Hong Kong Exchanges and Clearing Limited (HKEX) earlier announced its decision to deploy "FINI" (Fast Interface for New Issuance) as the mandatory platform for settlement of all Hong Kong’s future initial public offerings (IPOs). FINI is due to roll-out in the fourth quarter of 2022. Instead of compressing the existing "T+5" settlement cycle to "T+1", as originally proposed, HKEX is now proceeding with FINI development adopting a "T+2" IPO settlement cycle (the same as for the secondary market).
HKEX, on 6 July 2021, published its Conclusions to the November 2020 FINI Concept Paper. We have discussed the Concept Paper proposals in our earlier Legal Update and will highlight here the major changes in the finalised FINI model.
T+2 instead of T+1
Despite the size and maturity of Hong Kong’s primary market, the usual time gap between an offering being priced and new shares commencing trading on the Hong Kong Stock Exchange currently takes around five business days – hence the label "T+5" (where "T" denotes the IPO pricing day).
This compares unfavourably with New York and London where trading can take place on the "T+1" day.
A "T+1" settlement cycle was initially proposed in the HKEX Concept Paper – but market feedback preferred a "T+2" timetable. HKEX has now decided that FINI will initially adopt a "T+2" cycle as standard for all future IPOs, envisaging the market will eventually move to "T+1" settlement.
Below is an illustrative timetable for a typical Hong Kong IPO upon deployment of FINI:
|Target settlement timetable with FINI|
|Activity||Start time||Deadlines||Data input onto FINI|
|Offer initiation||post hearing letter||T-5 2:00 p.m.||IPO Sponsor to fill in details|
|IPO reference data live||T-4 9:00 a.m.||After listing||FINI generated standard form|
|Public offer subscription||T-4 9:00 a.m.||T-1 12:00 noon||Retail brokers/share registrars to input investors’ subscriptions|
|Public offer funding confirmation||T-1 12:00 noon||T-1 5:30 p.m.||Brokers' designated banks (DBs) to input confirmation|
|Allocation adjustments||after public offer closes||T 00:00||Principal lead broker/share registrars|
|Pricing||-||T 12:00 noon||Principal lead broker
|Balloting||after allocation adjustment||T 12:00 noon||Share registrars|
|Public offer money settlement||T 12:00 noon||T 5:30 p.m.||FINI generated instructions for money settlement via RTGS CHATS|
|Placee list submission||after allocation adjustment||T+1 10:00 a.m.||Underwriters and distributors|
|Obtain regulatory clearance||after placee list submission||T+1 5:00 p.m.||HKEX, SFC|
|Deposit of Public Offer Shares in Central Securities Depository||after money settlement||T+1 5:30 p.m.||Share registrars|
|Allotment results announcement||T+1 5:00 p.m.||T+1 11:00 p.m.
||Sponsor to confirm/publish FINI generated draft announcement|
|Deposit of International Offer Shares in Central Securities Depository||after regulatory clearance||T+2 9:00 a.m.||Sponsor/Principal lead broker to fill in placement e-form/share registrar
|Start of trading
||T+2 9:00 a.m.||Off-platform activity
EIPO Pre-funding Arrangements
The original proposal requiring an intermediary (effectively a CCASS participant, CP) to deposit a minimum of 10 per cent of its total share subscription value in cash with its designated bank (DB) – with remainder supported by cash or committed credit facilities – is now scrapped. HKEX explained that it did not intend to dictate how a CP should meet its pre-funding requirement (PFR), and clarified that:
- PFR will be a cash requirement
Under the revised arrangement, FINI will calculate and notify CP and its DB the amount of PFR (which is now a cash requirement) based on CP's EIPO application. Instead of transferring to the IPO issuer's receiving bank, as required under current IPO practice, DB should instead "lock" the required PFR based on funds available in the CP’s bank account, and send confirmation to FINI. A missing or negative confirmation from DB (i.e. failed pre-funding) will invalidate and remove the CP’s application from the ballot. As no interbank transfers are involved under the new pre-funding confirmation arrangement, HKEX believes this will help ease current liquidity challenges in the Hong Kong dollar interbank market during the IPO settlement period, particularly for large or unexpectedly popular public offerings, the "mega" IPOs.
- Compressed pre-funding is an option
For FINI to calculate the PFR amount, CP may opt in for compressed pre-funding, capping its PFR at maximum allotment exposure (equivalent to the value of an IPO’s entire public offer tranche, assuming the highest tier of clawback set out in the issuer’s prospectus were to be triggered). For a CP choosing not to opt in, its PFR will be the total share subscription value of its EIPO application. As an example, say the maximum value of the IPO's public offer tranche after clawback is HK$1 billion, and demand is "hot" with CP receiving clients' orders worth HK$2 billion. If CP has opted in, its PRF will be HK$1 billion. If not, its PFR will be HK$2 billion.
The practical consequence of opting in, therefore, is that not all of the funding arranged by CP to support its clients’ applications will necessarily be required to be fully drawn down and deposited with its DB in order to meet that CP’s PFR. HKEX believes this compressed pre-funding mechanism will allow brokers and banks to support their clients’ demand for shares with considerably smaller “lock-up” of liquid funds in “mega” IPOs, which may potentially also translate into lower IPO funding costs that more realistically reflect the actual credit consumption involved.
Mandatory Subscribers Identification Information
HKEX confirmed its intention to align the identification requirements for all IPO subscribers with those required for securities investors as set out in the proposed introduction of an "Investor identification regime at trading level for the securities market in Hong Kong" (HKIDR), announced for market consultation by the Securities and Futures Commission (SFC) on 4 December 2020.
This means that, subject to the HKIDR’s finalised standards and requirements, submission of the following information (and such additional details that may be prescribed from time to time) would be mandatory for all IPO subscribers:
|Details to be Provided for Identification|
|For individual subscribers||For corporate subscribers|
1. HKID card;
1. LEI registration document;
** In the case of individual subscribers, “order of priority” will mean that investors who hold a valid HKID must use that HKID number (rather than, say, a passport number) when subscribing for shares, while in the case of corporate subscribers, the company’s LEI number must be used if it has one.
Intermediaries whose clients elect to use a non-HKID identity document to make an application for public offer shares will be required to seek client confirmations that client does not possess a valid HKID as part of their initial know-your-client checks and ongoing monitoring.
Equipped with the investor identification information, FINI will help IPO issuers address multiple applications. However, as HKEX emphasised, FINI will not carry out checks for IPO issuers who restrict or prohibit certain groups of investors from applying for shares based on the issuing country or jurisdiction of their identity document.
BCAN as Identifier
HKEX indicated that, subject to HKIDR and further discussion with the SFC, it may allow licenced corporations and registered financial institutions who submit public offer applications through third-party CPs to identify their end-investors with a BCAN (broker-to-client assigned number), instead of disclosing the investors’ full identity details in their application, to preserve confidentiality between intermediaries.
FINI’s Scheduled Implementation
Subject to market readiness for a one-time adoption, the launch date of FINI is envisaged no earlier than the fourth quarter of 2022.