Legal development

SFC released consultation conclusions on the proposed code of conduct on bookbuilding

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    In February this year, the Securities and Futures Commission of Hong Kong (SFC) published a consultation paper (Consultation) on the insertion of a new paragraph 21 in the Code of Conduct for Persons Licensed by or Registered with the SFC (Code). The amendments set out standards of conduct expected of intermediaries involved in bookbuilding or placing activities in either equity (ECM) or debt capital markets (DCM). Details of the Consultation were covered in our recent webinar, the slides for which can be found here. The conclusions (Conclusions) of the Consultation were published on 29 October 2021 and the revised Code will become effective on 5 August 2022. This briefing sets out a summary of the issues and clarifications covered in the Conclusions. 

    Scope of coverage

    The Consultation specified the types of activities and offerings that are intended to be caught under the proposed Code. 


    ✓ Offerings listed in Hong Kong

    For ECM transactions, the Code would regulate activities conducted in connection with an offering listed in Hong Kong.

    ✓ Activities conducted in Hong Kong

    ✓ Convertible and exchangeable bonds


    × club deals
    × private placements
    × pre-priced deals

    In respect of DCM, any bookbuilding or placing activities conducted in Hong Kong in connection with all types of debt offerings (except for club deals, private placements and pre-priced deals) will be considered in-scope.

    The SFC has clarified that convertible and exchangeable bonds would fall within the scope of DCM activities for the purposes of the Code.

    ✓ marketing
    The SFC has also clarified that marketing pursuant to bookbuilding activities would be captured.

    Practical steps to take now

    Although there is a nine-month transition period after gazettal of the changes, financial institutions who undertake ECM and DCM transactions should now consider:

    • whether to update house manuals to adopt the changes required in the Code; 
    • preparation of pro forma template documents in terms of appointment of their roles in future DCM and ECM transactions;
    • setting up governance processes in being able to assess the transactions undertaken and issuer diligence;
    • setting up robust record-keeping processes to ensure compliance with the requirements of the Code.

    Ashurst have a full service team of ECM, DCM, regulatory and compliance specialists in Hong Kong to advise financial institutions in terms of their compliance with the changes to the Code. 

    Proposed standards of conduct 

    We set out in the table below the key proposed requirements. While some of the proposals were well-received, market participants also sought clarifications on certain definitions and raised concerns on practical challenges and potential conflicts that may arise. We have also included in the table the SFC's response to those comments. 

    proposed requirementssfc's response
    Early Appointment and written agreement

    Overall Coordinators (OCs) and Capital Market Intermediaries (CMIs) should be appointed:

    • at an early stage
    • by written agreement
    • specifying roles and responsibilities and fee arrangements.

    This is applicable to ECM and DCM offerings.

    In the case of IPO transactions, the arrangements with OCs will have to be submitted to the SFC before the Listing Committee Hearing.

    Requirement refined for non-OC CMIs in IPOs.

    For IPOs: the SFC agrees not to require appointment of non-OC syndicate CMIs and the determination of their fees be reported to the SFC.

    This will provide flexibility for the issuer to appoint more syndicate CMIs at a later stage, as may sometimes be the case especially in smaller scale IPO as reflected in the comments received.

     Assessment of the issuer and the offering

    CMIs should take reasonable steps to:

    • obtain an accurate understanding of the issuer; and
    • establish a formal governance process to review and assess the offering.
     Requirements remain applicable.
     Advice to the issuer

    It was originally proposed that an OC should provide advice to the issuer on:

    (i) syndicate membership and fee arrangements;

    Requirement to advise on (i) removed (but new requirement for IPO OCs imposed).

    The SFC agrees that:

    • OCs will not be required to advise on syndicate membership and fee arrangements; but
    • in the case of an IPO, OCs will be required to provide guidance to issuers on market practices for the fee split ratio (currently 75% fixed and 25% discretionary).

    This is in response to reservations expressed by respondents about the potential conflicts of interest that may arise.

    (ii) marketing strategy; and

    (iii) pricing and allocation.

    Requirements to advise on (ii) and (iii) remain applicable.

    The SFC does not agree with some respondents' view that this requirement may create disincentive for CMIs to secure a higher price. It maintains that requiring OCs to advise the issuers on pricing and allocation would balance the interests of different parties and promote effective price discovery.

    The SFC clarifies that the issuer will still have the final say on price and allocation and OCs are only required to follow the marketing and investor-targeting strategy agreed with issuer and provide explanation where there are deviations from it.

     Rebates and preferential treatment

    A CMI should not offer any rebates to its investor clients or pass on any rebates provided by the issuer.

    There are also specific requirements on disclosure and prevention of differential pricing.

    Rebates may be offered by issuers to intermediaries but cannot be passed on to end-investors.

    CMIs are not required to police private banks' rebate arrangements.

    Private banks (as execution-only non-syndicate CMIs) are required to comply with the requirement not to pass on rebates to investor clients.

     Assessment of investor clients

    CMIs should take reasonable steps to identify:

    • in share offerings, investors subject to restrictions; or
    • in the case of debt offerings, investors with association with the issuer or a CMI or its group companies.

    OCs are no longer required to provide relevant information to CMIs.

    Instead, OCs are now required to advise the issuer of the information to be provided to the CMIs.

    Definition of "association" in the context of debt offerings clarified.

    The SFC agrees that it would be more direct and efficient for the issuer to disseminate relevant information to the CMIs for the purposes of identifying these investors.

    The SFC clarifies that in the context of debt offerings, "associated" investors are defined as investors who are directors, employees or major shareholders of the issuer, CMIs or their group companies.

     Transparency of the book

    CMIs have the responsibility to ensure that:

    • the price discovery process is credible; and
    • the order book is transparent and incorporates only bona fide orders.

    For orders placed on an omnibus basis, CMIs will have to disclose to OCs and the issuer information about the underlying investors.

    CMIs should not place knowingly inflated orders.

    X-orders are prohibited.

    Concerns over client poaching recognised.

    Scope of information on omnibus orders limited to client's name and identification number.

    Information can only be used for order allocation (and not for client poaching).

    No other exemptions granted.

    Suggestions for exemptions (for example for legitimate reasons such as orders from sovereigns and central banks and illegality) are not accepted by the SFC because disclosure of investor identity is considered fundamental to ensuring transparency during the bookbuilding process.

    For the same reason, the SFC does not accept suggestions that the order book should only be made transparent to issuers and maintains that OCs should disseminate material information related to the offering in a timely manner to all syndicate CMIs.

     Conflict of interest

    CMIs should:

    • disclose actual and potential conflicts of interest which may arise when the CMI has a proprietary interest in an offering; and
    • give priority to investor clients’ orders over its own proprietary orders.

    On what constitutes "proprietary orders", the SFC clarifies that:

    Orders from syndicate members’ asset management arms

    will not be considered proprietary,

    provided that the orders are placed on an arm's length basis with effective Chinese Wall controls in place;

    Orders from syndicate members’ trading desks
    will be treated as proprietary orders; and
    Orders from syndicate members’ treasury arms
    will be treated as proprietary orders.
     Record keeping

    OCs and CMIs must keep robust audit trail, including, among other things:

    • records of all orders and changes to the order book; and
    • key communications with and information provided to issuer and other CMIs and investors.

    No quantifiable definition of changes or information that have to be recorded.

    The SFC does not seem to agree with some respondents' view that this requirement would be burdensome. 

    We look forward to having a further discussion with you on the revised Code and how it would impact your business.