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Fast Interface for New Issuance (FINI) Concept Paper Conclusions

2021-08-01

Introduction

In December 2020, we published a newsletter entitled “Roll-out of the FINI platform for IPO settlement“ introducing the concept paper “Modernising Hong Kong’s IPO Settlement Process” published by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) in November 2020 (“FINI Concept Paper”). On 6 July 2021, the Stock Exchange published its concept paper conclusions to the FINI Concept Paper. In this article, we will highlight the major changes that the Stock Exchange will make to the IPO settlement reform in response to respondents’ feedback to the FINI Concept Paper.


Fast Interface for New Issuance (FINI) Concept Paper Conclusions


“T+2” instead of “T+1”

A “T+1” settlement cycle, where shares can be first traded on the Stock Exchange one business day after the price determination date, was initially proposed in the FINI Concept Paper. However, numerous respondents were of the view that the T+1 IPO settlement timetable proposed, while desirable, was too tight operationally. In particular, the time for institutional trade allocation, pre-matching, placee vetting and settlement was considered insufficient by most market participants, who indicated that allowing more time for these sequential activities was important to avoid unnecessary settlement failures, especially in IPOs that feature heavy participation from overseas-based investors. Regarding the timing of the public offer, some brokers noted that application cut-off time at 9.30 a.m. on the public offer book-close date would not leave much time for IPO subscribers to make use of the final day of the offer period. The time provided for settlement banks to confirm the sufficiency of their clients’ application funds was also considered to be too short. Given that the market preferred a “T+2” timetable, the Stock Exchange has decided that FINI will initially adopt a “T+2” settlement timetable as the standard model for all future IPOs, unless the issuer has consulted the Stock Exchange in advance to seek consent to conduct its offering with a longer settlement timetable, or has been requested by the regulators to do so. It was noted that “T+2” need not be a permanent outcome and the vision of the Stock Exchange is for the market to eventually move towards “T+1” settlement in future.


Public offer pre-funding mechanism

The FINI Concept Paper proposed requiring an intermediary (effectively a CCASS participant) to deposit a minimum of 10% of its total subscription value in cash with its designated bank with the remainder to be supported by cash or committed credit facilities. Respondents from banks and brokers raised a number of questions about their expected roles and responsibilities under the new arrangement. In particular, there was uncertainty about whether banks would be required to play a larger role in credit intermediation, or to assume potential liability for money settlement on brokers’ behalf. Similar concerns were mirrored by some brokers’ associations, who asked whether fully pre-funded IPO subscription services without the backing of margin lending may still continue after the introduction of FINI, rather than needing to follow the 90% credit / 10% cash pre-funding guideline mentioned in the FINI Concept Paper.

In response to this feedback, the Stock Exchange has amended and clarified the public offer pre-funding arrangement and workflows that will take effect under FINI. Under the revised arrangement, FINI will calculate and notify the CCASS Participant and its designated bank the amount of pre-funding required based on the CCASS Participant’s Electronic Initial Public Offering (“EIPO”) application. Instead of transferring the application funds to the issuer’s receiving bank, it is proposed that the designated bank should reserve the required pre-funding based on funds available in the CCASS Participant’s bank account, and send a confirmation to FINI. A missing or negative confirmation from the designated bank (i.e. failed pre-funding) will invalidate and remove the CCASS Participant’s application from the ballot. As no interbank transfers are involved under the new pre-funding confirmation arrangement, the Stock Exchange believes this will help ease current liquidity challenges in the Hong Kong Dollar interbank market during the IPO settlement period, particularly for “mega” IPOs.

The Stock Exchange has further clarified that pre-funding compression will be optional for CCASS Participants and is ultimately a commercial choice. Only CCASS Participants who are able and willing to assume and manage their counterparty exposure to their own clients should consider whether they wish to avail themselves of this mechanism.

To effect this arrangement, every CCASS Participant will be offered the option to opt in to using the compressed Pre-Funding Requirement (“PFR”) calculation for all of its EIPO application lists at the point of on-boarding to FINI. Once opted in, the opt-in will cover all IPOs, without the CCASS Participant needing to make an election every time. CCASS Participants who do not opt in during on-boarding to FINI may do so at any time thereafter, in which case their PFR calculation methodology will be revised in respect of all future IPOs, except those whose public offer period has already started at the time of the opt-in request. CCASS Participants may opt out at any time.


Implementation of FINI in Q4 2022

The launch of FINI demonstrates the Stock Exchange’s ongoing commitment to collaborating with the market in developing the optimum technological platforms and processes. The Stock Exchange plans to ensure that there is ample time for market readiness ahead of the introduction of FINI and expects FINI to be rolled out in the fourth quarter of 2022, at the earliest. The Stock Exchange will invite market participants to join education sessions, on-boarding, market-wide testing and rehearsals to ensure a smooth transition.

 


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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers© 2021


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