The Stock Exchange of Hong Kong recently announced changes to the listing rules relating to derivative warrants. The principal changes include the relaxation of certain restrictions in placing guidelines for derivative warrants, the introduction of a requirement for warrant issuers to provide liquidity for derivative warrants listed on the exchange and the simplification of certain disclosure requirements for listing documents.
Relaxation Of Placing Guidelines
An issuer of derivatives warrants will no longer be required to place 85% of an issue on launch and may now retain up to 100% of an issue on launch.
An issuer will no longer be required to place a warrant with a minimum of 100 or 50 firms who each take up a minimum of HKD100,000 (USD13,000) of the warrants.
The original intent of these requirements was to ensure that a warrant issue had a wide spread of investors to promote post-listing liquidity in the warrant issue. However, these requirements will cease to be relevant with the inclusion of the new rule pertaining to the appointment of a liquidity provider.
Requirement To Appoint A Liquidity Provider
The new rules require an issuer to appoint a liquidity provider for newly issued derivative warrants.
The liquidity provider must be appointed by the issuer and will act as the issuer's agent. It must be an exchange participant but need not be a member of the issuer's group. Details of the liquidity provider must be disclosed in the listing document.
An issuer may appoint more than one liquidity provider for different issues but there can only be one liquidity provider for each individual issue.
Each liquidity provider will provide liquidity for warrants issued by an issuer by responding to requests for quotes or by continuously inputting bids and offers into the exchange's trading system. The chosen liquidity method must be described in the listing document. With regards to quote request, the listing document must also specify the time within which the liquidity provider will respond to requests for quotes.
The listing document must specify when the liquidity provider will make markets in the warrants, in normal circumstances, this will be from five minutes after the market has opened until the market closes.
The listing document must also specify the minimum quantity of warrants for which quotes will be provided.
Each liquidity provider will be assigned a unique broker number, which will start with the number 95, solely for providing liquidity in warrants. The broker number and telephone number for investors to make requests for quotes will be displayed in the free text areas of stock pages of warrants.
Simplification Of Disclosure Requirements
The new rules simplify some of the content requirements of listing documents. In particular, they remove the requirement to disclose:
* detailed information on the company underlying the
warrant issue if that company is listed on the exchange;
* details of outstanding warrants issued by an issuer or
guarantor;
* details of an issuer's and its group's dealings in the shares
of a company underlying a warrant issue;
* details of the holdings of the top five placees of a warrant
issue; and
* detailed information on the Hang Seng Index for warrants
relating to the index.
Although the new rules do not require disclosure of financial information relating to a company listed on the exchange whose shares underlie a warrant issue, the listing document must specify where such details may be obtained.
An issuer will be required to disclose daily dealings by it and any members of its group in warrants that the issuer has listed on the exchange. In addition, any dealings between the launch date and the day of listing of the warrants must also be reported to the exchange on the day of listing. The information will be released by the exchange on its teletext system and Web site.
The new rules became effective on Dec. 10 and apply to new warrant issues launched after then and on or before June 30.
This week's Learning Curve was written by Catherine Husted, partner and head of the Asian derivatives group at Allen & Overy in Hong Kong.
