HKEx to expand its custody and nominee services to OTC structured products

HKEx to expand its custody and nominee services to OTC structured products

23/04/10

Hong Kong Exchanges and Clearing Limited (HKEx) announced today that effective 26 April 2010, Hong Kong Securities Clearing Company Limited (HKSCC), a wholly-owned subsidiary of HKEx, will broaden the asset classes in its eligible securities by admitting over-the-counter (OTC) structured products (including but not limited to equity linked investments (ELIs) and equity linked notes (ELNs)) that have been authorised by the Securities and Futures Commission (SFC) into CCASS, the Central Clearing and Settlement System, for HKEx’s securities market.

“This initiative is consistent with our strategic plan,” said HKEx’s Head of Clearing, Derrick Fung.  “The changes will enable HKEx to extend its custody and nominee services to OTC securities and provide access to other new business opportunities in the OTC market.”

From 26 April, the custody and nominee services HKSCC currently offers for listed structured products such as allotment at the time of issuance and cash or scrip settlement at expiry will be offered for OTC ELIs, ELNs and other OTC structured products admitted into CCASS.  OTC structured products issued in global certificate or scripless form with settlement currency denominated in Hong Kong dollars, US dollars or other currencies as agreed with HKSCC from time to time will be eligible for admission.  In cases where an OTC ELI or ELN is physically settled at expiry, the underlying securities must be CCASS eligible to facilitate book entry scrip settlement.

OTC structured products will be subject to CCASS admission criteria currently applicable to other securities and an admission application fee of 0.02 per cent on the nominal value of the issue size, subject to a minimum of $800 and a maximum of $5,000.  As an incentive for a new issuer to use CCASS, the minimum fee will be $600 for their first OTC structured product admitted into CCASS and for all the others admitted over the following 12 months.

Issuers of structured products will not have to be CCASS Participants to use the services.

“After an OTC ELI or ELN with underlying securities listed in Hong Kong is admitted into CCASS, its issuer will be able to rely on the clearing system to settle the scrip payment at expiry with the many distributors which are CCASS Participants,” said Mr Fung.  “That will be much more efficient for the issuer than settling outside the system.

“We have had discussions with issuers and expect at least one of them will take advantage of the new services soon,” Mr Fung added.  “We also expect the services to require time to develop, as is often the case with new products or services.”

OTC structured products are generally designed for experienced investors.  As the products are not listed or traded on a stock exchange, investors who want to buy or sell them in the secondary market rely to a large extent on any market making arrangement provided by the issuer or its agent in the OTC market.

HKEx is not associated with OTC structured products themselves and investors should understand the risks before acquiring OTC structured products.  HKSCC’s acceptance of an OTC ELI or ELN as an eligible security does not imply HKEx’s endorsement or recommendation of the product, its issuer or its distributor.