The current IPO settlement process takes five business days for the issuers to settle and admit to trading. This process is risky for investors because it locks up subscription money while issuers are not trading their allotted shares in the secondary market. Furthermore, investors are exposed to market volatility during the "T+5" days. Hence, the current process is a necessary evil. However, this doesn't have to be the case.
Hong Kong's Stock Exchange (HKEX) is committed to speeding up the IPO settlement process. A concept paper issued by the HKEX proposes a new platform called the Fast Interface for New Issuance, or FINI. FINI will streamline the IPO settlement process, reduce transaction costs associated with IPO subscriptions, and mitigate market risk. FINI could also lead to shorter settlement processes.
FINI has proposed a new "T+2" IPO settlement timetable. The revised timetable begins 24 hours later than the timetable in the original concept paper. Therefore, IPOs with public offer book-closes on Monday, Tuesday, or Wednesday would price on Thursday morning. The revised FINI "T+2" IPO settlement timetable is listed in the table below. FINI is committed to introducing the "T+2" settlement timetable.
FINI retains the concept of pre-funding. However, CPs no longer need to transfer application funds to the issuing bank. They only have to transfer the funds to the designated IPO settlement bank. FINI also seeks to reduce potential counterparty exposure and concentration. These changes are intended to improve efficiency and speed the IPO settlement process. If you're looking for more information on how this process works, read on!
The DTC has its own risk management controls. These controls are released at 5:00pm eastern time and may include the use of a "Pending Transaction Account" (PTA). The PTA is reserved for pending transactions. The DTC may not process these transactions if the DTC is unable to verify the PTA data. However, transactions with a PTA indicator are processed after the PDA cutoff.
The process of establishing an IPO settlement account is relatively straightforward. Organizations interested in establishing a repo account should contact a Relationship Manager. Similarly, pledgee accounts at DTC follow the same procedures. The DTC will also provide individual reports of the settlement process. The final settlement figures are issued by the DTC's Settlement Department. Once these documents are completed, the settlement process will proceed. Then, the participants will be paid the money.
The T+2 settlement process will require prime brokers and clearinghouses to adjust their settlement timeline. The new settlement timeframe will require trade affirmations and disaffirmations to occur on a compressed timeframe. To meet this new deadline, the companies must provide the funds within two days of the trade date. However, this timeframe will be risky for both parties as it will be too short. It could also lead to systemic failure.
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