Q1: What is Shanghai-London Stock Connect Mechanism?
A: As a connectivity mechanism between the Shanghai Stock Exchange (SSE) and the London Stock Exchange (LSE), Shanghai-London Stock Connect refers to the arrangement that the eligible companies listed in the two countries issue the depositary receipts (DRs) and list and trade them on the other side's market according to the laws and regulations for the other side's market. At the same time, through the cross-border conversion mechanism between depositary receipts and underlying securities, the connectivity of the two markets will be realized.
Shanghai-London Stock Connect includes two business directions, eastbound and westbound. The eastbound business means that the LSE-listed companies list the Chinese depositary receipts (CDRs) on the SSE. In the westbound business, the A-share companies on the SSE list the global depositary receipts (GDRs) on the LSE.
In order to start steadily, the underlying securities of the DRs are limited to stocks, and the eastbound business will not allow the LSE-listed companies to conduct direct financing in China's domestic market by issuing new shares in the form of CDR for the time being. The listing and trading of the CDRs will be achieved by the domestic cross-border conversion institutions establishing the initial liquidity, which means that the domestic cross-border conversion institutions convert the underlying stocks bought in the foreign markets or acquired in other legal ways into the CDRs according to the relevant rules and depositary agreements, with the CDRs listed and traded afterwards. The A-share companies listed on the SSE can conduct direct financing in the UK market by issuing GDRs. Qualified securities trading institutions on both sides may directly open securities and fund accounts on the market of the other side, and engage in the cross-border conversion business for the depositary receipts based on relevant rules.
Q2: What is the background, significance and vision of the launch of Shanghai-London Stock Connect?
A: (1) The background of Shanghai-London Stock Connect. According to the results of Chinese President Xi Jinping's visit to the UK in October 2015 and the Seventh China-UK Economic and Financial Dialogue, both Chinese and British sides welcomed the feasibility study conducted by the SSE and the LSE on the connectivity between the markets in Shanghai and London. In November 2016, in the results of the 8th China-UK Economic and Financial Dialogue, the Chinese and British sides recognized the important progress made in the feasibility study on Shanghai-London Stock Connect, and agreed to carry out research and preparation for the operational systems and arrangements. In December 2017, in the policy results of the Ninth China-UK Economic and Financial Dialogue, the Chinese and British sides welcomed the progress in the research and preparation of the relevant operational systems and arrangements of Shanghai-London Stock Connect, and agreed to further study the arrangement for the qualified companies listed in both countries to be listed in the market on the other side through the depository receipts, so as to achieve the connectivity between the markets in the two countries. At the Boao Forum for Asia Annual Conference 2018 held in April 2018, Yi Gang, governor of the People's Bank of China, announced to strive to launch Shanghai-London Stock Connect within the year. On July 30, 2018, when meeting with British Foreign Secretary Jeremy Hunt, Premier Li Keqiang said that China and the UK should give play to the complementary advantages, expand cooperation in various fields, and take the opportunity of launching Shanghai-London Stock Connect in the year to vigorously cultivate new growth points for cooperation and achieve more mutual benefits and win-win results.
(2) The significance of Shanghai-London Stock Connect. Shanghai-London Stock Connect is an important initiative to deepen China-UK financial cooperation and expand the two-way opening up of China's capital market. It is in line with the spirit of the 19th CPC National Congress on promoting a new pattern of comprehensive opening up, and of great significance in the following aspects. First of all, Shanghai-London Stock Connect is conducive to expanding the two-way opening up of China's capital market, improving the function and internationalization of the domestic market, driving the domestic securities institutions to conduct the cross-border securities business and enhancing the international competitiveness of the securities industry. Secondly, the initiative provides an opportunity for the issuers and investors in both countries to access the market on the other side for investment and financing, enables domestic residents to invest in overseas products on the local market, supports the A-share listed companies to raise funds from overseas markets, and bolsters the entity enterprises' efforts in cross-border financing and mergers and acquisitions. Thirdly, the initiative will contribute to building Shanghai into an international financial center. Fourthly, the initiative will help deepen China-UK financial cooperation so as to jointly create an enhanced version of the "Golden Age" between China and Britain.
