Hong Kong is working night and day to launch an initiative that will let global investors trade Chinese stocks from the city for the first time and secure the former British colony's position among the world's pre-eminent share markets.
The Hong Kong and Chinese governments agreed in April to allow international investors to trade Shanghai 'A' shares via the Hong Kong stock exchange while mainland investors will be able to trade Hong Kong 'H' shares via the Shanghai Stock Exchange, subject to quotas both ways.
To meet an October deadline, regulators, brokers and engineers in Hong Kong have shunted other projects to the bottom of their to-do list, delaying technology upgrades, putting off new product launches and pushing market reforms onto the backburner.
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But the rush to launch the complex project risks a technology snafu that could lead to potential losses on investors' portfolios, people in the industry say. They also worry that the Hong Kong and Shanghai financial industry may not be fully prepared by October.
"My concern is that some exchange participant firms won't be ready, and many buy-side firms won't be either, which means the first few months may be quiet as institutional investors wait and see how the initial implementation pans out," said Stephane Loiseau, head of cash equities for Asia Pacific at Societe Generale.
"Everyone is trying to get ready to connect, even if the timeline is very aggressive," said Loiseau, whose bank has a big group of staff working on the project.
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One banker at an international firm said his institution had unsuccessfully approached the Shanghai Stock Exchange to urge it to delay the project because "the timeline is very tight."
The Shanghai exchange did not respond to requests for comment.
More than 100 banks and brokers in Hong Kong - including HSBC, Societe Generale, , Morgan Stanley, Citigroup and Instinet - are working on the project. The initiative has diverted thousands of staff from their everyday roles and will see many of them office-bound over several weekends in August and September for performance and business continuity testing.
"If you have to get your arms around this in two-and-half months, you have no choice but to be working on it 24-7," said Christopher Hamilton, executive for the Asia-Pacific region at Capco, a consultancy working on the project.
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"Banks are being cautious because there is reputational risk if you mess up," he said.
The trading link requires an unprecedented level of coordination between multiple parties - including brokers, asset managers, the two exchanges, their clearing and settlement providers, data providers, technology firms and several regulators.
Additionally, the Hong Kong and Shanghai markets have to overcome different currencies, fee structures, legal regimes, tax rules, national holidays, clearing and settlement processes, and supervisory regimes.
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All that has to be ironed out over a six-month period. Brokers note this is a narrow window, saying a relatively simple market connection to a new exchange system would normally take a minimum of nine months.
The link is the top priority at the Hong Kong Exchanges and Clearing (HKex), which has pushed a number of closely-watched initiatives - including a planned consultation on a closing auction and the introduction of trading controls known as circuit-breakers - onto the backburner, two sources familiar with the matter said.
The exchange has been "intensively preparing" for the trading link, a spokesman for HKEx said in a statement.
Many market participants said the Hong Kong Securities and Futures Commission (SFC) had told them informally that work on other reforms - including conclusions on a proposal to clamp down on off-exchange trading platforms known as dark pools - would be pushed back until after the launch.
The SFC declined to comment on the timing of these initiatives.
Operational risk
HKEx is set to report on Wednesday a slightly lower first-half profit compared with a year earlier, say analysts who cover the stock, as the exchange operator recovers from a slump in trading volumes at the end of 2013.
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Shares of HKEx have gained 35 percent year-to-date as investors focus more on the exchange's long-term prospects. Bullish investor sentiment on the trading link helped push Hong Kong's Hang Seng index to a three-year high last month.
The link will boost the average daily value of trading on the HKEx by around 38 percent to HK$93 billion ($12 billion) by 2015, according BNP estimates.
The project was first floated in 2007 but was later shelved due to China's slowdown amid the global financial crisis. The trading link has been hailed as a milestone in the opening up of China's capital markets, allowing foreign investors to trade in and out of Chinese stocks in real time.
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The project has taken on added political significance amid growing tensions between the mainland and Hong Kong over democratic reform in the city. In China, the project is being led by the central government, rather than the financial regulators, in a sign of its broader political importance, regulatory experts say.
China says the scheme is on schedule and rehearsals will begin at the end of August, with the link expected to go live two months later. But market players say there is still an enormous amount of work to do.
A key technical risk relates to the settlement of trades, which is complicated by significant differences between Hong Kong and Shanghai's settlement infrastructure, said Societe Generale's Loiseau.
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Failure to settle means a trade has not been completed, leaving the investor exposed to potential losses.
The Asia Securities Industry and Financial Markets Association has sought clarity from regulators on a number of other issues including share-ownership rights and tax.
Mark Austen, chief executive of the Hong Kong-based trade association, said a lack of clarity regarding how tax will apply to the scheme was among the most pressing issues.
"If they don't clarify that before it goes live, a lot of investors are going to be very nervous about their tax liability."