Caixin
Nov 18, 2020 06:06 AM
FINANCE

HKEX to Slash IPO Settlement Time to 1 Day From 5

Under the proposal, HKEX will introduce a new web-based service called FINI
Under the proposal, HKEX will introduce a new web-based service called FINI

The Hong Kong stock exchange plans to revamp the settlement process for initial public offerings (IPOs) to reduce the time between pricing and trading debut to one business day from five in an effort to attract more listings.

The change, proposed in a consultation paper published Monday by Hong Kong Exchanges and Clearing (HKEX), will overhaul the two decade-old IPO settlement regime applied in the city’s bourse and make it among the most competitive in the world, HKEX said.

Major markets in Europe and the U.S. use an IPO settlement system that can be completed in one day, but the average time taken by most listings is often longer than that, according to HKEX Chief Executive Charles Li. The new system will make the HKEX the first market to truly achieve a one-day settlement, Li said.

The average settlement time in the mainland’s A-share markets averaged around nine business days in 2018 and 2019.

Under the proposal, HKEX will introduce a new web-based service called FINI, for Fast Interface for New Issuance. It will enable IPO market participants, advisers and regulators to interact digitally and seamlessly on the many steps in the IPO settlement process.

“FINI will secure our continued attractiveness and competitiveness as the global listing market of choice, and we look forward to working with the Hong Kong IPO community on this exciting initiative,” Li said in a statement.

The current five-day lag to complete the workflow from pricing to trading in Hong Kong exposes investors to risks of price fluctuation, especially when markets are volatile, investors said. Processes that need to be completed include allotment, payment and stock admission.

HKEX identified the shortening of the IPO settlement process as a key initiative in its Strategic Plan 2019-21 as part of a broader range of market microstructure improvements. The exchange applied in June for the “FINI” trademark and unveiled the new platform in late September.

“The new mechanism will bring significant impacts on the Hong Kong stock market,” said an executive at a foreign investment bank. The revamp will make IPO pricing in the city more market-oriented, reduce price fluctuation after trading debut and allow pricing to better reflect market expectations, the executive said.

The HKEX will gather feedback on the revamp until Jan. 15 and expects to launch the new system no earlier than the second quarter of 2022.

In addition to shortening the IPO settlement process, the HKEX also proposed to alter the pre-funding mechanism to reduce the impact of IPOs on market liquidity.

Under the current system, brokers must transfer all funds to cover shares bid for by clients to the issuer before subscription starts, potentially tying up large amounts of cash. The proposed change will allow brokers to put up cash in advance for only 10% of shares sought by clients.

“This intends to alleviate the distortive impact that over-subscribed IPOs are known to have on Hong Kong dollar capital flows and interbank money markets,” the exchange said.

Hong Kong interbank lending rates surged ahead of Ant Group's planned $35 billion IPO in Shanghai and Hong Kong as high demand for the offering tightened liquidity. The rates later dropped to nine-year lows after mainland regulators suddenly suspended the listing.

“The new mechanism will further boost HKEX’s competitiveness and digital capacity, granting greater efficiency and risk-control capability for new IPOs,” said Pang Ming, a senior analyst at investment bank China Renaissance.

Despite the suspension of Ant Group’s share sale, the Hong Kong stock market has recorded about $37 billion of IPOs so far this year with an additional $6 billion of offerings scheduled later this year, according to Bloomberg.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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