THE STOCK EXCHANGE OF HONG KONG LIMITED
(A wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited)
Amendments to the Main Board Listing Rules in Respect of Structured Products
The Stock Exchange of Hong Kong Limited (the Exchange), a wholly owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx), announces amendments to the Main Board Listing Rules (referred as Listing Rules below) in respect of Structured Products. These changes implement the recommendations that were set out in Hong Kong’s Derivative Warrants Market, the Way Forward, Results of the Consultation on the Securities and Futures Commission (SFC) Six Point Plan (the Consultation Conclusions) published by the SFC on 31 March 2006. Details of the changes are set out below.
Further Issues
Issuers are required by the Listing Rules to provide liquidity (ie to be prepared to quote buying and selling prices) for a Structured Product issue for the period that it is listed on the Exchange. The prices quoted will generally be based on theoretical pricing models that have regard to the strike price, time to maturity and expected volatility of the underlying security. An issuer will not be able to quote a selling price for an issue if it no longer holds any part of that issue. This may result in the market price for that Structured Product Issue moving away from theoretical price levels. An issuer may, but is not required to, launch a Further Issue of a Structured Product Issue that has sold out. This increases the overall size of the issue, providing the issuer with additional supply which it can offer to sell in the market. Thus, a Further Issue facilitates an issuer quoting two-way prices for issues that are based on theoretical pricing models.
An issuer may only launch a Further Issue if it holds 20 per cent or less of an issue. The Consultation Conclusions recommended that issuers should be permitted to launch Further Issues when they held up to 50 per cent of an issue. The Listing Rules have been amended to give effect to this recommendation.
Minimum Life and Minimum Issue Price
The Listing Rules prescribe a minimum life for a Structured Product on launch of six months and a minimum issue price of $0.25 per structure product. These requirements mean that it is not possible for another issuer to launch a Structured Product issue on identical terms to an existing issue in order to compete with that issue if, on launch, the life to maturity would be below six months and/or the issue price would be below $0.25 per structure product. This creates a barrier to more open competition with the existing issue.
To help promote competition in the market the Consultation Conclusions proposed easing the restrictions on the minimum life and minimum issue price for issues that are identical to or substantially the same as existing issues. The Rules have been amended to allow substantially identical issues to be launched with a minimum issue price of $0.15 per structure product and a minimum period to maturity of three months.
Commission Arrangements
The Consultation Conclusions recommends that commission rebate and incentive schemes should be banned. This recommendation was out of concern that these schemes promoted increased turnover in warrants and that such turnover might attract less informed investors to invest in the most actively traded warrants rather than considering other, more relevant, factors. The Rules have been amended to prohibit issuers from offering, directly or indirectly, commission rebates or other incentives in respect of structured products that they have issued.
Information Management Arrangements
Issuers are prohibited from launching Structured Products where they possess price-sensitive information about the underlying security; this is similar to concepts in insider dealing legislation. There is a “carve out” in sections 271(2) and 292(2) in the Securities and Future Ordinance in respect of insider dealing and market misconduct by reason of insider dealing where information management arrangements are in place. The Rules have been amended so that issuers maintaining information management arrangements will not be subject to the existing limitation in the Listing Rules.
Effective Date
The amendments will come into effect on 30 September 2006.
The Exchange will review the operation of the Rules in respect of Further Issues and Minimum Life and Issue Price after six months.
The revised Listing Rules are available for viewing on the HKEx website at http://www.hkex.com.hk/eng/rulesreg/listrules/mbrules/pages/listrules.aspx.