In November 2020, the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) issued a concept paper entitled “Modernising Hong Kong’s IPO Settlement Process” (the “Concept Paper”). The Concept Paper introduces a new, purpose-built platform named FINI, which stands for Fast Interface for New Issuance, to modernise the settlement process of initial public offerings (“IPO(s)”) in Hong Kong. FINI, if rolled out, is about to shorten the time required for the settlement process, which will in turn reduce the time between the close of offer and the listing of the securities, the transaction costs involved in IPO subscription and the related market risk.
Under the proposal, the new practice of pre-fund of 10% of the subscription money may address the large interbank movements of money during and after the offer period of popular IOPs that are usually in excess of the size of the offer, which has been known to create short-term liquidity shortage and borrowing rate spikes in the Hong Kong dollar money market.
The current timetable of settlement process
The current IPO settlement process on average takes five business days for the new shares to be allocated, settled and admitted to trading on the Stock Exchange after the price determination day (“T+5 days”), and that may expose investors and issuers to market risks as they are unable to trade the allotted shares in the secondary market and may be subject to market volatility during the period of T+5 days. The current IPO settlement process also causes a lock-up of subscription money after the investors making the subscription application.
FINI entails the digitalisation of IPO settlement process and it will enable market participants and regulatory authorities to interact with each other through a secure, web-based portal. By streamlining the logistics, it is expected that FINI can reduce the time for IPO settlement by 70-80%. Upon the introduction of FINI, shares can be first traded on the Stock Exchange one business day (“T+1 day”) after the price determination date and the proposed standard timetable is summarised as follows:
While FINI will be a central repository for data relating to the institutional and retail tranches of each IPO in Hong Kong and digitalise and streamline the current paper-based system, it will not take over the roles of the intermediaries, advisers and regulatory authorities or other off-platform process e.g. roadshows, book-building, IPO pricing and balloting.
New York and London, which are the other popular listing venues in the world, are able to allow IPO trading on the T+1 day after pricing. Stock Exchange proposes to make FINI as a mandatory platform for handling all future IPOs in Hong Kong, but the roll-out of FINI is expected to occur no earlier than the second quarter of 2022 and the timeline depends on the market’s response to the FINI proposal.
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