Hong Kong’s securities watchdog plans to publish market sounding guidelines by year end, revising its previous draft by cutting back on prescriptive rules following feedback from market participants, according to people familiar with the matter. 

The Securities and Futures Commission (SFC) guidelines will narrow their scope to mostly publicly listed securities and shift the burden for preventing the abuse of pre-deal confidential information largely to banks and brokers, said the people, who asked not to be named because the matter is private.

The regulator’s private conversations with brokers, investors and industry groups are ongoing, and the guidelines could be fine tuned further, the people added. A spokesperson for the SFC said it had engaged the industry in “further discussions in finalising its proposed guidance on market sounding”, and the final version is still under deliberation.

Regulators from the US to Asia have been cracking down on problematic sharing of confidential information prior to market-moving deal announcements. So-called market soundings help banks and companies gauge demand from investors before they launch stock or bond sales. Hong Kong is trying to prevent misdeeds while it tries to revive the city’s financial hub status amid geopolitical tensions and China’s economic slowdown.

The guidelines are also being ironed out as Hong Kong prosecutes an alleged insider dealing case involving one of the city’s high-profile hedge fund firms, Segantii Capital Management Ltd. 

The SFC had faced push back from the hedge fund industry and other market participants after it released a consultation paper in October 2023 on market sounding practices. That draft covered all non-public information and all securities, and would apply to both brokers and potential investors that are licensed in the city. 

One focus of the guidelines involves block trades, which are off-exchange sales of large chunks of shares in listed companies. The leakage of confidential information ahead of such transactions has given some market participants an unfair trading advantage over others. 

Brokers and investors warned that the earlier draft guidelines risked imposing undue compliance burdens on them, and could drive market sounding activities away from Hong Kong. 

The latest version limits what is covered under what the SFC now calls “sounding information”. It refers to confidential information entrusted by sellers or issuers to brokers, which is then shared with potential investors to gauge their interest and help determine deal terms. 

Any information shared before banks receive explicit consent from recipients for market soundings must be broad, vague and avoid names. The two sides will agree beforehand when the sounding information will cease to be confidential. 

The new SFC draft is more in line with the European Union’s Market Abuse Regulation. It also slashes brokers’ record-keeping requirements for such information sharing to two years, from the previously proposed “no less than seven years”, people familiar with the matter said. 

Though billed as guidelines, the SFC document would serve as a de facto new regulation, as firms and individuals that flout them could lose their licences to operate in the city. The final guidelines are scheduled to be published along with the conclusions of the public consultation, the people said. 

The regulator also intends to circulate its new guidelines with the International Organization of Securities Commissions, in hopes of bringing other regulators on the same page, the people added. 

Below is a summary of the key changes:

  - Bloomberg