The corporate flag for Hong Kong Exchanges & Clearing Ltd (HKEX), right, and the Chinese national flag, left, fly outside the Exchange Square complex in Hong Kong, on Sept 16, 2019. (PAUL YEUNG / BLOOMBERG)

Hong Kong’s stock exchange is looking at speeding up the process of getting initial public offerings from pricing to trading, a move that would bring the world’s biggest listing market more in line with rival bourses.

Hong Kong Exchanges and Clearing Ltd will meet with brokers this week to discuss the proposal on cutting the IPO settlement cycle from the current five days, said people familiar with the matter, who asked not to be named revealing private deliberations. It will formally consult the market in the coming weeks if there are no major objections, the people said.

Among major global markets, Hong Kong remains the only place where IPO settlements take five business days. HKEx’s Chief Executive Officer Charles Li last year floated the idea of having just one settlement day to enhance the exchange’s appeal in luring big IPOs from New York

Among major global markets, Hong Kong remains the only place where IPO settlements take five business days. HKEx’s Chief Executive Officer Charles Li last year floated the idea of having just one settlement day to enhance the exchange’s appeal in luring big IPOs from New York. The talks come as Nasdaq Inc is tightening its rules to make it harder for Chinese mainland companies to list there.

The shares in the bourse gained 4.1 percent on Tuesday, the biggest jump in almost two months.   

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The delay in settling IPOs in Hong Kong, which saw HK$314 billion (US$40.5 billion) in such deals last year, has long been a headache for investors, but also for the city’s policy makers. Tying up pledged capital over a long period drains liquidity from the system, which drives up short-term interest rates and creates issues for authorities managing the city’s currency peg. Margin financing during big IPOs adds further pressure on liquidity.

But cutting the settlement time has faced skepticism from brokers and banks, who can make money by lending to investors during the period. Companies that are listing can also earn income off the pledged cash from retail investors.

“We are currently exploring a model that will modernize Hong Kong’s IPO settlement process,” HKEx said in a statement. “We will look to update the market on our proposals in due course.”

To cut the settlement time, the bourse is looking at building an electronic platform to connect parties together to speed up the flow of information, the people said. Considerations are also being made to make payments fully electronic, saving time by eliminating checks and accelerating the refunding of retail investors who weren’t alloted shares.

We are currently exploring a model that will modernize Hong Kong’s IPO settlement process. We will look to update the market on our proposals in due course.

HKEx

“A shorter settlement period would reduce the overall risks and uncertainty faced by issuers and investors with the added benefit of a shorter lock-up time of investor funds,” said Joelle Lau, partner-in-charge of Hong Kong at law firm Jones Day. “It’s a much anticipated change, which reflects a move away from the traditional reliance on paper forms in the Hong Kong IPO process.”

Alibaba Group Holding Inc’s US$13 billion mega listing last year, which was done fully electronically, was a good precursor for the coming changes, said Gordon Tsui, chairman of Hong Kong Securities Association. While quickening the settlement will reduce earnings for brokers, the prevailing low rates means such income is negligible anyway, he said.

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“Any reform needs good timing to push through,” Tsui said.

The new mechanism could also be a solution for yet another local problem, which involves retail investors placing orders with several brokers to boost the chance of snapping up shares in hot IPOs. Such a practice is banned by local listing rules, but there has been no penalty assessed in at least 13 years. A joint platform would limit the ability to arbitrage different brokers.

Edward Au, southern region managing partner and co-leader of the national public offering group at Deloitte China, said the planned changes to allow a faster refund will have a “positive impact” since investors will be able to subscribe to more IPOs when a number of issues are pricing around the same time.