The Hong Kong Exchanges and Clearing (HKEx) has proposed to add more relevant parties subject to its disciplinary sanctions, including guarantors of structured products and debt securities, in order to be able to bring actions if they fail to execute their obligations.
Under the current rules, guarantors of structured products are required to comply with the HKEx Listing Rules to the same extent as the issuers by signing a listing agreement.
Their obligations include, for example, announcing information necessary to avoid a false market in the securities and information that may have a material effect on its ability to meet the obligations as well as responding to enquiries on unusual movements in the price or trading volume of the securities.
However, unlike issuers, guarantors of structured products are not an existing ‘relevant party’ and thus not subject to the HKEx disciplinary jurisdiction.
As a result, ‘failure by guarantors to discharge their obligations will not necessarily carry any consequences,’ reads the consultation paper on Review of Listing Rules Relating to Disciplinary Powers and Sanction, which is open for public comments until 9 October.
“The securities market and economic climate have evolved over the years. Likewise the HKEx has from time to time reviewed its disciplinary powers and sanctions to ensure that they remain robust and effective,” an HKEx spokesperson told SRP in a written statement.
“The consultation is the product of such review, and we believe represents a sensible and balanced proposal,” it said. “As guarantors of structured products have obligations under the Listing Rules, it is appropriate that they, like other parties who have Listing Rule obligations, fall within the Exchange’s disciplinary jurisdiction.”
Structured products recorded HK$21.6 billion ($2.79 billion) average daily turnover (ADT) in July, which accounted for 13.1% of cash market ADT, increased by 13.0% compared with June, according to an HKEx announcement.
The number of listed derivative warrants and callable bull/bear contracts saw a steady rise from 5,172 and 3,830 in February to 6,724 and 5,031 in July, respectively. Meanwhile, the number of listed inline warrants gradually dropped from 919 to 808 during the same period.
In addition, the HKEx has proposed to include guarantors of debt securities as a relevant party under the MB (Main Board) rules in addition to the existing GEM (Growth Enterprise Market) rules, as the list of existing relevant parties under the two rules are ‘different for no apparent or valid reason’.
Enoch Wong, partner at Dentons Hong Kong, told SRP that the main reason for the proposal is that the surge of debt issuance from the local government and unlisted property companies has led the HKEx to seek more protection for investors by enabling themselves to be able to impose sanctions on the guarantors.
“The impact of this on debt issuance may not be significant – this factor alone will not deter firms from issuing bonds in Hong Kong, but this may slightly affect the decision of potential issuers on whether to list their bonds and structured products in Hong Kong or Singapore,” he said.