paribas Securities (Asia) Ltd.

Cheung believes that BNP Paribas has produced an optimal solution and model compared to others in the market. It offers one stop shop for top class brokerage and custody services.

“The performance demands placed on all Stock Connect participants are unprecedented as brokers and custodians must work flawlessly and seamlessly in all

processes starting from execution and settlement, and through post trade activities,” said Marelle.

International investors should not only appreciate the historical significance of Stock Connect, but the achievements of its participants. Marelle says, “In the US or Europe, a long process and timeframe are needed to establish linkages between exchanges. Following the announcement of the Stock Connect program in April,

market participants were given six months to produce a solution and be ready to trade. After the draft HKEX and CCASS rules for Northbound Trading was released in August, we only had weeks to achieve and verify our operational status according to the draft.”

So now there will soon be three ways for investors to access A shares : QFII, RQFII and Stock Connect. All these schemes operate independently from each other, but under the program, some investors can access Shanghai listed A shares stocks with more ease. This new program definitely points to an exciting new area ahead for Hong Kong’s equity markets and market players.

Based on information as of 25th September 2014.

BNP PARIBAS WILL BE READY TO OFFER SYNTHETIC

SECURITY PRODUCTS ON THE FIRST DAY OF TRADING

EXECUTION & SYNTHETIC ACCESS

BNP Paribas Global Equities & Commodity Derivatives 63rd Floor, Two International Finance Center 8 Finance Street, Central, Hong Kong

SYNTHETIC SOLUTIONS

Benjamin Dufour Head of Asia Pacific, Global Prime Services Direct line: +852 2108 5456 benjamin.dufour@asia.bnpparibas.com

CASH EQUITIES

Carrie Cheung Head of Electronic Trading, Asia Pacific Direct line: +852 2909 8709 carrie.t.cheung@asia.bnpparibas.com

CUSTODY

BNP Paribas Securities Services PCCW Tower, Taikoo Place, 979 King’s Road, Quarry bay, Hong Kong

Stéphanie Marelle Head of BNP Paribas Securities Services, Hong Kong Direct line: +852 3197 3321 stephanie.marelle@asia.bnpparibas.com

CLIENT RELATIONS

Angely Yip Director and head of Sales, Asset Owners & Asset Managers Direct line: +852 3197 3548 angely.yip@asia.bnpparibas.com

James O’Sullivan Head of client development, Broker Dealers & Banks Direct line: +852 3197 3338 james.osullivan@asia.bnpparibas.com

Website: http://securities.bnpparibas.com

Contacts :

DISCLAIMER :This material is prepared by BNP Paribas, BNP Paribas Securities

(Asia) Limited and BNP Paribas Securities Services. The information contained herein is believed to be reliable but neither BNP Paribas, BNP Paribas Securities (Asia) Limited, BNP Paribas Securities Services, nor any of their affiliates (collectively “BNPP”) warrant its completeness or accuracy. Opinions, statements and estimates contained herein constitute BNPP’s judgment and are subject to change. BNPP shall not be liable for any errors, omissions or opinions contained within this document. This material is for information only and is not intended as an offer or solicitation

for the purchase or sale of any financial instrument. Additional information is available on request.

BNP Paribas is incorporated in France with limited liability. BNP Paribas Hong Kong Branch is registered as a Licensed Bank under the Banking Ordinance and regulated by the Hong Kong Monetary Authority. BNP Paribas Hong Kong Branch is also a Registered Institution regulated by the Securities and Futures Commission for the conduct of Regulated Activity Types 1, 4 and 6 under the Securities and Futures Ordinance.

BNP Paribas Securities (Asia) Limited is a Licensed Corporation regulated by the Securities and Futures Commission for the conduct

of Regulated Activity Types 1, 2, 4, 6 and 7 under the Securities and Futures Ordinance.

BNP Paribas Securities Services is incorporated in France as a Partnership Limited by Shares and is authorised and supervised by the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers). BNP Paribas Securities Services, Hong Kong branch is a general clearing participant of Hong Kong Securities Clearing Company Limited and is regulated by the Securities And Futures Commission for the conduct of regulated activity Type 1 under the Securities and Futures Ordinance.

© BNP Paribas 2014. All rights reserved.