Financial Services Development Council (FSDC) is a high
level cross sector platform which formulate proposals to promote the further
development of Hong Kong’s financial services industry and map out the
strategic direction for development. To meet its objectives, FSDC has recently
issued a paper on ‘Optimizing Hong Kong’s Listed Structured Products Market’
(the “Proposal”).
The Proposal recognizes the fact that Hong Kong’s listed
structure products market is limited to vanilla warrants and CBBCs (Callable
Bull / Bear Contracts) but has the highest turnover by global standards. But, the
market is not geared to meet the future challenges due to certain deficiencies
like limited product range and underlying asset classes, outdated issuance and
listing process, higher costs and strict liquidity provisioning requirements.
These short-comings in comparison to other competitive markets tend to threaten
future development of Hong Kong’s listed structured product market.
The Proposal summarizes corrective actions that should be
taken for each of the short-coming so that Hong Kong’s listed structure product
market continues to maintain its leading position and offers wide variety of investment
options to investors, at the same time.
The main recommendations of the Proposal are on the product
types, naming convention, shorter timeframe and streamlined process, change in
the fee criteria, flexibility liquidity provisioning and investor education.
It is recommended to give easy access to non-leveraged and
investment type products through the exchange platform. These products are
Discount Certificates, (a Yield Enhancement Product) and Bonus Certificate (a
Participation Product). The pay-out from these listed products will be similar
to unlisted structured products offered by retails banks in Hong Kong.
FSDC has also recommended to change the naming convention
for structured products. E.g. it is suggested to use the word “X” in a stock
short name only to denote exotic products with high risk. Further, it wants the
exchange should design a common naming convention which should be consistently
applied for all listed structured products.
The Proposal has
extensively looked into the current listing procedure for structured products
and has recommended multiple areas to improve to shorten the timeline and
streamline the process. The framework to approve an application for structured
product should identify the steps required, approval criteria, persons responsible,
the timeframe for review etc. Also, electronic submission of documents for
approval of a new product should be introduced. Further, the eligibility
requirement for the underlying asset class for a listed structure product
should be clearly formulated.
Analysis of the fees charged to the issuers and the
investors show that the current fee structure is not supportive to introduce
new structured product types. The Proposal recommends to lower the listing
fees, issuance fee to be linked to volume and distribution reward schemes.
The current liquidity mechanism of Active Quote is suited
for products which are traded frequently. However, for investment type of
structured products, which are held to maturity and are not actively traded a quote
request liquidity process shall be evaluated.
FSDC’s recommendations are very practical, farsighted and
are timely. Hong Kong has not yet started losing its leadership position in
structured product market. Implementation of these recommendation will create a
robust structured product market in Hong Kong and all this continues to be
within the existing regulatory framework. This will immensely benefit the
retail investors since they will get the benefits and protection of a listed
product.
