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HK Enhances Regulation Of Structured Products

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

31 July 2012


Hong Kong Exchanges and Clearing Limited (HKEx) has announced the publication of a guide on enhancing the regulation of Hong Kong’s structured products market, thereby promoting its healthy long-term development.

Structured products are synthetic products whose investment returns are linked to the performance of the underlying instrument. Derivative warrants (DWs) and Callable Bull/Bear Contracts (CBBCs) are the two most popular listed structured products in Hong Kong.

The guide covers a number of regulatory enhancement measures in three main areas: the enhancement of issuers’ internal controls and standardization of listing documents; the improvement of liquidity provision standards; and the management of issuers' credit risks. The proposed measures were said to be in line with on-going efforts to strengthen protection for investors and support market development.

By the end of October 2012, supplemental listing documents will have to be standardized to enhance readability and facilitate clear comparison of competing product offering, whereas issuers will have to ensure immediately that they have adequate internal controls, a sound risk management system and sufficient market surveillance capability, and also that their reporting to the HKEx is timely.

The guide’s improvements to liquidity provision standards for listed structured products were developed jointly by a working group of listed structured products issuers, the Securities and Futures Commission and HKEx after extensive discussions.

The enhancements were formulated to enhance service levels for investors, in particular through the introduction of active quote standards for listed structured products with a local index or an actively traded stock as underlying instrument in most market situations. This means in general issuers will proactively provide quotes and save investors from the inconvenience of making quote requests.

Meanwhile, the guide also tightens the liquidity providing obligations for quote requests, to be effective by no later than the end of this year. It adopts a comprehensive and transparent approach by clearly stating the requirements on structured products issuers, criteria for active quotes, specifications on spread limits and possible scenarios for short interruptions.

It is expected that active quotes will be provided for at least 90% of the time of a trading day and that each pause will not exceed 10 minutes. Based on trading data for May 2012, application of the active quotes criteria would have covered almost 2,400 active DWs/CBBCs out of a total of 5,080 products, representing 92% of the total turnover of structured products.

The subsequent clarity should facilitate investors' understanding of the new liquidity provision service standard and provides a clear benchmark for performance measurement. HKEx will monitor the results following implementation to identify any other necessary enhancements.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp
TAGS: investment | law | capital markets | offshore | stock exchanges | Hong Kong | standards | regulation | alternative investment

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