Hong Kong: Other Securities Law Developments in Hong Kong

Last Updated: 14 October 2002

The following is a digest of other significant financial rules and guidelines issued or amended in recent months.

Listing rules amendment

In August the Main Board and GEM Listing Rules were amended. The amendments related to the disclosure of asset valuation and additional content requirements for financial statements.

Under the original rules, where any of a listed company’s real estate or other tangible assets have been valued and the valuation has been included in the prospectus at the time of listing, the assets must be stated at such valuation in the company’s financial statements, subject to certain exceptions. This requirement has now been removed for new listing applicants whose advanced booking form is dated on or after 1 September 2002.

Other amendments impact on disclosure of movements in equity and changes in accounting estimates in the financial statements.

SFC Hedge Fund Guidelines

In May the SFC broke new ground in the local hedge fund market by introducing the Hedge Fund Guidelines, which were incorporated into the SFC Code on Unit Trusts and Mutual Funds.

The new rules set out the criteria and procedures for obtaining SFC authorisation for a hedge fund. Among other things, there are requirements for the suitability of the management company, qualifications of prime brokers, minimum subscription to be received from each investor, investment and borrowing restrictions, rules on the naming of the scheme, disclosure of any performance fees to be levied, as well as rules on dealing and valuation.

Financial resources of securities margin financiers

In May the SFC introduced amendments to the Financial Resources Rules for securities and futures dealers and advisers. These amendments affect providers of securities margin financing (including securities dealers who provide such financing) and aim to ensure such margin financiers will have a sufficient capital cushion to provide for credit, liquidity and other risks. The new requirements are as follows:

a) In calculating the margin financier’s liquid assets, only 20% of illiquid collateral provided by clients will be taken into account. Generally speaking, these would be stocks and warrants that are difficult to liquidate quickly in the market.

b) In calculating ranking liabilities, a margin financier will be required to compare the total value of its margin loans to clients with the total value of borrowings it has obtained by re-pledging securities received from margin clients. If the borrowings exceed 65% of the loans extended, the excess must be included in the margin financier’s ranking liabilities.

Listing rules for structured products

In July, the Stock Exchange took steps to invigorate the market for structured products. The Main Board Listing Rules were amended to allow a wider range of structured products, such as equity linked instruments ("ELI") and derivative warrants, to be listed on the Stock Exchange. Previously, derivative warrants were the only structured products accepted for listing.

Issuers of listed structured products are required to provide liquidity for them. The rules also set out requirements for the status, financial position and suitability of the issuer of the product and the guarantor (if any). The product itself must also meet certain qualifications.

Listed ELI must be issued in scripless form, and have a minimum maturity period of 28 days and a maximum of two years. Investors may choose bull, bear and range ELI depending on their views on market movements. August saw the first successful ELI listings in Hong Kong, with the underlying stocks being blue chips such as HSBC, China Mobile, Cheung Kong and Hutchison Whampoa.

SFC Short Selling Guidelines

In June 2002 the SFC issued an Addendum to the Guidance Notice for Short Selling Reporting and Stock Lending Record Keeping Requirements. This sets out the SFC’s views on specific questions relating to short selling.

The addendum states examples of transactions which are not considered as prohibited "naked" short sales, and how a securities intermediary should ascertain whether any particular order from a client relates to a prohibited short sale. Also set out are acceptable practices for aggregating positions held by different trading units or trading books to determine the "net long" or "net short" position of the securities intermediary.

The short selling guidelines do not have force of law. However, an intermediary’s failure to comply with them may mean failure to meet the "fit and proper" criteria which impacts on the intermediary’s registered status.

© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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