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□ Our reporter Huang Ting
On July 18, the Shanghai Stock Exchange issued the Interim Measures for the Administration of Warrants of the Shanghai Stock Exchange. In order to facilitate market participants to better understand and use the Interim Measures, the Warrant Working Group of Shanghai Stock Exchange interpreted 12 important provisions and key clauses.
Definition and type of warrants
The definition of warrants in the Interim Measures reveals two main characteristics of warrants: (1) Warrants represent the contractual relationship between the issuer and the holder, and the rights enjoyed by warrant holders are obviously different from those enjoyed by shareholders in terms of the content of rights: that is, unless explicitly agreed in the contract, The warrant holder has no right to participate in the internal management and operational decisions of the underlying securities issuer and the warrant issuer; (2) The warrant gives the warrant holder a right of choice rather than an obligation. Unlike the warrant issuer's obligation to deliver the underlying securities or cash according to the agreement when the warrant issuer exercises its rights, the warrant holder can completely choose whether to exercise or not according to the market conditions, without any liability for breach of contract.
The Interim Measures cover different types of warrant products:
（1） According to the issuer, it can be divided into corporate warrants and covered warrants. Corporate warrants are those issued by the issuer of underlying securities, such as those issued by the issuer of underlying stocks (listed companies). Covered warrants are warrants issued by a third person (shareholders of listed companies or financial institutions such as securities companies) other than the issuer of underlying securities such as stocks. Considering the reality of market development, the Interim Measures do not stipulate the qualification conditions for a third person other than the issuer of the underlying securities of financial institutions such as securities companies as the issuer of covered warrants for the issuance of other covered warrants, except for the warrants issued for the purpose of resolving the split share structure.
（2） Based on the nature of the rights of the holders, it can be divided into call warrants (to purchase the underlying securities from the issuer) and put warrants (to sell the underlying securities to the issuer).
（3） With the exercise method as the standard, American style warrants that the agreed holder has the right to exercise within the specified period are American style warrants, while European style warrants that the agreed holder can only exercise on a specific expiration date are European style warrants.
（4） Based on the settlement method, it can be divided into real bond payment settlement warrants and cash settlement warrants. The settlement of actual securities payment is characterized by the transfer of the ownership of the underlying securities. The issuer must actually deliver or purchase the underlying securities to the holder. The cash settlement method is to pay the settlement difference only in cash without transferring the ownership of the underlying securities.
It can be seen from the above description that the Interim Measures fully consider various warrant schemes that may appear in the pilot reform of non tradable shares, and also reserve space for the Exchange to develop the warrant market in the next step. For example, the warrants issued by Baosteel Group in this split share structure reform are European style covered call warrants with real bond payment, which also reserves space for the next step development of the warrant market of the Exchange.
Issuance and listing review
According to the provisions of Articles 6 to 8 of the Interim Measures, the examination of the issuance of warrants will be completed by the Exchange and reported to the CSRC for record. The listing review of warrants is entirely the responsibility of the Exchange.
It should be noted that the issuance of corporate warrants is closely related to the issuance of stocks or bonds and involves financing activities. Therefore, the issuance of corporate warrants should first obtain the relevant approval of the CSRC before applying to the Exchange.
Conditions of underlying securities
The Interim Measures stipulate that stocks and other types of securities may be the underlying securities by way of enumeration. In view of the fact that the warrant market has just started, the Interim Measures only make clear provisions on the conditions for selecting a single stock as the underlying securities. The Exchange will make clear and improve the specific conditions for the underlying securities such as funds and a basket of stocks in a timely manner according to the needs of market development.
The high yield and high risk characteristics of warrant products determine that if the underlying stock does not have a considerable circulation scale, the price fluctuation and manipulation risk caused by the linkage between the underlying stock and the warrant price will be very huge. Choosing the stocks with large scale and strong liquidity as the underlying stocks is an important basis for active and stable warrant trading. In view of this, the Interim Measures put forward strict requirements on the qualification of underlying stock securities. What needs to be clear is that: first, the circulating stock index circulates A-shares. Second, the turnover rate is calculated based on the total market price, and the single day turnover rate=(the transaction amount of the underlying stock in the secondary market on the current day/the total market price) * 100%.
Listing conditions of warrants
Article 10 of the Interim Measures clearly stipulates the listing conditions of warrants, mainly including:
（1） Necessary terms of warrants: type of warrants ("call" or "put"), exercise price, exercise method ("European" or "American"), duration, exercise date, settlement method (real bond payment or cash settlement), and exercise proportion.
（2） The starting point for calculating the duration of warrants is the listing date, and the specific calculation can be carried out in days, months and years.
（3） The warrant issuer must provide a performance guarantee that meets the requirements.
（4） Performance guarantee of warrant issuer
Article 11 of the Interim Measures stipulates that the issuer shall provide performance guarantee for the warrants issued and listed on the Exchange. There are two types of guarantee, which can be selected by the issuer.
First, the issuer provides sufficient underlying securities or cash as performance guarantee through a special account opened with the clearing company. The Exchange will determine the amount of performance guarantee that the issuer needs to provide according to the specific circumstances, and require the issuer to complete the performance guarantee before the issuance of warrants. At the same time, the Exchange has the right to require the issuer to add performance collateral by adjusting the guarantee coefficient according to market conditions. The guarantee coefficient is a number between 0 and 1. At present, the guarantee coefficient of Baosteel warrants is 100%.
