Hong Kong Exchanges and Clearing Limited (HKEX) recently published a Concept Paper seeking market feedback on its proposal to digitalise the settlement process of Hong Kong’s initial public offerings (IPOs) by deploying a new central mandatory platform with common workflow logic and data standards for market participants, which it called FINI (Fast Interface for New Issuance)

As part of the reform, HKEX proposes:

  • a 45-hour timetable between book-close and trading as the standard outcome for Hong Kong IPOs, which means newly listed shares could begin trading on the Hong Kong Stock Exchange (Exchange) the next business day after pricing (“T+1”), fully replacing the existing “T+5” process; and
  • a reduction in the amount of upfront cash payment for public offer subscription from full payment to a minimum of 10 percent of the subscription value, giving significant liquidity relief for the market.

We will discuss in this Legal Update the key proposals set out in the Concept Paper.

The HKEX Proposal

  • FINI as a central repository for real-time IPO settlement data for every active IPO 

    Despite the size and maturity of Hong Kong’s primary market, the usual time gap between an offering being priced and the new shares commencing trading on the Exchange currently takes around five business days – hence the label "T+5" (where "T" represents the IPO pricing day), which compares unfavourably with New York and London where trading could take place on the "T+1" day.  In analysing the situation, HKEX highlights the lack of shared infrastructure with no clear "conductor" for the settlement process leading to complex logistic that relies heavily on human intervention and manual operations as the prime reason for the lengthy settlement duration.

    To address the prolonged market risk and operation risk associated with the current "T+5" process, HKEX proposes to launch FINI as a central mandatory platform where market participants exchange real-time information and complete tasks related to IPO settlement online.  It is believed that by replacing a large number of legacy bilateral workflows with online multi-party interactions, the settlement process will be more efficient and less prone to error under the FINI proposal, making IPO trading on "T+1" day after pricing achievable.

  • Upfront IPO subscription cash payment in public offer reduced to a minimum of  10 percent. of subscription value

    Under the current "pre-fund & refund" practice, intermediaries participating in the public offer tranche are asked to commit and transfer full IPO subscription funds to the issuer on behalf of their subscribing clients up front, and are subsequently refunded based on their ultimate allotment of shares and the final offer price. This movement of money entails significant interbank cash flows during the IPO settlement period, leading to short-term liquidity challenges in the Hong Kong dollar interbank market and raising the cost of borrowing, especially in relation to particularly large or unexpectedly popular public offerings.

    HKEX proposes to replace such practice by a "fund locking" confirmation mechanism under which at least 10 percent. of subscription value must be pre-funded in cash by the intermediary with the remainder amount supported by either cash or committed credit facilities.  Before the ballot, funds in respect of an intermediary’s aggregate client subscription value for a particular IPO will need to be confirmed by the intermediary and its designated bank. If no confirmation arrives FINI before the proposed deadline (12:00 noon, "T-1"),  the intermediary’s subscription list will not be included in the ballot.  After the ballot, only the portion of these funds corresponding to the intermediary’s actual allotment of shares in the IPO will be collected by the issuer’s bank as settlement.

    According to HKEX's calculation, had the proposed new methodology been applied to every Hong Kong public offer that completed between January 2018 and September 2020, total pre-funding required by the whole market would have been 71.5% lower, while the value of interbank money movement would have been 98.3% lower than it actually was.

Key Features of the Proposed FINI Platform

  • Platform operator being Hong Kong Securities Clearing Company Limited (HKSCC)

    HKSCC, a whollyowned subsidiary of HKEX, will operate the FINI platform alongside its Central Clearing and Settlement System (CCASS), with FINI serving as a de facto “on-ramp” for admission of newly issued shares into CCASS as a central securities depository for Hong Kong securities market.

  • IPO issuers or end-investors not required to use FINI

    The intended FINI users include retail brokers, share registrars, sponsors, underwriters, distributors, regulatory authorities and legal counsels, who are required to use FINI to conduct tasks that are specific to their role in each particular IPO and will have access to permissioned data and tasks that are within their ambit.  Issuers and end-investors, on the other hand, will not have access to FINI and will continue to be served by their agents who interact with FINI on their behalf.

    Not every settlement process will be conducted on FINI but the results of those tasks (such as roadshows, book building, pricing and balloting) will be captured and applied to facilitate downstream settlement.  Below are the tasks each user group is expected to conduct on FINI and the activities to be conducted off the platform:

  Tasks conducted on FINI “Off-platform” activities 
Retail brokers
  • Submit public offer subscriptions
  • Confirm pre-funding
  • Serve “EIPO channel” investors
  • Arrange subscription funding
Share registrars 
  • Submit public offer subscriptions
  • Confirm balloting results
  • Serve “White eIPO channel” investors
  • Conduct balloting
  • Manage issuance of share certificates
  • Manage issuer’s Register of Members
IPO sponsors
  • Validate IPO reference data & timings
  • Confirm the IPO price range / final price
  • Arrange publication of IPO prospectus
  • Arrange publication of announcements
Underwriters & distributors
  • Submit placee lists for clearance
  • Submit supporting documents
  • Conduct roadshow & book-building
  • Determine IPO price range / final price
SEHK Listing Division
  • Review allotment results and placee lists
  • Vet issuers’ listing applications
  • Other regulatory functions
HKSCC
  • Operate the FINI platform
  • Manage public offer operations
  • Admit shares into CCASS for trading
SFC 
  • Review allotment results & placee lists
  • Vet issuers’ listing applications
  • Other regulatory functions

 

Target IPO Settlement Timetable under the FINI Proposal

HKEX proposes a 45-hour timetable between book-close and trading as the standard outcome for Hong Kong IPOs (in which pricing should be confirmed within a maximum of 22 hours after public offer close; and trading should commence within a minimum of 23 hours after pricing is confirmed). Below is the recommended baseline timetable which HKEX believes to be achievable upon deployment of FINI:

Target settlement timetable with FINI
Activity Start (HKT) End by (HKT) Duration Data input
Offer initiation  Anytime T-5   2:00 p.m.   IPO sponsor 
IPO reference data live  T-4   9:00 a.m. After listing   FINI generated standard form 
IPO roadshow Anytime Before T day   Off-platform activity 
Public offer open
Input investors’ subscriptions

 
T-4   9 a.m. T-1   9:30 a.m. 3 business days for public offer  Retail brokers and share registrars 
Validate pre-funding 
Public offer close

 
  T-1   12 noon   Bank’s confirmation 
Allot shares via ballot Release allotment results T-1   12 noon T-1   2:00 p.m. 2 hours  Share registrars 
Settle public offer proceeds T-1   2:30 p.m. T-1   5:30 p.m. 3 hours FINI generated SWIFT messages
Confirm pricing Anytime T   10:00 a.m. Max. 22 hours after public offer close  Off-platform activity 
Submit placee information Anytime T   2:00 p.m.   Underwriters and distributors 
Obtain regulatory clearance Anytime T   5:00 p.m. 3 hours  HKSE, SFC 
Announce allotment results T   5:00 p.m.  T   11:00 p.m.  6 hours  FINI generated draft announcement 
Start of trading T+1   9:00 a.m.    Min. 23 hours after pricing deadline  Off-platform activity 
Settle public offer price difference refunds (if any)

T+1   9:00 a.m.

onwards 

    FINI generated SWIFT messages 

 

Implementation

Subject to market support and readiness for a one-time adoption, the launch date of FINI is envisaged to take place no earlier than the second quarter of 2022. The deadline for submitting responses to the Concept Paper is 15 January 2021.