HKEX mulls platform to cut settlement time for IPO investors
- HKEX is seeking to lower the IPO settlement time to ‘T+1’, bringing Hong Kong in line with overseas markets
- Reform would face opposition from industry groups brokers that benefit from the current five-day settlement period
Hong Kong Exchanges and Clearing is seeking to revamp the settlement process for initial public offerings, introducing new efficiencies that will help bring the city’s stock market in line with its counterparts in the US and Europe, according to chief executive Charles Li Xiaojia.
Although the planning is still at an early stage, Li said the exchange is considering an electronic platform and methods to reduce the funds needed during the offer process.
Any changes to the offer process are likely to be controversial, however, as it would likely impact the income of banks, brokers and other parties involved in the IPO process.
Many investors who subscribe to Hong Kong IPOs prefer to file paper applications with an accompanying cheque, even though online services are available. The process can be labour intensive, requiring staff to handle physical forms, cheques, oversee refunds and distribute share certificates.
The manual processing is one reason the typical IPO takes five days to settle in Hong Kong, a system known as “T+5”, as shares in the city can only start trading five days after the share subscription period ends.
Many markets in the UK, US and continental Europe enable trading within one day of the close of subscription, a process known as “T+1”.
The mainland uses a separate IPO system which does not enable direct comparisons to Hong Kong, according to Li. He added that markets in the US and Europe that cater solely to institutional investors operate under the T+1 system, whereas Hong Kong allows institutional and retail investors to subscribe to IPOs.
“If we cut off the retail offerings, the IPOs process can be shortened to T+1 easily, but that is not the direction we opt for,” Li said.
He said the exchange would strive to short the settlement time to T+1 to reduce risks and shorten the period of time investors’ funds would be frozen.
There is going to have a lot of debates from different parties, Li said. “I hope the stakeholders could consider the change will benefit the public and Hong Kong market as a whole,” he said.
In January, the HKEX said it will terminate paper-based subscriptions in 2022, although the change will have limited impact in terms of speeding up the process.
“Only if the whole operating model of the IPO is to be changed can we achieve T+1,” Li said.
He said that a system where investors secured guarantees from their banks would eliminate the need to transfer funds in advance of share allocations.
Another solution would involve an electronic platform for information sharing, Li said.
Mike Wong Ming-wai, chief executive of the Chamber of Listed Companies of Hong Kong, said the HKEX’s plan would face opposition.
“The current model allows banks and brokers to offer margin financing for investors to subscribe to new shares, while the listed companies earn interest from the subscription money during the five-day settlement period,” Wong said.
Stockbrokers will be hard hit as margin financing is an important source of income, according to Gordon Tsui Luen-on, managing director of investment company Hantec Pacific.
“If the model will be changed in a way that investors would no longer need to borrow money or if they would only need the money for one day instead of five, the interest income will be cut substantially. It will hit the business of many brokers as IPO lending represents about 10 per cent of all margin financing,” Tsui said.
Hong Kong ranked as the second-biggest IPO market worldwide during the first quarter, trailing Nasdaq which hosted the blockbuster US$2.5 billion IPO by ride-sharing service Lyft in March.
Li said the HKEX listing committee has set up a task force to study aspects of the IPO process, such as requirements on pre-IPO investment, cornerstone investors, and share pricing flexibility.
The HKEX is also looking at extending trading hours for the futures markets to 3am from 1am beginning in the middle of June.
“The extension of trading hours on the futures market is in response to demand from the European and US investors,” Li said.
