Hong Kong Stock Exchange

Hong Kong think tank calls for more incentives to promote city’s structured products market

Financial Services Development Council recommends incentives to encourage the introduction of discount certificates and bonus certificates

PUBLISHED : Wednesday, 19 April, 2017, 7:36pm
UPDATED : Wednesday, 19 April, 2017, 7:38pm

Government think tank the Financial Services Development Council issued a report on Tuesday recommending changes designed to maintain Hong Kong’s role as one of the world’s leading structured product markets.

The FSDC said it is encouraging Hong Kong’s market regulators to consider the introduction of discount certificates and bonus certificates in an attempt to offer a broader spectrum of different types of risk in investment products.

“There is considerable interest in issuance of these new products, especially by those investors looking for safe, small gains,” said Mark Dickens, a member of the FSDC. He estimates the growth potential of new structured products to be comparable to the existing unlisted equity-linked investment market of around HK$167 billion (US$21.5 billion).

In 2015 Hong Kong’s stock exchange recorded turnover of HK$6.34 trillion in listed structured products based on average daily figures, the highest in the world, according to FSDC data. Discount certificates and bonus certificates are permitted under the current regulatory regime and are already popular among retail investors in unlisted form through private and retail banks.

There is considerable interest in issuance of these new products, especially to those investors looking for safe, small gains
Mark Dickens, Financial Services Development Council

But issuance of these products has been hindered by a slow regulatory approval process and high costs, Dickens said. The large size of the market may have also led both regulators and market participants to rely on existing trading practises and overlook the need for improvements.

Consequently, listed structured products in Hong Kong are limited to two investment types – vanilla warrants and callable bull/bear contracts, both of which are highly traded and high risk.

Expanding the types of listed structured product could open up a valuable funding channel for companies while providing investors with a new venue to invest their money.

“By broadening the range of structured products listed on the exchange, it gives investors more investment choices that allow them to better navigate different market conditions,” said Ryan Wuebbels, executive director of the securities division at Goldman Sachs.

In its new report the FSDC recommends that the city’s stock exchange and Financial Supervisory Commission provide incentives to encourage use of the new products, such as reducing listing times from the existing six business days. It also supports lowering listing fees for first issuances, which are currently HK$60,000 for warrants and HK$18,000 for callable bull/bear contracts.

In comparison, the listing cost charged by Germany’s Deutsche Boerse, operator of the Frankfurt stock exchange, is 200 (US$213) per product, and also capped at an annual fee of 76,000.

The FSDC report noted that this means issuers in Germany with 300,000 to 400,000 products per year only pay listing fees of less than 1 per product. Products can also be listed quickly on the same day.

A handful of US and European investment banks are expected to promote discount certificates and bonus certificates in the market by increasing general education and communication in coming weeks or months, according to Dickens. However, it may take up to a year before Hong Kong’s regulators can take action on introducing the incentives because of staff shortages, he said.

“We are already offering such products in Europe and we see potential for the sector to grow in Hong Kong if the listing time and costs become more streamlined,” said Martin Wong, head of the exchange traded solutions business of BNP Paribas.

FSDC was established in January 2013 as a high-level government advisory body to engage with financial services industry, formulate proposals and map out a strategic direction for the development of Hong Kong as an international financial centre.