Measures tightening controls on trading of the derivatives to take effect in June as watchdog seeks to protect investors The Securities and Futures Commission will introduce measures, including a ban on commission rebates given by issuers to brokers of derivative warrants, to avoid misleading the market. The measures to be imposed in June are among a six-point plan to tighten controls on warrant trading that were unveiled yesterday by SFC chairman Martin Wheatley. The measures increase curbs on brokers who act as market makers for warrants. Mr Wheatley said the regulator had decided to proceed with all the proposals made in November last year, after considering 27 submissions on the plans. Most supported the proposals, although opposition voices had prompted modifications to some of the measures. Hong Kong Exchanges and Clearing last night supported the new measures. The SFC targeted warrants after the instruments took hold among retail investors, half of whom the regulator found had lost money on trades they insufficiently understood. Hong Kong is now the largest derivative warrant market worldwide, with trades representing 20 per cent of overall market turnover. 'The proposals to ban commission rebates, facilitate further warrant issues and the issuance of new marketing guidelines are likely to progress first in June, followed by the proposals for appointing external liquidity providers and use of plain language maybe in September,' Mr Wheatley said. In December, after more consultation with the market, the SFC will introduce detailed rules for market makers to ensure that spreads they quote are reasonable and their response time to orders is quicker. Mr Wheatley said the commission investigated complaints from investors and found some cases which showed warrant market makers had quoted prices with excessive spreads. However, this still complied with terms in the listing document of the warrants. This prompted the SFC to introduce the minimum service levels to ensure the spread and response time should be reasonable. The SFC decided to ban commission rebates because it found that some warrants were traded by a small group of brokers and investors whose real intention in executing the transactions was to earn the incentives offered by issuers. 'This misled other investors into believing the warrants were heavily traded. A ban on the commission rebate will create a healthy warrant market with only genuine investors in the market,' Mr Wheatley said. He said those who violated this rule and those who continued to offer rebates would face penalties ranging from fines to a suspension of licences. Their conduct could also be referred to a market misconduct tribunal or to the courts. The SFC will also make it easier for issuers to relaunch warrants so that their issue time can be shortened from four to two days. They can also reissue a warrant when 50 per cent of the warrants in the first batch is sold, down from 80 per cent. The change is aimed at ensuring the market has sufficient supply of warrants so as to stabilise prices. In view of market opposition, the SFC will not ban issuers from using external brokers as market markers but they must report these activities.