Hong Kong SFC Explores New Developments For Derivative Warrants Market

by Mary Swire, for LawAndTax-News.com, Hong Kong

14 April 2006

The rapid development of the warrants market is not unique to Hong Kong, and as new research by the Securities and Futures Commission shows, other warrants markets in Asia have been catching up fast in recent years.

The objective of the SFC research is to examine the latest developments in the major warrants markets in Asia, including Australia, and the implications for Hong Kong.

"It is important to keep abreast of the latest developments in the region. It is equally important to further strengthen the regulatory framework and enhance investor education," the SFC explained in a recent statement.

The proposals in a report released by the SFC last month, entitled 'Hong Kong’s Derivative Warrants Market – the Way Forward, Results of the Consultation on the SFC’s Six-Point Plan', have been put together with these aims in mind. The SFC also believes that these in turn will help ensure a healthy development of the market, which is necessary for its sustainable growth and long-term success.

The research found that in 2004 and 2005, Hong Kong’s derivative warrants market was the most active in the world. The market has been growing rapidly, with its turnover rising six times during 2002-2005. The recent rise in the turnover was mainly attributable to the active trading of derivative warrants issued on Mainland stocks.

However, the FSC cautioned that: "Hong Kong cannot be complacent in light of the growth in the other markets."

To illustrate the point, the SFC noted that mainland China, which recently resumed the trading of warrants, became the most active warrants market in the world in December 2005, although since January 2006, trading activities have retreated slightly due to changes in market sentiment and the introduction of new market measures.

The derivative warrants market in Singapore is also developing fast. On a few occasions, as soon as the listings of certain securities in Hong Kong took place, derivative warrants on those securities were listed on the Singapore Exchange. Nevertheless, trading was concentrated in Hong Kong after derivative warrants on these stocks were listed on Hong Kong Exchanges and Clearing Ltd. This suggests that liquidity tends to move to the market where the underlying stocks are listed.

Korea also launched a derivative warrants market in late November 2005 and within three months this had overtaken Australia and Singapore to become the third most active warrants market in Asia (after Hong Kong and the Mainland).

Responding to the consultation report, Hong Kong Exchanges and Clearing Limited (HKEx) broadly welcomed the SFC's initiative, stating that:

"HKEx is pleased to note that the SFC has consulted the market on its Six-Point Plan on Hong Kong's derivative warrants market and concluded that, having considered market comments received, it will take the proposals forward."

Some of the proposals contained in the SFC Conclusion Report may require changes to the Listing Rules for which there is a separate and independent process. This may include public consultation where appropriate on the specific rule changes, and approval by the Listing Committee and the SFC's Board.

"HKEx looks forward to working closely with the SFC and the industry to finalise and implement those initiatives deemed appropriate for further improving the derivative warrants market in Hong Kong," the statement concluded.

Recommended