Introduction

On 30 November 2023, the Stock Exchange of Hong Kong Limited (“Stock Exchange”) published a consultation paper with a proposal aiming to maintain normal operations of the Hong Kong securities and derivatives markets during severe weather (“SW”) conditions. Currently, on any day from Monday to Friday (except a Hong Kong public holiday) when a Typhoon Signal No. 8 or above is hoisted, a Black Rainstorm Warning is issued or Extreme Conditions is announced (“SWT Day”), markets will be closed.

The consultation paper points out the need to consider a change to existing SW arrangements in Hong Kong because SW-induced market closures expose Hong Kong’s diverse investor base to market risks and most of the other major markets can maintain market trading under SW. This article summarises the proposed operational arrangements for trading on an SWT Day and the legal implications for such change.

Proposed operational arrangements for severe weather trading

The Stock Exchange made this proposal with the following key principles in mind: first, ensuring personnel and investor safety; second, maximising investor benefit; third, maintaining normal operations to the highest extent possible and, fourth, ensuring that participants fulfil risk obligations corresponding to open positions and unsettled stock positions to comply and align with both local and international regulatory requirements.

The parts below summarise the proposed operational arrangements in relation to Hong Kong securities market, Northbound Trading under Stock Connect, Hong Kong derivatives market and new listing respectively.

Hong Kong Securities Market

Trading and clearing arrangements: Trading arrangements on an SWT Day, such as those relating to trading hours, trading mechanisms, will be the same as a regular trading day. Arrangement for Southbound Trading on an SWT Day will be the same as if there is no SW (i.e. it will be a Southbound trading day). Clearing and settlement will also remain the same as on a regular trading and settlement day. The process of creation and redemption of ETF units in the primary market is expected to remain the same as a regular trading and settlement day. There will also be no impact in general to the payment of cash settlement amounts on an SWT Day arising from normal expiry or a mandatory call event.

Buy-in exemption: Nonetheless, the physical outlets of Hong Kong Securities Clearing Company Limited (“HKSCC”) and share registrars are expected to be closed under SW. The deposit and withdrawal of physical securities by Participants will not be available under SW. The last registration date of corporate actions will continue to be postponed if it falls on an SWT Day. As such, Central Clearing and Settlement System (“CCASS”) participants who have sufficient securities outside of CCASS may not be able to physically deposit the securities for settlement purpose to cover their short positions. HKSCC may grant a buy-in exemption for such a scenario.

Corporate actions: Given that deposit and withdrawal of physical securities will not be available under SW, to ensure that the eligibility of entitlement or participation in corporate action of physical certificate holders will not be impacted by SW, the last registration date should continue to be postponed if it falls on an SWT Day.

For corporation actions with ex-entitlement arrangements such as cash dividend, if CCASS Participants holding physical certificates can lodge and complete the deposit or withdrawal with CCASS by the specified time on the postponed last registration date, the abovementioned entitlements in CCASS will be adjusted accordingly to reflect the respective deposit and withdrawal. For corporate actions subject to last registration date but without ex-entitlement arrangements such as voting, unless otherwise specified, HKSCC will follow the postponed last registration date to determine the eligibility of CCASS Participants to participate in the corporate action where applicable.

Northbound Trading under Stock Connect

The maintenance of the stock eligibility list of China Connect Securities and Special China Connect Securities the trading arrangements for Northbound Trading under Stock Connect will be the same as if it is a regular Northbound trading day. Custodian services, clearing, settlement and collateral management services arrangements and respective service schedules in CCASS will remain the same as on a regular Northbound trading and settlement day.

Hong Kong Derivatives Market

Trading arrangements will be the same as a regular trading day. The Final Settlement Price and Official Settlement Price for all futures and options contracts can be determined on an SWT Day with the exception of one-month and three-month HIBOR future contracts. Should an SWT Day fall on the last trading day of the one-month and three-month futures, the final settlement price will be based on the HIBOR rate on the trading day following SW. Clearing and settlement will also remain the same as a regular trading day.

New Listing

The Stock Exchange proposes that the listing and first-day of trading of new equity securities, debt securities and interests in authorised collective investment schemes proceed as usual on an SWT Day. The applicants should proceed with their listing plans as scheduled and adhere to the relevant time limits prescribed under the Listing Rules and, where applicable, other guidance from the Stock Exchange.

Legal implications of the proposal

The Companies Ordinance (Cap. 622) imposes certain obligations on public companies to do certain acts within a specified number of “business days”. Under the relevant provisions, a “business day” is defined as a day on which a recognised stock market is open for the business of dealing in securities. Hence, upon the implementation of the proposal in the consultation paper, an SWT Day would be considered a business day.

In the same vein, the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) imposes a number of requirements and obligations on listed issuers that reference “business day(s)” and/or specify time periods. A “business day” is defined in the same way as under the Companies Ordinance, which means that an SWT Day will be counted as a business day after the implementation of the proposed SW trading. Given that the Stock Exchange, the listed issuers and other relevant parties would be able to perform their obligations under the Listing Rules and the Stock Exchange’s online platforms/ systems (including the HKEXnews webpage) will also operate as normal on an SWT Day, the Stock Exchange considers that an SWT day should be a “business day” for the purpose of the Listing Rules and hence the Stock Exchange propose no change be made to the existing definition.

The Securities and Futures Commission (“SFC”) also indicated that they have considered whether there is a need to amend the Securities and Futures Ordinance (“SFO”), in particular provisions containing references to “Business Day” which is defined to exclude a gale warning day or a black rainstorm warning day. As currently assessed, such change is unnecessary for and is unlikely before the implementation of SW Trading but the SFC will continue to assess the need for legislative amendments.

Conclusion

The above proposal advocates removing existing SW arrangements so that trading, clearing and settlement services and operations can continue in both the securities and derivatives markets. The consultation paper aims to solicit public views on the above proposed SW trading arrangements. The consultation period for this will be eight weeks and will close on 26 January 2024.