HKEx Will Launch ELIs With Simplified Rules

by Mary Swire, Tax-News.com, Hong Kong

21 June 2002

Hong Kong Exchanges and Clearing Limited (HKEx), yesterday announced that it had amended its Main Board Listing Rules to allow a wider range of derivative products, including Equity Linked Instruments (ELI), to be listed on the Stock Exchange. The rule changes will be effective 1 July.

This means that the listing procedures for the new instruments will be the same as those for covered warrants, so ELI issuers will not need to issue prospectuses. The Securities and Futures Commission had previously required the expensive and time-consuming preparation of a prospectus from ELI issuers, which had caused HKEx to delay launching the products. As a result,

Last year, when the HKEx began planning to launch the products, the iMarkets, the online trading unit of Cheung Kong (Holdings), moved into the market last November, targetting only professional investors, so that prospectuses do not have to be issued.

Now that the SFC has climbed down, HKEx is going ahead with the new products.Under the new rules, structured products listed on the Stock Exchange may allow investors to purchase or sell the underlying asset at a predetermined price, or to receive a cash payment or payments based on the price or value of the underlying asset. The underlying asset may be a security, currency, commodity or other asset or combination of assets.

The listing application procedures for structured products have been streamlined, and structured product issuers will be required to publish their announcements on the HKEx website. Paid advertisements will no longer be required.

Structured products, except ELI, may have a life to maturity of up to five years. For ELI, the minimum maturity will be 28 calendar days and the maximum will be two years.

ELI combine the features of a fixed income instrument and a stock option. The performance of ELI are linked, in whole or in part, to the market performance of the underlying equity security. ELI normally offer a potentially higher yield than fixed deposits or traditional bonds provided that the investor’s directional view on the underlying security is correct. If investor’s view is not correct, investor may lose part or all of their investment. The first ELI are expected to be listed in the third quarter.

Under the new ELI market framework, issuers will be able to offer three standard types of ELI (Bull, Bear and Range). Issuers will have to appoint Liquidity Providers for their ELI. ELI may be issued in Hong Kong dollars for a single underlying security which is eligible for the issuance of structured products. ELI must be issued in board lots and each board lot must be equal to or in multiples of the board lots of the underlying security.

ELI will be traded on AMS/3, the Third Generation Automatic Order Matching and Execution System. Settlement will be T+2 in CCASS, the Central Clearing and Settlement System. ELI will normally be traded in scripless form without a Hong Kong register and kept in CCASS Participant and Investor Participant accounts under CCASS. Withdrawal of such ELI from CCASS is not allowed. Upon expiry, issuers will distribute payments through CCASS.

Investors will be able to buy ELI through brokers anytime during trading hours. The potential yields on ELI and other information will be available from major information vendors.

HKEx will offer an ELI education programme for investors. Interested investors are advised to consult their brokers for details when ELI are available on the Stock Exchange.

“HKEx is confident that the listing and trading of ELI on the Stock Exchange will enhance the product range available to investors and issuers and will provide a transparent, fair and orderly market for the trading of ELI in Hong Kong,” said an HKEx spokesman. “The date for the introduction of the ELI market will be announced when the market preparations have been completed.”

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