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|
|Underwriters & distributors||
|SEHK Listing Division||
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|
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.
|FINI generated SWIFT messages|
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.