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New Listing Rules For Hong Kong Structured Products

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


* 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


* 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.

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