The loophole in which mainland investors participate in the trading of Hong Kong stocks in the form of "one person, multiple households" will soon be plugged.

The HKEx recently announced to market participantsCircularAll relevant intermediaries are required to participate in the end-to-end test of the Hong Kong investor identification number system (that is, the real-name system) between May 16 and July 15, which means that the real-name system of Hong Kong stocks is a step closer to its formal implementation.

According to the HKEx, market exercises for systems related to the Hong Kong investor identification number system will be conducted in the third quarter of this year to enable the relevant regulated intermediaries to confirm their readiness before the implementation of the Hong Kong investor identifier system. Earlier, the SFC said that the investor identifier system would be formally implemented in the second half of this year.

Both off-site and off-site transactions need "real names".

In accordance with the requirements of the investor identification number system, when a trading order (automatic order matching) is submitted or arranged to be submitted to the trading system of the HKEx for execution, or when exchange participants are required to report over-the-counter transactions to the HKEx, the identification number of the relevant customer must be provided in the relevant trading order or transaction report.

Under the new system, the relevant regulated intermediaries are required to assign a unique brokerage customer code to each of the existing clients involved in over-the-counter trading of securities listed on the HKEx. The customer code of each brokerage shall be matched with the customer identification information of that particular customer, including the customer name, the country or jurisdiction in which the identity document is issued, the type of the identity document and the number of the identity document.

According to the requirements, the relevant licensed corporations and registered institutions are required to ensure that the latest customer identification information of the relevant customer, together with the customer's brokerage customer code, is submitted to the HKEx at or before the specified time, and take relevant data privacy and security measures to protect the data collected, transmitted and stored.

The investor identification number system will apply to all securities listed or traded on the HKEx trading system, including derivatives, but not to derivatives traded on the Hong Kong Futures Exchange trading system, as well as unlisted structured products, such as stock-linked investment instruments and stock-linked notes. As far as intermediaries are concerned, both valet transactions and proprietary transactions need to meet the requirements of the new system.

Crack down on violations such as "one person, multiple households"

In recent years, mainland investors have invested in Hong Kong stocks in the form of "one person, multiple households", which is a factor triggering the adjustment of the system.

Rule 13.21 of the listing rules expressly prohibits the repeated subscription of new shares by the same person, requiring the issuer, its directors, sponsors and underwriters to take reasonable steps to ensure that duplicate or suspected duplicate applications can be identified and rejected. However, in practice, due to the mainland ID card number more than 9, resulting in a variety of combinations of certificate numbers reported by securities firms.

Before the introduction of the investor identification number system, the trading system used by the HKEx only obtained the information of the exchange participants who entered the securities trading orders, not the customers who actually issued the trading orders. When suspicious trading activities occur, the SFC may have to give two or more notices to the relevant exchange participants or other intermediaries in order to identify the clients concerned, which is detrimental to regulatory efficiency and intermediaries face higher compliance costs.

Apart from the problem of "one person, multiple households", the lack of an effective investor identification mechanism has made the Hong Kong Securities and Futures Commission face a greater workload and longer investigation time in identifying market misconduct such as market manipulation and insider trading.

For example, market manipulators may deliberately open multiple trading accounts with different HKEx participants to cover their tracks and bid up the share price of a stock through different accounts. When conducting suspicious insider trading investigations, insider traders and ordinary investors may successively sell shares through the same intermediary. In the absence of an effective identification mechanism, it is difficult for regulators to identify whether the two trades belong to different traders through trading orders or reports submitted by HKEx participants.

Against this background, in December 2020, the Hong Kong Securities Regulatory Commission issued a consultation document recommending the implementation of an investor identification number system for the Hong Kong securities market at the transaction level. In August last year, the Hong Kong Securities Regulatory Commission issued a consultation summary document and decided to implement the Hong Kong investor identification number system.

The SFC said the investor identification number system would make it easier for regulators to monitor the market more timely and effectively, while reducing the ongoing compliance costs incurred by the SFC in handling customer identity inquiries. "this is in line with the development of major jurisdictions such as the United States, Europe, Australia, Singapore and mainland China, and will help ensure the integrity of the market, thereby supporting Hong Kong's continued development as a leading international financial centre. "