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Nation drafts rules for new investment tool

(Shanghai Daily)
Updated: 2007-02-17 10:38

China is likely to allow its first-tier brokers to issue covered warrants for heavyweight stocks in the middle of the year as it acts to nourish the market with derivatives, industry insiders said yesterday.

Stock authorities are now drafting rules for the products, which would allow brokerages and other institutions to sell warrants based on the shares of public companies, according to people familiar with the matter.

Warrants are financial derivatives that permit holders to buy or sell a fixed number of shares to issuers at a pre-set price during a specific period.

China re-introduced warrants in 2005 as part of a compensation package offered by controlling shareholders to minority investors in a program to make all shares at domestically listed firms tradable.

Before that, regulators banned warrants for 10 years because they were being used for speculation and caused significant market volatility.

But as current regulations allow only big shareholders to issue free warrants to public investors in exchange for the right to float their locked shares, the supply lags demand, and trading irregularities occurred again last year.

"Bringing in covered warrants will help ease a supply strain," said a brokerage source in Shanghai. "Regulators have long considered such a move but are extremely careful about the need to contain risks."

Under the proposed arrangement, any listed firm whose shares are to become the underlying assets of covered warrants must have at least 300 million tradable shares with a minimum value of three billion yuan (US$387 million) in each of the previous 20 trading days.

In addition, the company must have had 25 percent of its total shares change hands in the past 60 trading sessions to demonstrate good liquidity, the sources said.

Only 20-odd top-level brokerage houses out of 120-plus mainland securities firms will be able to issue covered warrants in the initial stage, they said. The listed firms involved will likely be big-cap stocks, such as banks and steel makers.

As regulators now take a cautious attitude toward the launch of new derivatives, it might take months to finalize the rules, the sources said.

The official debut of covered warrants may come late in the second quarter, they said.

"That's a bit behind the original schedule as the market had widely expected covered warrants in the fourth quarter of last year," said a second source close to the regulator.

"But because the market began to stage a rebound after years of losses, derivatives will only be launched after regulators are convinced a risk-control mechanism is solid enough to curb trading irregularities."