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All aboard the through train

Published on Saturday, 08 Nov 2014
Jessica Morrison
Jeremy Lam

While an official launch date is yet to be announced, the Shanghai-Hong Kong Stock Connect, which will allow qualified institutions and individuals to buy and sell certain shares listed on the two exchanges, could also provide a welcome long-term jobs boost to the financial sector.

Following the implementation of the trading mechanism, subject to quotas, Hong Kong and overseas investors will be able to trade up to 13 billion yuan (HK$16.4 billion) of A shares listed in Shanghai per day, while mainland investors will be able to trade up to 10.5 billion yuan of Hong Kong listed shares.

Under the current arrangement, individual investors from Hong Kong or overseas can only participate indirectly in the mainland's capital markets through investment tools such as the Qualified Foreign Institutional Investor (QFII) fund.

Jessica Morrison, head of APAC market structure at Deutsche Bank, says that under the pilot programme, the SH-HK Stock Connect, or the so-called "through train", is expected to generate new business and create new roles in the market.

"The potential for growth is there," says Morrison, who describes the initiative as a historic event. "We are witnessing the world's second largest equity market gradually opening up to global investors in a meaningful way."

The new channel will allow further access to mainland equity markets through, for example, Chinese stocks being included on global indices.

Morrison says this will likely create new roles in Hong Kong and the mainland. "This is just the beginning, as we are currently only in the pilot programme stage of development. The positions being created are sustainable, and the market demand for these roles will only strengthen as the programme develops."

A prime example, she says, is in the alternative investment community - including bodies such as hedge funds - which up to now has not had access to mainland equity markets to the extent it would have liked. "Now that this channel is opening up, there is very keen interest to participate," Morrison says, adding that the increased trading activity could have important follow-on effects for the broader market.

As trading volume grows and the market matures, Morrison expects the nature of talent needs to also evolve. She expects emerging roles to shift the current urgent need for operational expertise back to a central focus on the quality of trading execution.

This will create a need for experienced IT professionals and those familiar with electronic trading, research and sales trading offerings.

"We are seeing the brokerages that have best-in-class talent across these areas as best placed to be successful and capture the opportunities that the Shanghai-Hong Kong Stock Connect will bring," Morrison says.

The melding of the two different exchanges will create a "major evolution" in market structure, leading to demand for professionals from all of the major areas of a brokerage platform, including trading, operations, IT, legal and compliance.

"Those that have a deep understanding of all of the idiosyncrasies of these two different market structures will be very valuable," Morrison says.

In the near term, there has been immediate hiring demand in operations. "At this pilot stage, many of the processes related to the programme are manual and thus require a lot of immediate manpower," Morrison explains. However, these roles are expected to transform as the market matures.

There is also significant demand for increased research coverage, particularly for northbound trade, as Hong Kong and overseas investors look for high-quality A-share research as they prepare to increase their investment activities.

In addition to technical skills, having a strong regulatory background and understanding is of paramount importance in every function related to the market. "Having the ability to translate and apply regulations as they matter to your function is critical," Morrison says.

She adds that while regulatory knowledge used to be viewed as primarily the domain of the legal and compliance functions, it is now clear that a deep understanding of the regulatory framework is a basic requirement that exists across all functions. "Professionals and firms that are not able to get that right will not succeed," she warns.

While many individual investors are excited about gaining greater access to the mainland's equity market, Jeremy Lam, co-head of the financial services practice at law firm Deacons, says the fund industry is also evaluating the potential that the SH-HK Stock Connect scheme will present.

With Deacons acting as legal adviser to about 70 per cent of funds authorised by the Securities and Futures Commission, Lam says his firm is helping clients evaluate both the potential opportunities and risk factors associated with the cross-border trading mechanism.

"In most cases, clients need to ensure that any investments that they make meet the Undertakings for Collective Investment in Transferable Securities, the main European framework covering collective investment schemes that are suitable for retail investors," Lam says.

As the major testing ground for the mainland's offshore financial reforms, Hong Kong is strongly positioned to benefit in several ways, including increased interest from the international fund management community.

Lam says if proposed reforms are passed following the ongoing consultation process, it could lead the way for large fund houses to create or domicile funds in Hong Kong.

This mutual recognition would allow Hong Kong-domiciled funds to be sold on the mainland, and mainland funds to be sold in Hong Kong, which could also create another strategic advantage, according to Lam.

"In addition to the legal sector, more jobs would be created for accountants, research analysts, and other professionals," Lam says.

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