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The launch of the FINI system on the Hong Kong Stock Exchange has three major effects on Hong Kong stocks

Starting from November 22, 2023, the Hong Kong Stock Exchange's FINI system will be officially launched. All Hong Kong stock IPOs will be processed through FINI, and the opening of new markets for Hong Kong stocks will enter a new stage as a result.

Seeing this, you might have these questions:

What is FINI? How does FINI work?

More importantly, what impact does FINI have on Hong Kong stocks

Let's take a look at these questions.

1. What is FINI? What is the operating mechanism?

FINI (Fast Interface for New Exchanges) is a new platform for issuing new shares launched by the Hong Kong Stock Exchange. It is also an electronic settlement system. What is it for? For the Hong Kong Stock Exchange, the purpose of launching this system is mainly to shorten the IPO settlement time.

According to the old system, after the Hong Kong stock IPO was completed, it took a long time for the IPO to be distributed and funds settled, and it took 5 trading days to go public. Compared to that, the US stock IPO process is much simpler. Once the IPO is completed and pricing is completed, it can be listed on the next day.

The disadvantages of long settlement periods are obvious. First, capital was taken up. During the IPO period, IPO funds were all frozen, affecting the efficiency of capital utilization. More importantly, newcomers are forced to endure market fluctuations of up to 5 days after the subscription is over and before the listing transaction, which increases the risk of IPO subscription as a result.

Because of this, the previous IPO settlement process was widely criticized, and the Hong Kong Stock Exchange felt pain. After a long period of preparation, the new FINI settlement system was finally launched. After simplifying the IPO settlement process, it has now been shortened to two days. The details are shown in the following figure.

(1) There is no change in the prospecting period. Generally, it is still 3.5 working days.

(2) In the past, IPO pricing was generally on the day the prospection ended, but now it has been changed to one day after the prospectus closing date (T-1), and the pricing date is defined as T-day.

(3) One business day after the pricing date, that is, T+1, is a dark market. One more business day after that, T+2 is officially listed.

2. How much impact does the FINI system have on the launch of new Hong Kong stocks?

So, after the launch of FINI, what impact will it have on the opening of Hong Kong stocks? It is mainly reflected in 3 points.

The first point is to drastically reduce the cost of financing interest.

As far as opening new shares are concerned, for new shares that they are optimistic about, or for subscribing to popular stocks that are very popular, many people may consider using bank financing provided by brokerage firms, so they can subscribe for more new shares, which in turn increases the winning rate.

However, using financing requires interest costs, and the longer the financing period, the higher the interest costs. Under the old settlement system, interest accrual usually starts on the day the prospectus closes and ends the day before the dark market. Since the settlement period is as long as 5 days, the entire interest cycle is also relatively long, usually around 6 days.

Well, under FINI's new settlement process, if the interest accrual rules remain the same, the entire interest cycle becomes two days (prospectus closing date and pricing date), and in a few cases it is 4 days (if the period spans a weekend). In the case of not spanning weekends, as shown in the following figure.

In other words, under the FINI system, the new interest calculation cycle for financing has changed from about 6 days to 2 working days, and the average financing cost has been reduced by more than half.

What kind of concept is this? Let's take an example to illustrate.

If an investor subscribes for an IPO for an amount of HK$5 million (Group B), of which 500,000 is used for principal and 4.5 million for bank financing, it is assumed that the financing interest rate is 3.98%. If interest is accrued for 6 days, the interest cost is approximately HK$2,944, while if interest is accrued for 2 days, the interest cost is only HK$981, which is only 1/3 of the original cost.

You think this is the end of the money-saving game? NO! If a certain IPO is very popular, the financing subscription may even be directly waived of interest. What's going on with this again? It is also a benefit of the new FINI system rules.

In the previous settlement system, no matter how much money you purchased, you needed to freeze how much money you needed to freeze. However, according to the regulations of the FINI system, for IPO funds, only the amount of the winning bid needs to be frozen, not the entire purchase capital. However, for bank financing subscription amounts that have not been frozen, interest may be reduced.

