June 18, 2007 - Depository Trust & Clearing Corp. (DTCC) of New York and its Chinese counterpart, the China Securities Depository & Clearing Corp. (SD&C), have signed a memorandum of understanding (MOU), launching formal cooperation in areas of information exchange and "projects of interest," the companies said last week after sealing the agreement June 8 in Beijing.
The agreement constitutes a legal and business framework for the two organizations to work together at both senior and staff levels, DTCC said.
SD&C was formed six years ago, with a mission of building "an open, flexible and unified securities registration and settlement system in line with international standards and practices," the organization's vice chairman and general manager, Ying Jin, said at the signing ceremony. SD&C had previously established relationships with stock exchanges and depository and clearing institutions in Asia, Europe, North America, Oceania, South America and Africa, she said.
"As the central securities depository of this young market, we are trying our best to provide safe, stable and efficient back-office support for the market, which means a huge responsibility for us," Jin said. "With the development of China's securities market, SD&C is enriching its knowledge and experience and exploring an innovative way of development."
In the wording of the MOU, the two sides will "establish a basis of cooperation in securities depository and clearing matters to help foster the prosperity of their financial markets, promote cross-border investment and explore opportunities for cooperation in both depository and clearing operations and in the establishment of an operation linkage." The parties also "anticipate developing a closer working relationship" in the future.
With more than 35 years of experience as the world's biggest domestic depository and operator of the largest post-trade infrastructure, DTCC can impart knowledge and guidance on many of the issues China will be facing, Mary Ann Callahan, DTCC managing director for international affairs, told Securities Industry News. "Not all of those solutions necessarily will work in China," she said. "But simply having an opportunity to discuss the how and why of our functioning will provide new insights and solutions for China to consider."
The agreement is an early step that could conceivably lead to actions on cross-border trading later. "We believe that as investors continue to invest more globally each year it is increasingly important that the post-trade infrastructure develop and change to support such trading much better than it does currently," said Callahan. The MOU "allows both DTCC and the SD&C to build systems and operations that will work more efficiently with each other ... and hopefully will result in a more cost-efficient and better way for investors to buy and sell stock in both our countries."
Long operational experience isn't the only reason that the Chinese look to the U.S. for guidance. "Since the U.S. represents the primary base of foreign investment and potential investment flowing into the China markets, it makes sense that SD&C sign the MOU," said Matthew Bienfang, brokerage and wealth management services research director at TowerGroup in Needham, Mass. "This is the fastest and most efficient way to open those markets to U.S. brokerages."
International investments into China are limited to purchases of stocks listed in Hong Kong and other international exchanges, or through the limited investment opportunities offered through China's qualified foreign institutional investor program, currently being increased to $30 billion since the previous $10 billion allotment was used up.
With DTCC's help, SD&C will be able to bring the Chinese system more in line with U.S. standards and practices, Bienfang said. "This will in turn grease the capital flow into China's markets by reducing the cost and operational and settlement risk. SD&C has an opportunity to refine a model that offers familiarity and continuity to which U.S. brokers are more likely to respond positively and adopt more rapidly."
This isn't the first MOU that DTCC has with a Chinese clearing corporation. In December it signed one with a related organization, the China Government Depository Trust & Clearing Co., which handles clearing and settlement for the Chinese bond market. The SD&C agreement tightens DTCC's links with the post-trade infrastructure in China, said Callahan.
According to Chambers Yang, a partner at Shanghai-based law firm Haworth & Lexon, this deal could help lead to the eventual development of a global market for securities.
"SD&C can help U.S. investors to invest in China through DTCC," Yang said, "while DTCC can help Chinese investors to invest in U.S. through SD&C." That will not happen in the near term, however, because of the closed nature of the Chinese stock market.
Still, the MOU "is an important first step for future cooperation," commented Wenli Yuan, a Beijing-based senior analyst with Boston research firm Celent. DTCC, for its part, "could get a better understanding of business in China, a more and more important market in the financial industry," she said.
Benoit Florencon contributed to this report.