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.
