HOSE announces new rules on covered warrants

An investor traces market fluctuations at the trading floor of Tân Việt Securities Joint Stock Company in Hà Nội. - VNS Photo Đoàn Tùng

According to HOSE, a covered warrants issuer shall maintain at least one employee managing risks concerning issues of warrants. The issuer shall sustain a quantity of underlying securities adequate to hedge risks against outstanding warrants.

Hedging transactions via an independent trading account shall be reserved solely for hedging activities or occur through the issuer’s proprietary trading accounts. The issuer’s hedging activities shall include sale, purchase, borrowing and other transactions according to the laws.

Securities traded in hedging activities shall consist of underlying securities and others based on underlying securities as per the law. Securities for hedging purposes shall be frozen during the exercise of warrants by delivering underlying securities.

Securities for hedging purpose cannot be used as a pledge, mortgage, deposit, loan or collateral.

The issuer shall be responsible for managing and independently recording the portfolio of hedging securities in accounting records. Moreover, it shall adhere to the hedging level specified by the Stock Exchange.

Upon the listing of warrants, the issuer shall report to the Stock Exchange on a daily basis about hedging activities. Such a report shall indicate the actual and theoretical hedging positions of each warrant according to regulations of the Stock Exchange. The Stock Exchange can request the issuer to explain the inputs of the calculation of the theoretical hedging position if such inputs are considered ungrounded.

The theoretical hedging position is calculated according to the risk prevention plan that the issuer has specified in a prospectus.

The actual hedging position is calculated according to the actual position in the issuer’s hedging account.

The calculation of the actual and theoretical hedging positions for each issue shall be subject to the guidance by the State Securities Commission.

If the issuer does not abide by the hedging plan, the Stock Exchange shall impose remedial measures.

HOSE will request the issuer’s explanation if the disproportion between the theoretical and actual risk hedging positions exceeds 20 per cent for three consecutive working days. In three working days, upon the Stock Exchange’s request of explanation, the issuer shall hedge risks to lessen the disproportion to or lower than 20 per cent.

The issuer will have to deposit a sum of money, at market price, equal to the disproportion of the theoretical and actual hedging positions if such a disproportion exceeds 50 per cent for 3 consecutive working days. In 3 working days, upon the Stock Exchange’s request of such deposit, the issuer shall put the sum of money into the proprietary trading account.

HOSE will issue a market-wide warning if the issuer does not hedge risks at the Stock Exchange’s request though having received a third request for explanation or if the issuer does not make the deposit.

The warning on a warrant shall be lifted after the issuer has maintained the disproportion between the theoretical and actual hedging positions at or less than 20 per cent in 30 trading days or after the issuer made the deposit.

On monthly basis, Stock Exchanges shall report to the State Securities Commission with regard to the situations of the issuer not abiding by the hedging plan.

When a market-wide warning is issued on the issuer, the State Securities Commission can lower the warrant issue quota of the issuer’s subsequent offering as per the State Securities Commission’s regulations.

Covered warrants, a new investment tool, will be allowed to start trading on the HOSE in late March. This will be the fourth product traded on 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.