Obligations of Liquidity Providers for Derivative Warrants
Issuers are required to appoint Liquidity Providers (LPs) to provide liquidity for their listed derivative warrants. For each derivative warrant issue there can only be one LP. Each LP should have a code of 95XX for identification. Investors can visit the website of Hong Kong Exchanges and Clearing Limited (HKEx) for the list of LPs.
Listing documents show the exact obligations of LPs. In normal circumstances, LPs should provide liquidity for derivative warrant issues by means of continuous quotes or quote request from five minutes after the market has opened until the market closes. The LP should provide liquidity for at least 10 board lots of a derivative warrant. An issuer must specify the maximum spread between its bid and offer prices in the listing document. Under the quote request system, the response time for each quote request should also be specified in the listing document. If the quote provided by the LP is not considered ideal, a broker can act on behalf of a client to enter the clients buy or sell order into the trading system for processing.
Under the quote request system, LPs would provide bid/ask prices only upon receiving quote requests. A telephone number that investors can call for quote requests via their brokers is displayed on the derivative warrants stock page and in the listing document.
Circumstances in which LPs are not required to provide liquidity
Since different LP obligations may apply for different derivative warrants, investors should read the listing document before trading a derivative warrant. Some circumstances in which LPs are not required to provide liquidity include:
the pre-market opening session and the first five minutes after the market has opened;
when trading in the security underlying a derivative warrant is suspended;
when an issuer has no derivative warrants available for sale, the LP will only provide bid prices;
when the theoretical value of a derivative warrant is less than HK$0.01, the LP will normally not provide bid prices;
when an issuer or LP experiences technical difficulties in its daily operations;
when an issuer is not able to hedge its exposure; and
during fast markets
Frequently Asked Questions
1. How can an investor find the name of the LP appointed by an issuer?
Investors can obtain the information either by visiting the special section of HKExs website on derivative warrants or by referring to the listing document. The special section on HKExs website provides useful information on derivative warrants such as announcements, listing documents and LP information.
2. How many LPs can an issuer appoint for each derivative warrant issue?
An issuer may appoint different LPs for different warrant issues. However, for each derivative warrant issue there can only be one LP.
3. What are the obligations of an LP?
The listing document lists the exact obligations of an LP. In normal circumstances, LPs should provide liquidity for derivative warrant issue by means of continuous quotes or quote request from five minutes after the market has opened until the market closes. The LP should provide liquidity for at least 10 board lots of a derivative warrant. An issuer must specify the maximum spread between its bid and offer prices in the listing document. Under the quote request system, investors may contact their brokers to request a quote from the LP.
4. How can an investor request prices from an LP?
Under the quote request system, an investor may contact his/her brokers to request a quote from the LP.
5. Under what circumstances is the LP not required to provide liquidity?
The circumstances in which LP is not required to provide liquidity are described in the listing document. Investor should refer to the listing document for details. These circumstances include:
the pre-market opening session and the first five minutes after the market has opened;
when the theoretical value of a derivative warrant is less than HK$0.01, the LP will normally not provide bid prices;
when trading in the security underlying a derivative warrant is suspended;
during fast markets;
when an issuer or LP experiences technical difficulties in its daily operations;
when an issuer is not able to hedge its exposure; and
when an issuer has no derivative warrants available for sale, the LP will only provide bid prices.
6. What action would HKEx take if an LP cannot fulfill its obligation?
According to the Rules of the Exchange, HKEx has absolute discretion at any time to prohibit any Exchange Participant or Dealing Partnership from being appointed or acting as Derivative Warrant LP on such terms and for such period as the Board shall think fit without giving any reason or notice.
7. If the appointed LP is no longer a Stock Exchange Participant, can the LP continue to provide liquidity?
If the appointed LP is no longer a Stock Exchange Participant, HKEx has the right to prohibit him/her be appointed or from continuing to perform as an LP.
8. Is an issuer required to appoint another LP if the existing LP is disqualified?
If the derivative warrant has not expired, the issuer must appoint another LP.