Hong Kong Exchanges and Clearing Limited (HKEx) will introduce a requirement for derivative warrant issuers to provide liquidity for warrants that they have listed. This, and easing some of the restrictions in the placing guidelines for derivative warrants are the major amendments to the Listing Rules for derivative warrants that follow a market consultation in May 2001. Amendments to The Rules of the Exchange will also be made to support these changes.

The new rules will become effective on 10 December 2001. A derivative warrant issuer will be required to appoint a Stock Exchange participant as a derivative warrant liquidity provider for newly issued derivative warrants. That participant may provide liquidity for warrants by responding to requests for quotes (Quote Request) or by continuously inputting bid and offers (Continuous Quote) into the Stock Exchange's trading system.

The issuer may appoint different liquidity providers for different issues, and liquidity providers may act on behalf of more than one issuer. However, each derivative warrant issue can have only one liquidity provider.

Each liquidity provider will be assigned a unique broker number, which will start with the number 95, solely for providing liquidity. The broker number and telephone number for Stock Exchange participants to make quote requests will be displayed in the free text areas of stock pages of warrants to increase market transparency. Liquidity providers will be supplied with a derivative warrants open gateway or AMS (Automatic Order Matching and Execution System) terminal.

The current requirement for issuers to have placed at least 85% of a warrant issue to a specified minimum number of investors will no longer apply. The purpose of this requirement was to ensure that a warrant issue had a wide spread of investors to promote post-listing liquidity in a warrant issue. This requirement ceases to be as relevant now that issuers are required to provide liquidity for warrants they have issued.

HKEx is confident that these changes will provide increased liquidity and transparency for the benefit of investors in the derivative warrant market.

Other amendments to the Listing Rules will simplify the contents of listing documents V particularly where the warrants are issued over listed securities; and provide for more frequent reporting by issuers of their trading in derivative warrants.

The above Listing Rules changes will apply for derivative warrants launched on or after 10 December 2001 and on or before 30 June 2002. During this period, the Stock Exchange will evaluate the operation of these rules and the derivative market generally.

The Stock Exchange will also formulate rule changes to support further development of the derivative warrant market. These proposals will reflect the experience gained from the operation of the above rule amendments and will also address issues that were included in the consultation paper but which have not been addressed in the amendments set out above.

One of the further changes being considered is whether to require issuers to provide liquidity by means of Continuous Quote only. Before such a change can be introduced it will be necessary for exchange participants to upgrade their internal systems.