(3) The vision for Shanghai-London Stock Connect. Opening up to the outside world is the only way for China to achieve prosperity and is also an inevitable trend for the future development of China's capital market. Shanghai-London Stock Connect will start with the overseas issuers of underlying securities listing the CDRs and the domestic listed companies issuing the GDRs, and then further improve the supporting systems according to the market developments, so as to provide the opportunities for the domestic investors to more conveniently invest in the quality listed companies overseas and offer more support to the domestic listed companies in expanding their international businesses and improving their international visibility. Moreover, in the process, the internationalization of the SSE will be advanced, and the international influence of China's capital market will be improved, with the aim of building a first-class exchange with international competitiveness and better serving the two-way opening up of China's capital market.
Q3: What is CDR and GDR?
A: The "Several Opinions on Piloting the Domestic Issuance of Stocks or Depositary Receipts by Quality Innovative Enterprises" (Guo Ban Fa [2018] No. 21 Document) forwarded by the General Office of the State Council defines the CDRs as the securities that are signed and issued by the depositaries, issued in China's mainland based on the overseas securities, and represent the rights and interests of the overseas underlying securities. Correspondingly, the GDRs in Shanghai-London Stock Connect are the securities that are signed and issued by the depositaries, issued in the UK based on the A-stocks on the SSE, and represent the rights and interests of the underlying securities in China's mainland.
Q4: What is a CDR depositary? What responsibilities does a depositary take?
A: A depositary shall be a domestic legal person who holds the overseas underlying securities in accordance with the depositary agreement and accordingly signs and issues the depositary receipts representing the rights and interests of the overseas underlying securities. A depositary mainly plays the role of the "converter" between the overseas underlying stocks and the domestic depositary receipts. A depositary can convert the underlying stocks into CDRs or convert the CDRs into the underlying stocks according to the investors' intentions, thus achieving the cross-border conversion of the CDRs and the underlying stocks. Article 27 of the "Measures for the Administration of Issuance and Transaction of Depositary Receipts (for Trial Implementation)" stipulates the responsibilities that a depositary shall bear.
Q5: What is a depositary agreement?
A: A depositary agreement is an agreement on the rights and interests represented by the depositary receipts and the reciprocal rights and obligations of the issuers of the underlying securities, the depositaries and the holders of the depositary receipts. An investor who holds a depositary receipt becomes a party of the depositary agreement and is deemed to have agreed to and abide by the rules of the depositary agreement. Article 28 of the "Measures for the Administration of Issuance and Transaction of Depositary Receipts (for Trial Implementation)" provides for the terms to be included in the depositary agreement.
Q6: What is a CDR custodian? What responsibilities does a custodian take?
A: A custodian is a financial institution entrusted by a depositary to look after the underlying assets represented by the depositary receipts in accordance with the depositary agreement.
Article 29 of the "Measures for the Administration of Issuance and Transaction of Depositary Receipts (for Trial Implementation)" provides for the responsibilities of a custodian.
Q7: What rights and obligations do CDR holders have and how shall they exercise their rights?
A: The rights enjoyed by CDR holders include but are not limited to: firstly, according to law they enjoy the interests and rights of the overseas underlying securities represented by the depositary receipts; secondly, they enjoy the shareholders' rights exercised through the depositors, and the rights include but are not limited to: voting, obtaining cash dividends, share dividends and other distributed property, exercising the rights of right issue, exercising the voting rights, etc.; thirdly, they enjoy other rights provided by the laws and regulations and the rules of the China Securities Regulatory Commission (CSRC) as well as the depository agreement. The CDR holders exercise their rights mainly through the depositaries, who shall provide corresponding services for the CDR holders to exercise their rights in accordance with laws and regulations and the rules of the CSRC as well as the depositary agreement.
