Real-time disclosure – Is Hong Kong ready?
The Securities and Futures (Amendment) Ordinance, enacted earlier this year, requires listed companies to disclose price-sensitive information ‘as soon as reasonably practicable’ to the public. One rather significant ‘practical’ impediment to speedy disclosure, however, is listing rule 2.07C(4) which prohibits the publication of company announcements, with limited exceptions, during share trading hours. The HKICS seeks your views on how to facilitate real-time disclosure in Hong Kong.
Regulators in Hong Kong have made very clear their desire for Hong Kong listed companies to move towards the ‘continuous disclosure’ of price-sensitive information (PSI). Hence the enactment of a statutory requirement earlier this year for a listed company to disclose any ‘inside information’ to the public ‘as soon as reasonably practicable’ after such information has come to its knowledge.
This would seem to bring Hong Kong in line with global trends. In all of the major jurisdictions around the world, listed companies are expected to notify the market on a continuous basis of any information that is likely to have a material effect on the price or value of their securities. In most cases that means on or near real-time disclosure of PSI. In Hong Kong, however, companies are often prevented from making real-time disclosures for several hours because main board listing rule 2.07C(4) prohibits the publication of company announcements, with limited exceptions, during share trading hours.
Publish and be damned
This problem is not new. Back in September 2007, Standard Chartered found itself in a compliance dilemma which has become increasingly common for companies with dual listings in Hong Kong and overseas. Its disclosure obligations in the UK required it to release PSI as soon as possible. Its disclosure obligations in both Hong Kong and the UK required it to ensure the information was released simultaneously to all of its shareholders.
These two obligations came into a head on collision due to listing rule 2.07C(4) which prevented it from publishing the information to its Hong Kong investors during Hong Kong’s share trading hours.
In the circumstances the only way out of this dilemma for Standard Chartered was to apply for a waiver from rule 2.07C(4). This waiver was granted and has since been granted to the five other companies dually listed in Hong Kong and the London Stock Exchange (LSE) – HSBC Holdings, Standard Chartered, Prudential, Glencore International and Kazakhmys – but Hong Kong Exchanges and Clearing (the Exchange), along with the Institute and other market participants, has been eager to find a more permanent solution to the problems arising from this rule.
The HKICS has been lobbying the Exchange for some time on the issue of real-time disclosure and the problems associated with listing rule 2.07C(4). Apart from the compliance dilemma highlighted above, the Institute’s main concern is that rule 2.07C(4) requires listed companies to hold back information until one of the permitted publication windows (that is, before trading hours, during lunch time and after trading closes). This is an impediment to real-time disclosure and increases the potential liabilities of listed issuers since there is always the danger that the information may leak.
While the company can request a suspension of trading in its shares to avoid this problem, the Exchange may or may not allow such a suspension as listed issuers are supposed to be responsible for maintaining the confidence of the information. Moreover a suspension to trading causes significant disruption to the market.
A proposed solution
Many of the Institute’s arguments have been accepted by the Exchange for some time. The Exchange is aware that Hong Kong lags behind international best practice on real-time disclosure – it is one of the only developed jurisdictions that does not allow PSI announcements throughout the day. But the devil, as they say, has been in the detail. The Exchange has been reluctant to permit PSI announcements during trading hours because they want to ensure that investors have time to absorb and react to the information provided.
As far back as March 2002, the Exchange consulted the market on allowing listed companies to publish announcements during trading hours. This was the consultation which paved the way for listed companies to publish their announcements on the Exchange’s website and abolish paid advertisements. A majority of the respondents supported the release of PSI announcements during trading hours. Until this year, however, the Exchange maintained the status quo due to its own and market concerns that permitting PSI announcements during trading hours would leave investors, particularly retail investors, with very little time to react to these announcements.
The Exchange’s solution to this conundrum came in July this year with the publication of a consultation paper proposing to permit listed companies to publish PSI announcements on the HKExnews website during share trading hours provided there is a short halt in trading of the company’s shares to enable investors to digest the contents of the announcement.
‘Given today’s technology, the status of Hong Kong as an international financial centre and the increasing globalisation of share trading, there is a clear need for the dissemination of listed issuers’ announcements to be more timely and for the duration of any break in trading to be kept as short as possible,’ says Mark Dickens, HKEx’s Head of Listing.
The Institute broadly supports publication of price sensitive announcements during trading hours and in the interest of the market, keep suspension to the absolute minimum, but is eager to solicit the views of HKICS members on the issues raised.
Are ‘trading halts’ the answer?
Permitting the publication of PSI announcements during trading hours will solve many of the problems highlighted above. The Exchange is now consulting on a short trading halt of a minimum of 30 minutes but up to two days on application of the issuer. Under the current arrangements, a suspension in trading means that trading can only be resumed, at the earliest, in the next trading session following publication of the announcement.
The intent is that this system would allow PSI to be disseminated and assessed by the market in a much more timely manner, and price discovery would occur as soon as possible after all material information relevant to a security’s value has been released.
