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Derivatives

New Hong Kong Listed Structured Products

Hong Kong Exchanges and Clearing (HKEx) recently announced that a new type of product, Capital Protected Instruments (CPIs), is eligible for listing on The Stock Exchange of Hong Kong (SEHK). The CPIs provide a certain level of guaranteed return for investors and are regarded as structured products for the purpose of the Listing Rules of the SEHK. In order to list CPIs on the SEHK, issuers will need to comply with the listing requirements set out in Chapter 15A of the Listing Rules of the SEHK.  

Listing Requirements

Certain key listing requirements in respect of the issue

of CPIs include:

* the underlying assets must be securities, indices, currencies,

commodities or any other assets as approved by the SEHK

* the CPIs must have a minimum tenor of six months and a

maximum tenor of five years from the date of the listing of

the CPIs. If an issuer of CPIs would like to increase the

tenor of the CPIs beyond the five-year limit, they may

apply to the Securities and Futures Commission (SFC) and

the SEHK for a waiver in relation to the maximum tenor

* the market capitalization of the CPIs must be not less than

HKD10 million

* issuers are required to appoint a liquidity provider for the

CPIs to make a market in respect of the CPIs in accordance

with the SEHK requirements

* the minimum issue price of the CPIs is HKD0.25 per CPI

* an issuer of CPIs must meet certain eligibility requirements

of the SEHK, including having a net asset value of not less

than HKD2 trillion and having a credit rating or a

regulatory status acceptable to the SEHK

* the participation rate in respect of the CPIs may be fixed

at the end of the book-building/offer period (as opposed

to at launch); if this approach is adopted, the range of

participation rates must be declared at launch and the final

participation rate must be fixed and announced at the end

of the book-building/offer period

* the minimum capital protection level in respect of any

CPIs is 80% of the face value of the CPIs

* the CPIs can be issued or denominated in any currency

acceptable to the SEHK, but all trading and settlement of

trades of CPIs must be made in Hong Kong or U.S. dollars

* issuers are required to report any cross trades (including

direct business) or grey market trades by the issuer and its

associates to the SEHK, together with all daily trading in

the CPIs

* CPIs may be offered by way of placement (which is similar

to the approach widely adopted for derivative warrants) or

by way of offer for subscription (in the same way as an

initial public offering of shares)

* the initial listing fee for an issue of CPIs will be 0.01% of

the total issue size of the CPIs, subject to a minimum fee

of HKD30,000 and a maximum fee of HKD100,000.

In addition, if an issue of CPIs has a tenor of more than

one year, an annual listing fee of HKD30,000 for each

subsequent year will be payable in advance at the time of

the listing of the CPIs.

 

Disclosure Requirements

In addition to disclosing the terms and conditions of the CPIs together with general and financial information on the issuer (and the guarantor, if relevant) in the listing document, the following disclosure will also be required to be made in listing documents relating to CPIs:

* the terms of the capital protection, including the basis of

calculation of cash payments, whether to be made on a

periodic basis or at expiry

* the nature of the underlying asset

* general risk warnings relating to the nature of the CPIs,

including that the protection level is only in respect of a

certain percentage of the face value of the CPIs, that

holders of the CPIs will only benefit from the capital

protection if they hold their CPIs to maturity, that selling

CPIs in the secondary market prior to the expiry of the

CPIs may result in a loss for the holders of the CPIs and

that there will be foreign exchange risk and potentially

additional expenses and/or settlement delays for holders of

the CPIs if the CPIs are denominated in currencies other

than Hong Kong dollars

* details of the liquidity provider, including whether the

liquidity provider will provide continuous quotes for the

CPIs or whether quotes will only be provided on request;

* the terms and conditions of any foreign currency

conversion (if applicable)

* the SEHK has stated that to the extent that the CPIs

constitute debentures for the purposes of the Hong Kong

Companies Ordinance, a prospectus will have to be

prepared by issuers of CPIs. In addition to the disclosure

requirements of the SEHK, the issuers will also have to

comply with the disclosure requirements contained in the

Third Schedule to the Companies Ordinance and the SFC

guidelines on marketing materials.

The SEHK have advised existing issuers of listed derivative warrants and equity linked instruments that they can either update their current base listing document to include the new terms in respect of CPIs or a separate listing document in respect of CPIs can be prepared.

 

This week's Learning Curve was written by Catherine Husted, partner and head of Asian derivatives group at Allen & Overyin Hong Kong.

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