Covered warrants trading to start in September

Covered warrants, a new investment tool, will be allowed to start trading on the HCM Stock Exchange this September.

This will be the fourth product traded on the HCM City’s bourse, together with stocks, bonds and fund certificates.

The new product is expected to provide investors with more investment and hedge options, while helping draw foreign investments as there is no cap on foreign ownership of this product.

Covered warrants, issued by a securities company, allow the holder to buy (call warrant) or sell (put warrant) the underlying stock (including shares, bonds or other securities) at a specific price on or before a pre-determined date.

At a meeting last week, Nguyen Dich Thanh, deputy director for the product research and development division at the HCM Stock Exchange, said the bourse had launched a trial in late April.

In the next four months, the exchange would complete the legal framework for support issuers (securities firms) in testing the trading system and issuing documents, Thanh said.

Covered warrants, just like other options products, have potential larger capital gains/losses because of the difference between the exercise price and the stock price. However, investors must also take certain risks of default from issuers if they suffer financial stress.

To mitigate risks, Circular 107 on the sale and trading of covered warrants by the Ministry of Finance, which took effect January 1 this year, set conditions under which an underlying security may have warrants and responsibilities of the issuance organization.

The underlying stocks must be listed on a stock exchange and meet criteria in terms of market capitalization, liquidity, free float and business performance of the issuer. The stocks must also not be under “special control”, “suspended from trading” or “soon to be delisted”.

Securities companies which want to issue covered warrants must satisfy conditions including charter capital and equity capital of at least VND1 trillion (roughly US$44 million), no cumulative losses and fully licensed securities operations. They are not being suspended and in the process of consolidation, merger or dissolution and their audit financial statements has no exceptions.

The development of covered warrants is designed to prepare investors and derivatives market for more complicated products, including options.