This article provides an in-depth analysis of the differences between securities accounts and custody systems of A-shares, Hong Kong stocks, and U.S. stocks. From the account panorama and custody evolution of A-shares to the unique model of Hong Kong stocks and US stocks, it has gradually unfolded. It clearly shows the architectural logic of the three major markets in terms of accounts and custody, helping readers fully grasp the key foundations of cross-border investment.
1. A-share securities account system
1. Panorama of the A-share securities account system
First of all, let’s help you establish a preliminary feeling through a panorama of the A-share securities account system (as shown in the figure below), and then cut in little by little, unfolding piece by piece, if you can help everyone achieve the effect of grasping, it is the biggest wish of the hearth.
From the above securities account system diagram, we can clearly understand the three major account systems: Zhongdeng account, brokerage account and third-party depository account. The securities account system is divided into securities account and capital account, the securities account is opened by China Securities Depository and Clearing Co., Ltd. (hereinafter referred to as Zhongdeng), and the securities company plays the role of an account opening agent in the process of opening a securities account: acting as an agent for China Clearing to open a securities account for customers.
2. Zhongdeng account system
Zhongdeng account system: one-code pass, A share account, B share account, closed-end fund account, credit account, settlement margin account, settlement reserve account, etc., the Zhongdeng account system is shown in the figure below
Brief summary:
China Clearing will open a one-code account for each investor, and then set up a securities sub-account under the one-code account account. An investor can only apply to open a one-code account with one code.
An investor can apply to open up to 3 A-share accounts and closed-end fund accounts in the same market, and can only apply for the opening of 1 credit account and B-share account; The same special institution and product can only apply to open one one-code pass account; The same special institution and product can apply to open multiple securities sub-accounts.
Brief summary:
The settlement participant applies to Zhongdeng to open a settlement reserve account. When opening an account, the Clearing Participant needs to open a Clearing Participant’s receiving bank account with its beneficiary bank.
Zhongdeng will also open a special deposit account for its settlement reserves with Zhongdeng Clearing Bank.
Image source: China Clearing Network, if there is any infringement, please contact to delete
3. Brokerage account system
In order to carry out business smoothly, domestic securities firms mainly adopt the hybrid model of “centralized registration + secondary custody”, with China Clearing (CSDC) as the core center and securities firms as the intermediary channel, forming a multi-level account management system. The account structure type and operation logic are shown in the following figure.
Note: Investors cannot directly open accounts with Zhongdeng Company and the Exchange, but entrust the securities company to open a securities account on behalf of the investor, and will open a securities account and a capital account when the investor opens an account.
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As shown in the following figure:
Knock on the blackboard to draw the key points:
1. Domestic securities account system: with the mixed model of “(centralized registration = central registration) + (secondary custody = third-party bank depository)”, it forms a multi-level (ordinary account, margin and securities lending account, derivatives account, cross-border account) and sub-authority structure. The ownership of securities is directly registered by China Clearing, the brokerage is only a channel, the capital flow is strictly monitored by the bank, isolated from the securities firm’s own assets, and different trading varieties (such as two financial institutions, options) need to open independent functional accounts.
2. The domestic brokerage account system Let’s talk about this for the time being, other details of the domestic brokerage account system, please see: Let’s talk: securities and fund account system and operation.
4. Tripartite depository account system
1.1.4.1. Background of tripartite depository: prevent securities firms from misappropriating customer funds (such as the full implementation after the “misappropriation of customer deposits” incident by China Southern Securities in 2004). To summarize: closed operation of funds, full supervision of banks, and account binding relationships.
1.1.4.2. The concept of tripartite depository: the customer deposit of a securities company is handed over to the bank depository, and the depository bank is responsible for the deposit, deposit, transfer, and security management of the customer’s transaction settlement fund, while the securities company is only responsible for the customer’s securities transaction, share management and clearing and settlement.
1.1.4.3. Tripartite depository account system and process: as shown in the figure below. The third-party depository business follows the principle of “securities firms manage securities and banks manage funds”, and strictly separates investors’ “fund accounts” and “fund margin accounts”.
Brief summary:
The tripartite depository system has built the world’s strictest investor fund protection mechanism through the division of labor between “banks managing money, brokerage firms managing transactions, and China Clearing managing securities”. This point is different from the US stock market, which will be focused on in the following article.
The domestic tripartite depository account system Let’s talk about this for the time being, other details of the domestic tripartite depository account system, securities and fund account system and operation.
2. A-share securities custody system
1. The evolution history of A-share securities custody
1.1. At the beginning of the establishment of our country’s securities market, there was no so-called first-level custody, and of course, it was also based on overseas mature markets and implemented the second-level custody system. Investors need to choose a brokerage business department to custody their shares, and the brokerage firm will open a master account with CCASS and escrow the client’s securities. In this model, investors bind trading seats through a designated trading system: the shares bought by which brokerage can only be sold through that brokerage, and they must be transferred to custody when they need to change brokers.
