HKEx eases fears over derivatives

PUBLISHED : Saturday, 24 September, 2011, 12:00am
UPDATED : Saturday, 24 September, 2011, 12:00am


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Investment banks will be banned from issuing warrants or other derivatives if their ratings fall below a certain threshold, Hong Kong Exchanges and Clearing said yesterday.

However, warrants already issued by such banks would be allowed to continue to trade but the issuers would need to continue to provide liquidity until the products expired, HKEx said.

Ratings agencies have expressed concern about the impact of the crisis in the euro zone on some banks.

HKEx requires an issuer to have one of the top three credit ratings from either Moody's Investors Service or Standard & Poor's.

At present, no issuers have dropped below this HKEx threshold, although some have been on the brink. HKEx's comments yesterday were made to clarify procedures if an issuer's credit-rating downgrade meant it was banned.

Brokers said the clarification would help ease investors' fears and prevent panic selling of warrants or derivative products issued by these issuers if a downgrade caused their removal as qualified issuers. Moody's last week cut the ratings of French banks Societe Generale and Credit Agricole by one notch, citing their exposure to Greek debt, although their ratings still fall within the HKEx criteria. The rating agency is also reviewing French bank BNP Paribas' rating.

The Securities and Futures Commission and HKEx meanwhile warned investors to pay attention to downgrade news.

'In light of the economic environment in Europe and the recent market volatility, the SFC and HKEx would like to remind investors holding uncollateralised structured products, such as derivative warrants and callable bull/bear contracts that they should pay close attention to the financial strength and creditworthiness of structured product issuers,' the two regulators said.

'Uncollateralised structured products are not asset-backed. In the event that a structured product issuer becomes insolvent and defaults on its listed securities, investors will be considered as unsecured creditors and will have no preferential claims to any assets held by the issuer.'

The collapse of Lehman Brothers in September 2008 left thousands of investors facing losses.