Q8: How do the basic business modes of Shanghai-London Stock Connect operate? What are the differences between it and Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect?
A: Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect is a connectivity model, in which the trading orders placed by the domestic investors are routed by the securities trading service companies established by the exchanges to the overseas exchanges for execution, and the securities registration and settlement institutions on both sides shall provide the local investors with the nominal holder service, hold the overseas securities as a representative and participate in clearing and settlement.
Shanghai-London Stock Connect is a model for the listed companies in Shanghai and London that meet certain conditions to list and trade the depositary receipts in the market on the other side. The mode in which investors participate in trading and settlement of the depositary receipts is similar to that for stocks. In addition, with reference to the international practices, the depositary receipts and the underlying stocks can be converted into each other in Shanghai-London Stock Connect. With the mutual conversion mechanism between the underlying stocks and the depositary receipts, the trading in the two markets will be connected.
Simply put, in Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, the investors on both sides directly buy and sell stocks in the market on the other side, with the "investors" crossing the border but the products still remaining in the market on the other side. However, in Shanghai-London Stock Connect, the depositary receipts converted from the stocks in the opposite market are listed and traded in the local market, with the "products" crossing the border but the investors still remaining in the local market.
Q9: What laws are applicable for the issuance and listing in Shanghai-London Stock Connect?
A: The eastbound business of Shanghai-London Stock Connect shall conform to China's securities regulatory laws and regulations, and applicable to the business are the related rules of the CSRC and the SSE for issuance and listing, continuous regulation, local trading and cross-border conversion of the CDRs in Shanghai-London Stock Connect. The overseas issuers of underlying securities shall meet the requirements for the public issuance of depositary receipts in the "Securities Law", the "Several Opinions on Piloting the Domestic Issuance of Stocks or Depositary Receipts by Innovative Enterprises", the "Measures for Administration of Issuing and Trading the Depositary Receipts (for Trail Implementation)" (the "Administration Measures" for short) and the "Regulatory Rules for the Connectivity of the Depositary Receipt Business on Shanghai Stock Exchange and London Stock Exchange (for Trial Implementation)" (the "Regulatory Rules" for short), as well as the requirements of the SSE for listing the CDRs under the Shanghai-London Stock Connect mechanism.
In the westbound business, the relevant rules of the UK market are applicable to the issuance and listing, continuous regulation and local trading of the GDRs. To issue the GDRs, the domestic listed companies shall also comply with the "Securities Law", the "Special Provisions of the State Council on the Limited Liability Companies Issuing and listing Shares Overseas", the "Regulatory Provisions" and other laws and regulations, and meet the relevant regulatory requirements of the CSRC for the domestic enterprises to issue or list securities and depositary receipts of Shanghai-London Stock Connect overseas.
Q10: Which investors can participate in the CDR investment under the Shanghai-London Stock Connect mechanism?
A: The matters concerning the suitability management of the CDR investors under the Shanghai-London Stock Connect mechanism will be specified by the SSE in the business rules. In the early pilot stage, the institutional investors and eligible individual investors may, according to the relevant rules of the CSRC and the SSE, apply to the securities companies designated for trading for participating in the CDR investment under the Shanghai-London Stock Connect mechanism.
Q11: What are the institutional arrangements for investor protection under the Shanghai-London Stock Connect mechanism, and what are the remedies for the investors whose rights are violated?
A: In order to effectively protect the legitimate rights and interests of domestic investors, based on the international experience and the business characteristics, the system rules for Shanghai-London Stock Connect require overseas issuers to treat Chinese investors fairly, and multiple measures for protecting the investors' rights and interests are introduced:
First of all, the threshold for the investors' access is set. When granting the permit for CDR trading under the Shanghai-London Stock Connect mechanism to investors, especially the individual investors, the securities companies are required to assess the investors' application for the permit in accordance with the requirements for the management of the investor suitability, and fully disclose the risks for investment in the CDRs under the Shanghai-London Stock Connect mechanism.
