Q1: Recently, the China Securities Regulatory Commission (CSRC) announced the successful investigation into a typical case of using accounts of Shanghai-Hong Kong Stock Connect (SH-HK Stock Connect) in cross-border manipulation of shares in Zhejiang Feida Environmental Science and Technology Co., Ltd. (Feida Environmental) and other stocks, which has drawn widespread attention in the market. According to the sources, the clues about the cross-border manipulation case were first detected and reported by the Shanghai Stock Exchange (SSE). Can you brief us on the main efforts made by the SSE in monitoring and screening the violations under the SH-HK Stock Connect trading mechanism?
A: Strengthening the supervision over unusual transactions in SH-HK Stock Connect and the screening of the clues about violations is a key task that the SSE has been committed to in more than 3 years since the launch of the SH-HK Stock Connect. The clues abut "Tang Hanbo" and others using the Shanghai Stock Connect to manipulate the stock of Zhejiang China Commodities City Group Co., Ltd., which were detected and reported in 2016, have been verified by the CSRC, resulting in the first case of administrative penalty for cross-border manipulation through SH-HK Stock Connect. The case announced recently by the CSRC that the employees of a private equity fund used the asset management accounts and the Shanghai Stock Connect accounts to carry out cross-border manipulation is another example of cross-border manipulation through SH-HK Stock Connect reported by the SSE.
In August 2016, the real-time monitoring on the SSE showed abnormal trends in the prices of such stocks as Feida Environmental from time to time. At the same time, Hong Kong Exchanges and Clearing Limited. (HKEX) reported that when trading the stock of Feida Environmental, an investor earned a large amount of profit through quite a few unusual transactions characterized by buying in large sums and selling reversely on the next trading day. Later, the big data comparisons and inspections showed that the Shanghai Stock Connect account had colluded with a number of domestic connected accounts to drive up stock prices by buying with large orders in the trading sessions and the final session before closing, placing false orders and by other means, and conduct reverse trading in large sums on the day or the next day, which was suspected of market manipulation. In view of the situation, the SSE applied to the CSRC for investigation after continuous monitoring and analysis.
The Shanghai Stock Connect follows the "secondary account" structure of the Hong Kong stock market. At present, the real-time monitoring can only show the information of Hong Kong brokers without displaying the specific investors placing the buy and sell orders, which is different from the domestic "see-through" account monitoring system. It was thanks to the proactive and comprehensive transaction supervision models as well as the efficient and smooth cross-border cooperation mechanism of the SSE and HKEX that the clues about the cross-border manipulations through SH-HK Stock Connect could be detected in a short period of time. With discussions the two exchanges agreed that if HKEX finds out that there are suspicious cases of unusual transactions such as intensive and large-sum trading activities by the Shanghai Stock Connect accounts during the monitoring, it will promptly notify the SSE for verification, and vice versa. At the same time, the two exchanges have also reinforced mutual assistance in the implementation of self-regulatory measures in response to abnormal trading practices.
According to statistics, currently HKEX has announced a total of nearly 20 cases of suspected unusual transactions in Shanghai Stock Connect. The SSE has asked HKEX to assist in the investigation over more than 60 cases, and issued written warnings to Shanghai Stock Connect investors with abnormal transactions. In addition, the SSE has provided effective professional support for the cross-border regulation and enforcement at the CSRC level, and offered assistance in data investigation in more than 70 cases. In general, the abovementioned SH-HK Stock Connect regulatory cooperation mechanism has played an important role in cracking down on cross-border manipulation and other violations.
Q2: With the further development of the Shanghai and Shenzhen-Hong Kong Stock Connect trading mechanisms in recent years, what are the follow-up arrangements of the SSE for cross-border transaction monitoring?
A: To further improve the regulation of the SH-HK Stock Connect transactions, the SSE and HKEX have worked together to continuously explore and improve the cross-border transaction monitoring modes and advance the development of the see-through account system for Shanghai Stock Connect.
At the end of last year, the Securities and Futures Commission of Hong King (SFC) and HKEX announced the plan to launch the investor identification code system in the third quarter of 2018. The system requires Hong Kong brokers to compile the client codes for their clients that match the clients' specific identification information, and attach the relevant brokers' client codes in placing orders, thus initially achieving the see-through identity information of the northbound trading investors. Such system will help carry out the transaction monitoring and analysis with finer granularity, broaden the channels for multi-dimensional verification and analysis of violation clues, and greatly enhance the ability to monitor transactions. At present, according to the unified deployment of the CSRC, the SSE is stepping up efforts to complete the tasks such as the development of monitoring technology models, revision of business rules and improvement of business processes.
"While the devil climbs a post, the priest climbs ten." The investors must firmly establish the awareness of compliance trading, and must not mistakenly believe that the SH-HK Stock Connect cross-border trading is a regulatory vacuum and an area without rule of law. Relying on increasingly sophisticated technologies such as big data, cloud computing and artificial intelligence, as well as the closer regulatory cooperation mechanism between the SSE and HKEX, the SSE will provide a stronger frontline trading regulatory protection for the healthy development of Shanghai Stock Connect.