Receiving Bank

HKMA recently released a new SPM titled "New Share Subscription and Share Margin Financing", which consolidates all of its previous guidelines on IPO and SMF. This blog summarizes certain important issues relating to receiving banks.

Major Risks of IPO to Receiving Banks:

• Reputation risk - A poorly managed IPO may lead to disruption of the receiving bank's normal business and operations.
• Operational risk - Breach of T&C of the Receiving Bank Agreement or any operational error may be liable to fines, claims or damages.
• Credit risk - Owing to the role in recycling application monies, the receiving bank incurs credit risk to other counterparties (mainly other banks) and even liquidity risk from their defaults.

Handling of IPO Applications by Receiving Banks:

• A receiving bank should arrange suitably trained staff to answer enquiries about an IPO. Enquiries relating to dealing in and advising on securities must only be answered by "relevant individuals" registered with HKMA.
• No unsolicited calls should be made to invite non-existing clients to subscribe for an IPO.
• White application forms that are pre-stamped with the company chop of any stockbroker should not be distributed.
• Sufficient white forms and prospectuses should be made available for distribution.
• If a bank is to act as a receiving bank for more than one IPO at the same time, measures should be taken to minimize operational errors.
• A receiving bank is usually required to hold the application monies in a New Issue Account on trust for the applicants through its nominee company, and transfer the refund monies to a Refund Account after share allotment.
• Security measures should be taken to provent misappropriation of IPO refund cheques, including partial disclosure of ID / passport no. on the refund cheques and verification of such no. before encashment of those cheques.
• Electronic refund is only available to eIPO applications.

The banking and securities industries of HK have experienced so many hot IPO exercises in the past decade. This SPM is definitely a good summary of those lessons.