What does that mean? Let's continue with the example we just explained. Investors finance the subscription of a certain IPO of 5 million (Group B head). There are the following three types of IPO subscription popularity situations:

(1) The subscription was very deserted, and the winning rate was 100%. How much did investors buy and how much did they win. Well, all of the 4.5 million financing used by investors was frozen due to winning the deal.

(2) There is a certain level of subscription popularity, and the winning rate for Group B is 10%-100%. Assuming 50%, then the investor's bid amount is 2.5 million. Excluding 500,000 of their own funds, they only need to freeze 2 million bank financing.

(3) Subscriptions are very popular, and the winning rate for Group B is less than 10%. Well, investors won less than 500,000 of their own funds, so there is no need to freeze bank financing. In case (2) (3), the investor's financing interest may be partially or fully reduced depending on the circumstances of the frozen funds. The details depend on the brokers' fee policy.

The second point is to drastically reduce market risk during the IPO period.

In addition to reducing financing costs, another benefit of the new FINI system is that it can reduce market risk. In the past, there were 5 trading days between the end of the IPO and the dark market. For this long period of time, if the turmoil in the Hong Kong stock market intensifies, or if companies in the same industry experience a sharp decline during this period, it may have a huge impact on the performance of the IPO after listing.

Now, judging from the flow chart below, from T-1, when the offering ends, to T+1 for the dark market, the period is only 3 trading days (T-1/T/T+1), so the market risk exposure for IPO is relatively much less. Investors can focus more on the risks of the IPO itself rather than market risks.

The reduction in market risk may have a significant impact on the position management of new hires, especially those that are relatively professional. When it comes to rookies, the greater the risk, the more careful you need to be in position management. Well, now, while waiting for a dark market or listing transaction, the market risk exposure time has been shortened, so during position control, it may also be appropriately relaxed.

Third, multi-account subscriptions may be withdrawn from history.

If investors purchase the same IPO from different brokerage firms, it is a multi-account purchase. Repeated purchases from multiple households are never permitted. This is clearly stated in the listing rules prepared by the Hong Kong Stock Exchange.

However, in the past, there have been technical difficulties in reviewing multi-household subscriptions. Therefore, just as traffic light rules cannot stop pedestrians from running through red lights, the phenomenon of multi-household purchases has objectively existed before.

Today, the Hong Kong Stock Exchange's FINI system has made checking multiple accounts a very simple matter. Because every investor has opened no matter how many accounts they have opened, the FINI system will identify the investor's personal information through this identification code, which in turn will identify potential repeated subscriptions. The specific processing rules are shown below.

To make it easier to understand, let's use the analogy of driving a car. As soon as you run through a red light, the system can locate you through your license plate and issue a ticket for you.

However, if an investor has purchased the same IPO from different brokerage firms, then after the subscription is closed, these subscription orders will be identified and marked, and will not enter the lottery list. Even if the final IPO winning rate is 100%, these repeated subscriptions will be turned away.

Finally, let me summarize:

The FINI system is a new platform for issuing new shares launched by the Hong Kong Stock Exchange. The purpose of its launch is mainly to shorten the IPO settlement cycle.

For investors participating in the launch of new Hong Kong stocks, the launch of the FINI system has had three major effects:

First, drastically reduce financing costs. The average number of days that interest is accrued on financing may be reduced from 6 days to 2 days. At the same time, if the brokerage firm exempts interest, there is an opportunity for interest costs to be completely eliminated.

Second, reduce the risk of market fluctuations. The exposure time for IPO positions was reduced from 5 days to 3 days, and the risk of market fluctuations during this period was relatively reduced.

Third, put an end to multiple households technologically. The FINI system can identify repeated purchases with one click. Repeated subscriptions do not enter the lottery process.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.