Nearly 50% of firms not yet ready for new SFC bookbuilding requirements

Forty-four percent of brokers and investment bankers said that they have more work to do to fully implement the new Code of Conduct for bookbuilding and placing activities in ECM and DCM transactions.

The proposed code will come into effect on 5th August 2022. The SFC expects all firms to roll out new policies and procedures, processes and controls by then. When we polled the audience at a recent Bovill webinar, asking whether they were ready to meet requirements, 28% said they had more work to do and 16% said that they were only half way there.

What the SFC expects

The SFC has now defined a capital market intermediary (CMI) as any intermediary licensed or registered under the SFO which engages in the bookbuilding, placing activities or advising, guiding and assisting the issuer client in those activities.  Those CMIs acting as the head of the syndicate are designated as overall coordinator (OC).

The proposed Code sets out the standards of conduct expected of CMIs, covering a wide spectrum of activities, including bookbuilding, allocation and placing to address issues including inflated or opaque demand, preferential treatment and rebates, etc.

There are five key areas that CMIs should focus on in order to be compliant with the new regulations. These areas include appointment, management of order book and allocation, record keeping, handling conflict of interest and having adequate resources, systems and controls in place.


The proposed Code now requires that syndicate membership and fee arrangements be determined at an early stage and formal appointments of CMIs through written agreements to enhance accountability amongst syndicate CMIs and discourage undesirable behaviours.

The syndicate CMI (including OC) should be appointed by the issuer under a written agreement before it conducts any bookbuilding or placing activities. The written agreement should clearly specify, among other things, the fixed fees to be paid to that syndicate CMI.

Firms should perform a full assessment of their roles as intermediaries in ECM and DCM transactions and assess how the new regulations could affect them as well as to prepare and update their appointment documentation.

Order Book and Allocation

A CMI should take reasonable steps to ensure that all orders (including indications of interest) placed in an order book represent bona fide demand of its investor clients, itself and its group companies and make enquiries with them about orders which appear unusual.

It should ensure transparency in the bookbuilding process and disclose the identities of all investor clients in an order book.

There are additional requirements for OC on pricing and to ensure that the proprietary orders of CMIs or their group companies and the orders placed by associated investor clients will not negatively impact the price discovery process.

A CMI should establish and implement an allocation policy to ensure a fair allocation of shares or debt securities to its investor clients and prevent any practices which may result in the unfair treatment of investor clients or knowingly distort the demand for other share or debt offerings.

In the case of an IPO, allocation recommendations should also ensure that allocations to restricted investors comply with the Stock Exchange of Hong Kong requirements and be made with a view to achieving an open market and an adequate spread of shareholders.

Firms are advised to conduct a gap analysis of existing policies, procedures, systems and controls to check any updates need to be made to their bookbuilding and allocation activities.

Record keeping

A CMI should also set up robust record-keeping processes to ensure that it maintains books and records which are sufficient to demonstrate its compliance with all applicable requirements.

Conflict of interest

A CMI should establish, implement and maintain policies and procedures to: (i) identify, manage and disclose actual and potential conflicts of interest which may, for example, arise when a CMI serves both the interests of its issuer client and investor clients or serves the interests of its investor clients when having a proprietary interest; and (ii) to govern the process for generating proprietary orders as well as making allocations to such orders.

It is advised that a CMI should establish a formal governance process to review and assess the offering, including any actual or potential conflicts of interest between the CMI and the issuer and the associated risks by, for example, updating its conflict of interest policy and register.

Resources, systems and controls

A CMI is expected to maintain sufficient resources and effective systems and controls to ensure that it can discharge its obligations and responsibilities including having Chinese walls to prevent the flow of information which may be confidential or price sensitive between staff performing different activities and to prevent and manage any conflicts of interest which may arise.

A CMI should exercise due skill, care and diligence in the selection and appointment on non-syndicate CMIs and should conduct independent surveillance and monitoring on a regular basis to detect irregularities, conflicts of interest, leakage of price sensitive or confidential information about the issuer client and potential non-compliance with applicable regulatory requirements.

It is recommended that firms should review their Chinese wall policies, prepare risk assessment templates for different orders and ensure they have an effective surveillance and monitoring system and incident management and reporting policy to ensure that any issues identified are reported to independent control functions for follow-up action and being escalated to senior management as appropriate.

How we can help

Bovill has extensive experience in designing and implementing compliance frameworks for primary markets. We can assist you in preparing for the new Code of Conduct by:

  • Conducting a gap analysis between current practices and the new Code of Conduct
  • Reviewing recent transactions, to identify any current practices which may fall foul of the SFC requirements
  • Developing compliant policies and procedures, governance process on transactions
  • Updating issuer due diligence process
  • Training staff on the new requirements and global best practice.