If the underlying securities or cash are used as guarantee, the issuer shall be obliged to ensure that the underlying securities or cash are free from pledge, judicial freeze or other rights defects.
Second, provide institutions recognized by the Exchange such as commercial banks as irrevocable joint and several liability guarantors for performance.
information disclosure
Information disclosure mainly includes two aspects: (1) various announcements issued by the warrant issuer in accordance with the relevant provisions to perform the obligation of information disclosure. In addition to the warrant issuance prospectus, listing announcement, indicative announcement of delisting and delisting announcement clearly specified in the Interim Measures, the Exchange will also require the issuer to timely release information such as exercise price adjustment and clarification of market rumors in the form of information disclosure content and format guidance according to market needs and in combination with the requirements of the split share structure reform, To improve market transparency and fully safeguard the interests of investors. （2） The list of the holders who can circulate each warrant and hold 5% or more of the number of warrants that can be circulated announced by the Exchange before the opening of the market every day.
Warrant transaction
Warrant trading is very similar to stocks, and is the same with stocks in terms of trading time, trading mechanism (bidding method), etc. The difference lies in:
（1） Minimum unit of declared price: different from the minimum unit of stock price change of 0.01 yuan, the minimum unit of warrant price change is 0.001 yuan. This is because the price of the warrant may be very low. For example, the price of the warrant may be only a few cents in the case of out of price securities. At this time, if the minimum change unit of the price is 0.01 yuan, it will be too large, because even if the minimum price unit changes, from the perspective of the range of change, it may cause significant fluctuations in the price.
（2） Limit on the rise and fall of the warrant price: At present, the rise and fall of the stock is limited by a proportion of 10%, while the rise and fall of the warrant are limited by the price of the rise and fall rather than the percentage. This is because the price of the warrant is mainly determined by the price of its underlying stock, and the price of the warrant often only accounts for a small proportion of the price of the underlying stock. The change in the price of the underlying stock may cause a large proportion of the change in the price of the warrant, thus making any prescribed limit on the proportion of rise and fall inappropriate. For example, the closing price of T day warrants is 1 yuan, and the closing price of underlying stocks is 10 yuan. On the T+1 day, the underlying stock rose to 11 yuan. Other factors are inconvenient. The warrant price should rise by 1 yuan, or 100%. According to the formula in the Measures, the price of the warrant is 1 ＋ (11-10) × 125%=2.25 yuan, that is, when the underlying stock goes up or down, the warrant has not yet gone up or down.
Warrant issuers and issuers of underlying securities are prohibited from trading warrants
The Interim Measures stipulate that the warrant issuer shall not trade the warrants issued by itself, and the issuer of the underlying securities shall not trade the warrants corresponding to the underlying securities. As warrants are highly leveraged products, small changes in underlying stocks will lead to large fluctuations in warrant prices. If the warrant issuer and the issuer of the underlying stock are allowed to buy and sell warrants, then the warrant issuer and the issuer of the underlying stock may affect the price of the underlying stock in some way, which may lead to substantial fluctuations in the price of the warrants, thus obtaining illegal gains and causing losses to ordinary investors.
Termination of Warrants
Article 14 of the Interim Measures stipulates that "the trading of warrants shall be terminated five trading days before the expiration of the duration of warrants, but the warrants may be exercised". The first five trading days here include the maturity date, that is, the maturity date is T day, and the warrant will terminate trading from T-4 day.
Exercise of Warrants
One of the main provisions of the Interim Measures on exercise is that "warrants purchased on the same day may be exercised on the same day. The underlying securities obtained on the same day may not be sold on the same day". The purpose of this provision is to maintain the interaction between the warrant price and the underlying stock, so that the characteristics that the warrant price is mainly determined by the underlying stock can be more effectively reflected. Of course, it is more ideal to allow the underlying securities obtained by the exercise on the same day to be sold on the same day. However, after comprehensive consideration of risk control and other factors, the Exchange has made the current regulations.
Settlement of warrant exercise
In terms of the method of exercise settlement, the Interim Measures stipulate both the method of cash settlement and the method of securities payment. In the cash settlement method, the settlement price of the underlying securities is very important for both the warrant issuer and the warrant holder. For this reason, the Interim Measures stipulate that "the settlement price of the underlying securities is the average daily closing price of the underlying securities ten trading days before the exercise date". In this way, the possibility of settlement price manipulation can be avoided to a greater extent. In addition, from the perspective of investor protection, the Interim Measures allow automatic payment of cash settlement and agency exercise of securities payment, and make corresponding provisions.
Fees for warrant transaction and exercise
Warrants are another innovative product in China's securities market. In order to encourage the development of this product, the Bourse considers giving certain preferential measures in terms of fees. The formulation of its transaction and exercise fees basically refers to the fund standards listed and traded in the Bourse. For example, the warrant trading commission shall not exceed 0.3% of the transaction amount, and 0.05% of the share transfer fee shall be paid to the registered company at the face value of the transferred shares when exercising.
The creation mechanism of warrants
The warrant price mainly depends on the underlying stock market price and its volatility, and its price should not be completely affected by the supply and demand relationship. When the market demand rises, there should be some mechanism to allow the supply of warrants to increase in due course, so as to stabilize the price boom. The mature overseas warrant market has used this "continuous offering" mechanism without exception. For this reason, Article 29 of the Interim Measures stipulates that qualified institutions can create warrants to increase the supply of warrants in the secondary market and prevent the price of warrants from soaring out of the reasonable price area. The Exchange will timely issue specific operation rules related to the creation.
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