London bourse to launch trading in Chinese depositary receipts: sources

[HONG KONG] The London Stock Exchange (LSE) will launch trading of global depositary receipts (GDR) of Chinese companies next year, kicking off a partnership between the bourse and its Shanghai counterpart, sources with knowledge of the matter said.

The move, which will see GDRs of Shanghai-listed companies traded during London hours, would serve as an alternative to a cross-continent, direct equity trading link being studied by the LSE and the Shanghai Stock Exchange (SSE) but which is unlikely to be pursued due to the technical challenges involved, the sources told Reuters.

"Starting with GDRs would be a relatively easy and straight-forward way for the exchanges to deepen ties," said Anish Puaar, a London-based market structure analyst at brokerage Rosenblatt Securities.

"GDR listings give investors easier access to overseas companies without having to go through the complexity of connecting via a direct trading link. The LSE has already had success with this model, particularly in Russian names," Mr Puaar said.

The two exchanges have not yet signed a formal agreement on the GDR plan but hope to do so in the second half, two sources briefed on the matter said. While an agreement would lay the framework allowing the Chinese companies to issue the GDRs, any actual issuance will depend on the companies' needs.

The LSE Group declined to comment. The SSE did not respond to requests for comment.

Britain and China said in September they had asked the LSE and SSE to launch a feasibility study into building a trading link, with the aim of emulating the landmark "Stock Connect"between the Hong Kong and Shanghai bourses launched in 2014.

Last month the Shanghai bourse said the exchanges had reached a preliminary agreement on a "cooperation framework" for the link, but did not provide further details.

One source with direct knowledge of the matter said London had received lukewarm industry feedback on a proposal for a direct equity trading link due to the differences in time-zones.

The Shanghai market closes as the London market opens, creating significant liquidity, clearing and settlement problems for a direct equity trading link, several sources said.

"With GDRs, you don't have all the infrastructure issues that you'd have with a direct link," said one source with direct knowledge of the discussions.

GDRs are bank-issued certificates representing ownership of a set number of company shares that can be listed and traded independently from the underlying stocks. They are often used by emerging market companies to raise capital overseas.

The LSE group has a well-established depositary receipts business providing trading in companies from 44 countries, and has long been home to the most actively traded depositary receipts of Russian companies, such as Gazprom.

The exchanges are also discussing the prospect of the SSE listing and trading depositary receipts of London-listed companies, although the bourses are concerned that China's retail-dominated domestic investor base would not be comfortable trading unfamiliar London stocks, said two sources briefed on the matter.

One option would be for the Shanghai exchange to list GDRs on the more than 60 London-listed Chinese companies, although this has not been decided, the same sources said.

REUTERS