Late last month, the Securities and Futures Commission (SFC) announced that agreement had been reached with the China Securities Regulatory Commission (CSRC) to implement the investor identification model for Stock Connect Northbound trading (NB Investor ID Model) on 17 September 2018. This will apply to Northbound trading under both the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect.

The NB Investor ID Model is intended to improve cross-border market surveillance and will provide Mainland and Hong Kong regulators direct and real-time line of sight into cross-market trades at the client level.

Background to the NB Investor ID Model and the SFC’s announcement of the agreement with the CSRC to introduce the NB Investor ID Model can be found in our e-bulletin of December 2017.

Exchange participants should submit the required mapping data to The Stock Exchange of Hong Kong Limited (SEHK) as soon as possible ahead of the launch of the NB Investor ID Model on 17 September 2018, and ensure that all data protection laws are complied with prior to doing so.

What is the NB Investor ID Model and how does it operate?

Under the NB Investor ID Model, China Connect Exchange Participants (CCEPs) and Trade-through Exchange Participants (TTEPs) are required to assign a unique “Broker-to-Client Assigned Number” (BCAN) to each of their Northbound trading clients. The BCAN can be used to identify a specific client and will be mapped to the “Client Identification Data” (CID) of that particular client.

CCEPs/TTEPs will be required to submit the BCAN-CID mappings of all of their Northbound trading clients to SEHK by the cut-off time on T-1 day, using a single file (BCAN-CID Mapping File). SEHK then sends the BCAN-CID Mapping Files to the Mainland exchanges. The Mainland exchanges or ChinaClear will consolidate and validate the BCANs and CIDs received and, if any issue arises, they will inform SEHK (and SEHK will inform the relevant CCEPs/TTEPs) that the corresponding BCANs cannot be used for trading on T day.

CCEPs are required to tag Northbound trading orders with the corresponding BCANs on a real-time basis when submitting the orders to SEHK. The BCAN information relating to Northbound orders and trades will be shared with the Mainland exchanges on a real-time basis. A Northbound order submitted without the BCAN or with the BCAN in an incorrect format will be rejected by SEHK, and a Northbound order submitted with an invalid BCAN will be rejected by the relevant Mainland exchange.

BCANs and CIDs are for Mainland and Hong Kong regulators’ market monitoring and surveillance only. They will not be used in clearing and settlement nor be available for public viewing.

How should agency trades and proprietary trades be tagged?

For agency trading, the BCAN of the client who is a non-affiliate of the CCEP should be tagged to an order. If a CCEP’s direct client is an affiliate, the BCAN at the next level (or further levels down) is required until the client is not an affiliate. The purpose of this is to identify the person or entity that is ultimately responsible for originating the instruction.

For proprietary trading by CCEPs/TTEPs (and/or their affiliates), each CCEP/TTEP will tag an order with the BCAN it has assigned for itself.

What information is included in the CID?

For individual clients: (a) their full name as shown on their identity document, (b) the issuing country or jurisdiction of their identity document, (c) the type of identity document (such as Hong Kong identification card, passport, etc), and (d) the identity document number.

For institutional or corporate clients: (a) their entity name as shown on the certificate of incorporation or Legal Entity Identifier (LEI), (b) their place of incorporation, (c) the type of document (eg certificate of incorporation or LEI), and (d) their certificate number or LEI.

What about the existing manual broker enquiry process?

CCEPs/TTEPs should be aware that SEHK will retain the existing manual broker enquiry process after the launch of the NB Investor ID Model, and may continue to require CCEPs/TTEPs to provide beneficial ownership information for Northbound orders on an ad hoc basis (in addition to BCAN/CID) under the existing surveillance cooperation arrangements with the Mainland exchanges. We anticipate that SEHK is likely to make such requests where information not captured by BCAN/CID is required for regulatory surveillance or enforcement purposes.

What client consents and/or authorisations are required from a PDPO perspective?

The BCAN-CID Mapping Files comprising individual clients’ names and identity document details will be personal data as defined under the Personal Data Privacy Ordinance (PDPO). As BCANs are assigned by CCEPs/TTEPs to uniquely identify their clients (which may include individuals), BCANs can also constitute personal data in the hands of CCEPs/TTEPs.

CCEPs/TTEPs should therefore review and, if necessary, amend their existing client documentation and personal information collection statements (PICS) or other similar documents, to ensure that all necessary authorisations and consents are obtained from their clients regarding the collection, storage, use, disclosure and transfer of personal data under the NB Investor ID Model.

For an existing client, CCEPs/TTEPs should be aware that pursuant to Data Protection Principle 3 in Schedule 1 of the PDPO (DPP3), personal data cannot be used for a “new purpose” unless the client has first given his/her prescribed consent for such purpose.

If the client’s consent at the time of data collection was not broad enough to cover the NB Investor ID Model, the CCEP/TTEP should ensure that the prescribed consent under DPP3 is obtained. A CCEP/TTEP should also make it a condition to the client’s use of the Northbound trading services that the client has provided and not withdrawn such consent.

For reference, SEHK has prepared some sample language for inclusion in the PICS of CCEPs/TTEPs for the purpose of the NB Investor ID Model.

What about overseas data protection laws?

Depending on the nationality or place of business or residence of CCEPs/TTEPs (and/or their clients), or place of data collection, overseas data protection laws may also apply, such as the European Union’s General Data Protection Regulation. CCEPs/TTEPs should ensure that they comply with all relevant data protection laws of other applicable jurisdictions when collecting, storing, using, disclosing and transferring personal data under the NB Investor ID Model.

What if client consent cannot be obtained?

If a CCEP/TTEP is unable to obtain a client’s consent and/or authorisation, the CCEP/TTEP may only input Northbound sell orders (but not Northbound buy orders) for such client, with these sell orders tagged using specific reserved BCANs prescribed by SEHK.

What is next?

CCEPs and TTEPs should submit their BCAN-CID Mapping Files to SEHK as early as possible (ahead of the launch of the NB Investor ID Model on 17 September 2018), to allow sufficient time to rectify any issues which may occur during the registration process with the Mainland authorities (see SEHK circular of 4 September 2018). Submission should be made via the dedicated secure file transfer protocol. SEHK has previously provided some data record examples for the reference of CCEPs and TTEPs.

In a circular issued on 6 September 2018, SEHK sets out a special arrangement during the initial period from 17 September to 12 October 2018, whereby China Connect orders will not be rejected on the two grounds stated in the circular, so long as the tagged BCANs are in the prescribed format. It also discusses a post release test to be held on 15 September 2018 for CCEPs to further verify their system readiness (optional but encouraged) and a stabilisation period which will apply in the first week of the launch (ie, 17 to 21 September 2018).

Updated Rules of the Exchange (clean and marked up versions) have been published to incorporate additional provisions for the NB Investor ID Model and to reflect the revised daily quotas for Stock Connect (which took effect on 1 May 2018).

Detailed information about the NB Investor ID Model is available on a dedicated webpage of the Hong Kong Exchanges and Clearing Limited.

The CSRC has agreed to introduce a similar investor identification regime for Southbound trading after the regime for Northbound trading has been implemented.

In the longer term, the SFC intends to implement an investor identification regime covering all trading on the SEHK. Market consultation will be conducted in due course.