However, are trading halts the best solution available? Should Hong Kong adopt a model for the publication of PSI announcements without any halt in trading, as is the current practice in the UK? The Exchange points out that the investor demographic in the UK is different from that in Hong Kong, and it fears that such a system may put retail investors at a disadvantage. The release of real-time information means that investors need to access information quickly. While the technology to alert investors to any PSI announcements already exists and is widely available in Hong Kong (for example investors can subscribe to ‘e-alerts’ both from specific listed issuers and the HKExnews website), not all retail investors have signed up for them. The Exchange believes that trading halts will give investors more notice that an announcement has been made and more time to evaluate the information.
How will the new arrangements work in practice?
In principle the trading halt system may seem to be quite straightforward – trading is halted, the issuer publishes its announcement, trading resumes – but there are, inevitably, a number of practical issues which need to be considered.
What should be the minimum trading halt period?
The Exchange proposes to halt trading for at least 30 minutes after the PSI announcement is published. To facilitate price discovery, the Exchange also proposes a 10-minute single-price auction for the relevant shares and structured products upon the lifting of the trading halt. It adds that there should be at least 20 minutes of continuous trading after the auction, this would mean that the latest trading resumption would have to be at least 30 minutes before the end of the trading day (that is 3:30pm on a normal trading day). The Exchange further proposes that any trading resumption will take place on the quarter hour or the half hour.
What should be the maximum trading halt period?
Sometimes the trading resumption may be delayed while the company gathers information, so the issue arises of when a trading halt should be considered a suspension? The Exchange proposes to consider any trading halt that continues for two days as a suspension.
Where should the PSI announcement be made?
Companies will be required to make their PSI announcements on the HKExnews website. The Exchange proposes to provide information on those securities subject to a trading halt on a separate information page of its HKExnews website. ‘We will disseminate the required information (for example, time of trading halt imposed, time of lifting of trading halt, etc) in a separate information page on the HKExnews website as soon as we receive the same from issuers to ensure timely access by market users,’ the consultation states.
Should existing orders be purged?
The Exchange proposes to purge all outstanding orders, including orders for the company’s shares and any related structured products, in the securities and derivatives markets at the time of the trading halt. The Exchange’s trading system has already been enhanced to handle the suspension and resumption of an underlying stock and its related derivative products simultaneously. In the derivatives market there would not be a mid-session auction (described above) for stock options/ stock futures. Trading of related stock options and stock futures will resume upon the completion of the midsession auction for the underlying shares.
Should companies be able to request a trading halt for results announcements?
Results announcements can currently only be published outside trading hours. The Institute has raised with the Exchange its concern that the lunch time publication window (which is the most common timeslot adopted by issuers for the publication of results and which this year was shortened to 30 minutes) may not provide sufficient time for companies to publish their results announcements. The Exchange’s consultation proposes that results announcements should continue to be published outside trading hours as far as possible, but it adds that it may grant a trading halt for the publication of results announcements during trading hours where justified.
Should the existing arrangement for non-PSI announcements remain unchanged?
HKEx proposes that the existing arrangement for non-PSI announcements to be published outside trading hours should remain unchanged.
Should the waivers currently in place continue to apply?
As mentioned above, five companies with dual UK and Hong Kong listings have waivers to publish PSI announcements without a trading halt – should these waivers survive the introduction of the new rules?
How much lead time is needed to prepare for the implementation of trading halts?
The Exchange’s consultation paper seeks views on whether three or six months would be sufficient lead time for the market to prepare for the new arrangements.
The HKEx consultation paper on trading halts is available on the HKEx website (www.hkex.com.hk). The deadline for responses is 8 October 2012.
Many thanks to April Chan, Technical Consultation Panel chairman and Immediate Past President of the Institute, together with Mohan Datwani, the Institute’s Technical and Research Director, for their help in preparing this article.
SIDEBAR: Make a difference
With the Exchange’s new consultation on implementing trading halts it looks like we might finally be seeing the end of Hong Kong’s prohibition against PSI announcements during trading hours. This prohibition has been a major headache for Hong Kong company secretaries, particularly those working for companies with dual listings overseas.
The Institute became first became involved in this issue when many members voiced concerns about the problems associated with listing rule 2.07C(4). The issue was subsequently taken up by the Institute’s Technical Consultation Panel (TCP) and Institute representatives have repeatedly highlighted the need for Hong Kong to facilitate real-time disclosure of PSI with the Exchange.
The Institute can therefore take some credit for the new proposed reforms – in fact the Exchange’s consultation paper acknowledges the Institute’s contribution to this debate. This demonstrates the value of member involvement in the issues relevant to company secretarial practice in Hong Kong, and the Institute is keen to engage HKICS members in this and other topical debates. If you have any views on the questions raised by this article, you can get in touch with:
- HKICS Technical & Research Director Mohan Datwani by email: email@example.com; or by phone: +(852) 2881 6177, or
- CSj Editor Kieran Colvert by email: kieran@ ninehillsmedia.com; or by phone: +(852) 2982 0559.
In addition, your comments and views on topical issues are always welcome on the Institute’s blog: www.governancemaze.org