1.2. Why the primary custody was adopted later, everyone should know: since 2000, the stock market has continued to be sluggish and phased adjustment, and the once glorious securities companies have begun to reveal various problems, among which the embezzlement of customer deposits, which ranks first among the three original sins, has sent many securities companies with dazzling halos to the guillotine. Regulators have learned the hard way and in order to protect investors, they will not form systemic risks.
1.3. The regulator implemented a series of compulsory measures around 2005, including the third-party depository of customer margins (the bank independently deposits customer funds) and the primary custody of securities. Since then, investors’ securities have been held in custody by the China Depository and Clearing Corporation, and securities firms cannot touch customer securities, realizing the separate custody of funds and securities, and greatly reducing the moral hazard of securities firms misappropriating customer assets.
2. Definition and structure of A-share securities custody
2.1. Definition: The securities custody system refers to the systematic arrangement of centralized or decentralized custody of securities assets held by investors through professional institutions, and the provision of clearing, settlement, equity distribution and other services. Its core goals are: asset security, transaction efficiency, and rights and interests protection.
2.2. Structure: The securities custody system refers to the systematic arrangement of centralized or decentralized custody of securities assets held by investors through professional institutions, and the provision of services such as clearing, settlement, and equity distribution. Its core goals are: asset security, transaction efficiency, and rights and interests protection.
The primary settlement shall be organized and completed by the securities registration and clearing institution
Under multilateral netting, the securities depository and clearing institution is the organizer of the primary clearing, and it intervenes in the transaction relationship between the two parties to the securities transaction, becoming the “seller of all buyers” and “the buyer of all sellers”, that is, the common counterparty (CCP). During the clearing of securities transactions, the securities depository and clearing institution shall make a difference on the securities receivable and payable and funds of all transactions reached by the clearing participants, and each clearing participant shall settle with the securities depository and clearing institution according to the net amount obtained from the difference. The securities registration and clearing institution needs to open a securities and fund settlement account for the clearing participant to handle the settlement of relevant securities and funds. In terms of securities settlement, the securities depository and clearing institution shall increase or subtract the net amount of securities receivable or payable from the securities account of the clearing participant according to the liquidation results. In terms of fund settlement, it is generally done by the settlement bank (commercial bank or central bank) to deduct money on behalf of the settlement bank.
The secondary settlement shall be organized and completed by the settlement participants
After obtaining the primary clearing result from the securities depository and clearing institution, the clearing participant shall liquidate the amount of securities receivable and payable by each customer and the amount of funds according to the transaction details of its customer’s securities transactions, and accordingly carry out the secondary settlement of securities and funds with the customer. In terms of fund settlement, the clearing participant usually credits or debits the amount of funds receivable or payable directly from the investor’s fund account. In terms of securities settlement, there are two realization modes according to the different securities accounts and securities holding systems:
One is the settlement participant: directly transfer the amount of securities receivable or payable to the investor’s securities account. Normally, in this case, the record of the balance held by the investor’s securities account is maintained by the clearing participant, and the securities registration and clearing institution does not maintain the details of the investor’s holdings. For example, the securities markets in the United States and Hong Kong use this model.
One is the clearing participant: the securities transfer between him and the investor is entrusted to the securities registration and clearing institution, and the securities registration and clearing institution maintains the balance record of the investor’s securities account on his behalf. For example, the securities market in Taiwan adopts this model and summarizes it as “two-stage legal structure, one-stage computer job processing”.
In other words, in terms of legal relationship, secondary settlement is the completion of securities settlement between participants and customers; However, in terms of technical means, securities settlement between participants and customers is entrusted to the clearing institution to complete it on their behalf.
3. Knock on the blackboard to draw the key points:
A-share securities accounts and custody systems, everything has two sides, there are advantages and disadvantages, only the benefits outweigh the disadvantages.
Pros: After the implementation of primary custody, regulators can penetrate into each investor’s account, improve market transparency, and effectively curb the misappropriation of customer assets by brokers. At the same time, all account behaviors are clear and verifiable, which helps to crack down on illegal activities such as insider trading and market manipulation.
Disadvantages: At the expense of some business development of securities firms, the financial innovation ability of securities firms is restricted. Under the primary custody, customer assets are deposited in CSI accounts, and brokerages cannot use them to develop complex structured products or hedging tools, which restricts the space for brokerages to provide comprehensive financial services.
In addition, too single custody model is also considered to be not conducive to improving settlement efficiency and international standards. In order to make up for the shortcomings of the custody mechanism, the management adopts: income swap, which we will talk about later.
