HONG KONG: Investment banking syndicates for debt and stock issuance in Hong Kong will have to be fixed earlier and brokers will have to disclose their fee structure to the regulator under new rules proposed by the markets watchdog on Monday.
The proposals from the Securities and Futures Commission (SFC) are intended to clarify the roles played by investment banks handling capital market deals to improve transparency.
They "set out the standards of conduct expected of them in bookbuilding, pricing, allocation and placing activities", the SFC said in a statement.
Banks build books as they take in orders for equity deals such as initial public offerings, or for corporate bond sales. The book is the basis from which bankers and their clients allocate shares or bonds to investors in each deal.
The SFC said sometimes companies would reward brokers for sourcing large numbers of orders, which would drive the price of an IPO or debt offering to a level that could not be sustained in secondary trading.
"There have been numerous examples ... where there were sharp declines in post-IPO share prices amidst thin liquidity, which some market participants attribute to these types of behaviour," they said.
"The industry is broadly supportive of the SFC's proactive intent to construct a more balanced market structure between the issuer, the underwriter and the investor in an effort to build a more sustainable listings regime in Hong Kong," said Lyndon Chao, the head of equities and post trade at industry body Asifma.
Under the proposals, the structures of banking syndicates working on deals will be set earlier to stop last-minute jostling to gain roles by banks that promise to bring large orders from potential investors. The division between fixed and discretionary fees for banks advising on deals will be set early and disclosed to the regulator.
The SFC said when substantial fixed fees were already allocated, brokers without a mandate had less incentive for brokers "swarm" order books at the last minute and bring in large price-insensitive orders.
Equity capital markets fees account for almost 40% of the Asian region's investment banking wallet, versus 25% globally, making it a hotly contested business. In Hong Kong alone, the fees were worth $1.19 billion in 2020, up from $996.2 million a year earlier, according to Refinitiv
At least one bank should be designated the overall coordinator with responsibility for handling the distribution of deals, the proposals said. Sponsors will still carry out due diligence before a company is listed and retain responsibility for assuring potential investors that its IPO prospectus is accurate.
The SFC plans to add the requirements to its Code of Conduct, by which finance professionals in Hong Kong are required to abide, it said, confirming a Reuters report from November.
A three-month consultation period is now underway.