Hong Kong Exchanges and Clearing recently announced changes to the stock exchanges listing rules. The principal changes include the broadening of the rules to cover structured products, which include derivative warrants and equity linked instruments (ELIs) and the streamlining of the rules applicable to such structured products. The new rules became effective on July 1.
New Structured Products
In addition to the issue of derivative warrants, issuers are now able to list a limited range of ELIs and other products, which are approved by the exchange. Certain characteristics of the structured products include:
* the underlying assets may be
a security, index, currency,
commodity or other asset or
combination of such assets;
* cash payments are
determined by one or more valuations
of the underlying asset at various points in time;
* exercise can be American, European, or other styles
approved by the exchange;
* investors may make one or more payments during the life
of the product;
* payments of dividends (or other distributions) received
from the underlying asset may be made;
* the return may be subject to a cap or have
knock-in/knock-out features.
Three types of ELIs can now be listed on the exchange, bull, bear and range. Each type involves an initial payment by the investor in return for a pay out on maturity of a pre-set cash amount, delivery of the underlying shares or a cash payment determined by reference to the value of the underlying shares.
Listing Rule Changes
The principal changes to the rules:
* announcements of the launch and expiry of issues are
to be published on the HKEx Web site, rather than in
the newspapers;
* firms can now issue structured products where the
underlying is, or includes, securities of that financial
institution or members of its group;
* eligible stocks will include any Hang Seng Index firms,
stock with public float capitalization of at least HKD4
billion (USD512 million) for single stock structured
products and HKD1 billion for basket structured products;
* the tenor for structured products is limited to a maximum
of five years, but is capped at
two years for ELIs, and there
is a minimum maturity of 28
days for ELIs and six months
for warrants;
* the market capitalization of
structured products has been reduced to HKD10,000,000;
* an issuer can launch a further issue when it holds up to
20% of the existing issue;
* structured products can now be launched during, rather
than at the end of, a trading day;
* documents such as the listing document, the financial
statements of the issuer and the guarantor can now
be made available on a Web site instead of at a
physical address;
* the requirement to provide disclosure on placing has been
removed;
* copies of material agreements such as the registrar's
agreement, warrant instrument and warrant agency
agreement no longer need to be delivered to
the exchange;
* responsibility statements for information in the listing
document can be given on a corporate basis and not
personally by directors--there is no longer a need to seek
waivers from the exchange on this point;
* global registered certificates for structured products are
permitted;
* reduced listing fees for ELIs have been introduced.
Listing Document Disclosure
The following disclosure is no longer required in listing documents:
* particulars of preliminary expenses for an issue;
* details of the consents and approvals for an issue;
* summary of the notional value and replacement cost
of the issuers' off-balance sheet financial instruments
(including derivative warrants, options, futures and swaps)
and statement of the methods used to value the
notional value and replacement costs of its off-balance
sheet financial instruments;
* details of the auditors to the issuer;
* name, residential or business address of every director
of the issuer;
* situation and registered office of the issuer;
* dates of and parties to all material contracts in relation
to the structured products.
First Issues of ELIs
The first equity-linked instruments will be listed on The Stock Exchange of Hong Kong in the last week of July. The exchange has invited issuers to submit documents in English and Chinese last Monday, in order to be in the first batch of issuers.
This week's Learning Curve was written by Catherine Husted, partner and head of the Asian derivatives group at Allen & Overy.