Secondly, the issuers' legal responsibilities are stipulated. The overseas issuers of the underlying securities are required to participate in the CDR issuance, fulfill the obligations of the issuer and the listed company in accordance with the law, and bear the corresponding legal responsibilities.
Thirdly, the security of the underlying assets of the depositary receipts is ensured. The depositaries are required to open individual accounts for the underlying assets of the depositary receipts, effectively separate the underlying assets of the depositary receipts from their own assets, manage them and keep accounts separately, not to classify the underlying assets of the depositary receipts into their own assets, and not to encroach on or embezzle the underlying assets of the depositary receipts.
Fourthly, the domestic investors' right to know is protected. The overseas issuers of the underlying securities are required to establish securities affairs institutions within the territory of China, employ the domestic representatives for information disclosure who are familiar with China's rules and requirements for information disclosure and shall be responsible for information disclosure and regulatory liaison during the listing of the CDRs under the Shanghai-London Stock Connect mechanism, set up the channels for effective communication with the investors, regulators and the exchange in China, and protect the legitimate rights and interests of domestic investors in accordance with the rules.
Fifthly, a dispute mediation mechanism is established. The depositary agreement is required to expressly stipulate that the disputes arising from the depositary receipts shall be governed by the Chinese laws and shall be under the jurisdiction of the domestic courts. When the rights of CDR investors under the Shanghai-London Stock Connect mechanism are infringed, the domestic investors may file securities lawsuits at the domestic courts against the issuers of the underlying securities in accordance with the provisions of relevant laws and regulations as well as the depositary agreement; or, according to the arbitration agreement, they may apply to an arbitration institution with jurisdiction for arbitration.
Q12: What factors are considered in selecting the underlying enterprises for Shanghai-London Stock Connect?
A: The model of listing the depositary receipts on each other's markets is adopted in Shanghai-London Stock Connect. The qualified companies listed on the SSE and the LSE are welcomed in applying to the securities regulators and the exchange on the other side for issuing and listing as well as vigorously participating in the eastbound and westbound businesses.
In the direction of CDR, the overseas issuers of the underlying securities shall be the senior companies listed on the main board of the LSE, and their listing periods and market capitalization sizes shall meet certain requirements, so as to select the issuers with better liquidity and a broad investor base in the UK market for the participation in the eastbound business, and achieve a smooth start for the program.
In the direction of GDR, the LSE welcomes the companies listed on the main board of the SSE with the market value reaching a certain standard in issuing the GDRs.
Q13: How can we operate in the cross-border conversion between DRs and underlying stocks?
A: Both the eastbound and the westbound businesses of Shanghai-London Stock Connect allow the mutual conversion of the DRs and the underlying stocks on the basis of the established ratios, which is the main way for Shanghai-London Stock Connect to realize the connectivity between the two markets, and is conducive to the market's independently regulating the DR supply and demand and maintaining the price linkage of DRs and underlying stocks.
Specifically, the cross-border conversion includes a "generation" process in which the underlying stock is converted into DR and a "reconversion" process in which the DR is converted back to the underlying stock. The entire cross-border conversion is jointly completed by the market participants such as investors, depositaries, custodians and cross-border conversion institutions. In the process of generation, the holders of the underlying stocks consign the underlying stocks to the depositaries, who, according to the arrangements of the depositary agreement, complete the procedures of signing and issuing the depositary receipts, and transform the holders of underlying stocks into the holders of depositary receipts where the depositary receipts are listed and traded; in the reconversion process, after the holders of the depositary receipts consign the depositary receipts to the depositaries, the depositaries shall, according to the arrangements of the depositary agreement, complete the procedure of writing off the depositary receipts, and turn the underlying stocks into the holding of the holders of depositary receipts where the underlying stocks are listed and traded.
