Understanding the Three Fund Settlement Models in China’s Stock Markets

1. Three Trading Settlement Modes

The Chinese public‑fund market uses three main settlement models: the custodian (bank) settlement mode, the broker settlement mode, and the broker‑custodian (QFII‑like) settlement mode.

1.1 Custodian Settlement Mode (Bank Settlement)

Fund managers rent a securities‑company trading unit and execute trades directly through their own investment‑management system. At the end of each trading day the custodian settles with the Shanghai‑Shenzhen exchanges and China Securities Depository & Clearing Corporation (CSDC) based on data issued by the exchanges.

1.2 Broker Settlement Mode (Broker‑Centric)

Public‑fund institutions open brokerage accounts with securities firms and trade through the broker’s front‑end system. Each order is verified for securities and cash adequacy by the broker, and at day‑end the broker clears and settles with the exchange and CSDC, then distributes settlement data to the fund manager and custodian.

1.3 Broker‑Custodian Settlement Mode (QFII‑Like)

In this hybrid model, fund managers submit trade instructions to the broker, while the custodian handles settlement. Funds are held in the custodian’s account, eliminating the need for bank‑to‑broker transfers. Virtual positions (“virtual headroom”) are used to control daily trading limits.

2. Differences Among the Three Modes

The three models differ in account management, trading‑unit configuration, fund flow, custodial settlement, compliance, risk management, and investment scope. Generally, custodian settlement offers slightly faster settlement, while broker settlement provides real‑time capital‑and‑securities verification, enhancing risk monitoring.

3. Selection Rules for Settlement Modes

According to CSRC notices (2023‑09‑06, 2023‑68), the choice of model follows three principles:

New or ≤3‑year‑old fund managers must use broker‑centric or hybrid models.

Fund managers established after the 2017 pilot may adopt the custodian model if they meet governance, financial, compliance, and IT‑system requirements.

Other eligible institutions (insurance asset‑management companies, banks, etc.) may also choose any of the three models.

4. Advantages, Disadvantages, and How to Choose

Each model has its own strengths: the custodian model simplifies fund control but may have slower data; the broker model enables real‑time monitoring and full commission capture; the hybrid model balances fund‑level control with broker‑level service, supporting “1+1+1 > 3” synergy for fund managers, custodians, and brokers.

5. Process Flowcharts

5.1 Custodian Settlement Process

Fund managers send trade orders directly to the exchange; the custodian settles with the exchange and CSDC, then reconciles with the fund manager.

5.2 Broker Settlement Process

The broker validates each order, forwards it to the exchange, and clears with CSDC; settlement data is then sent to the fund manager and custodian.

5.3 Hybrid Settlement Process

Trade instructions are submitted to the broker, while the custodian settles using virtual positions to control daily limits.

6. Interest Calculation

The three models have distinct interest‑calculation methods, summarized in the table below.

7. Supporting Systems

Major vendors (e.g., Hang Seng, Jinzheng) provide integrated fund‑management platforms that cover asset management, order management, risk control, valuation, clearing, and reporting. Features include agile fund‑dispatch, reliable end‑of‑day clearing, flexible reporting, comprehensive risk controls, and simple trade‑interface integration.

Source: Publicly available information compiled by Tianxiang Investment Advisory.