On 6 July 2021, the Hong Kong Exchanges and Clearing Limited (the “HKEx”) published its conclusions in response to its concept paper on the introduction of a new IPO settlement platform – Fast Interface for New Issuance (“FINI”). The aim of this innovation is to provide an interactive digital platform for market participants, to reduce market risk associated with Hong Kong dollar liquidity issues and to bring Hong Kong in line with other leading international equity listing venues in terms of IPO settlement efficiency.
FINI is expected to launch no earlier than the fourth quarter of 2022.
What is FINI?
FINI is a web-based platform for IPO market participants and regulatory authorities to interact throughout the IPO settlement process. Through FINI, market participants will have access to active IPO data at different stages in real-time, all the way from offer initiation, public offer subscription, pricing, balloting, placee list submission, regulatory clearance, allotment results announcement and stock admission processes.
In terms of the roles and responsibilities of market participants, HKEx has delineated tasks that can benefit from standardisation and digital efficiency and those that should remain “off-platform”. As such, FINI will not replace critical “off-platform” processes such as roadshows, bookbuilding, IPO pricing and balloting, but will help to capture the results of these tasks from responsible parties to facilitate the settlement process. Note that IPO issuers and end-investors will not be required to access or use the FINI platform.
Shortened IPO settlement cycle
Hong Kong currently has a “T+5” settlement cycle, meaning it takes around five business days from an offering being priced and the shares commencing trading on The Stock Exchange of Hong Kong. This compares unfavourably with New York and London, where new shares commence trading one day after pricing. While the HKEx originally proposed a “T+1” timetable in the concept paper, it was considered insufficient from operation point of view by many market participants, in particular the timeline for institutional trade allocation, prematching, placee vetting and settlement.
As such, FINI will introduce a “T+2” IPO settlement timetable as an initial standard model (a “T+3” or longer IPO settlement timetable may be considered by the HKEx if the issuer submits an advance request to the HKEx, or has been requested by regulators to do so).
Public offer pre-funding mechanism
Under FINI, the concept of pre-funding is retained, but the mechanics are revised. In particular, CCASS participants (“CPs”) are no longer required to transfer application funds to the issuer’s receiving bank as evidence of their fund sufficiency. Instead, the Hong Kong Securities Clearing Company Limited (“HKSCC”) will ask for confirmation from the CPs that their application funds are held on deposit with their own designated IPO settlement bank prior to the ballot. Upon completion of the ballot, the receiving bank would only collect from these funds the portion required to settle each CP’s actual share allotment. The reason for this change is to shorten the time required and reduce potential counterparty and concentration exposures created during transfers of substantial application funds.
Furthermore, FINI addressed the issue of excessive liquidity “lock-up” by allowing CPs to opt in for a compressed pre-funding requirement. This mechanism will significantly reduce the amount of liquidity “locked-up” in the banking system during the IPO subscription period in the largest or most popular IPOs.
FINI sets to introduce a mandatory standard for investor ID information identification in all IPO subscription channels to improve disclosure quality and enable detection of duplicate subscriptions from the same investor. The submitting broker, share registrar or distributor will be alerted if any suspected duplicate or incomplete entries are identified.
In the event brokers are reluctant to disclose their clients’ identifying information to CPs, FINI proposes that, subject to regulatory considerations, intermediaries may be permitted to identify subscribers for shares in public offers with a Broker-to-Client Assigned Number (“BCAN”) on an optional basis.
After taking into account concerns raised by market participants, HKEx intends to align the investor identification requirements for IPO subscribers in FINI with those set out in “Investor identification regime at trading level for the securities market in Hong Kong,” published by the Securities and Futures Commission.
Placee list submission
HKEx intends to fully digitalise placee list submission and the review process. The FINI system will incorporate some new workflow features to help reduce the need for manual reconciliation during placee submission, vetting and approval process. For example, underwriters and distributors will be able to manage an online control list directly on the digital platform, and distributors may “tag” placees as connected clients / connected persons of the IPO issuer.
FINI will also automatically generate marketing statements for distributors and generate a bilingual allotment results data table for the IPO issuer’s advisers to review and amend immediately after the clearance of placee allocations.
The new “T+2” IPO settlement timetable represents a significant reduction in the market risk faced by investors, issuers and underwriters in a Hong Kong IPO. The FINI platform will enable significant process rationalisation and cost savings for participants in Hong Kong’s IPO market. It also provides a much-needed forum with transparent real-time data for all stakeholders to collaborate on the mechanics of their IPO projects. The initiative has been well received by market participants as it showcases HKEx’s commitment to stay in line with other leading international listing venues as well as its readiness to implement any future reforms and new features that may benefit the Hong Kong IPO market.