Compliance: Theory and Practice in the Financial Services Industry
12B. Warrants
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Definitions |
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Who is the Issuer of a Warrant? |
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PDS Requirements |
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Confirmations |
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ASX Market Rules |
| CR r1.0.02(1) - Definition of Warrant | |||
| A warrant means a financial product: | |||
| (a) | that is: | ||
| (i) | a derivative under s761D; or | ||
| (ii) | a financial product that would, apart from the effect of s761D(3)(c), be a derivative for s761D, and is excluded by that section only because: | ||
| (A) | it is a security under paragraph (c) of the definition of security in s761A; | ||
| (B) | it is a legal or equitable right or interest mentioned in s764A(1)(b)(ii); or | ||
| (C) | it is a legal or equitable right or interest mentioned in s764A(1)(ba)(ii); and | ||
| (b) | that is transferable. | ||
In relation to (a)(ii)(A) above, s761D(3)(c) excludes from the definition of "derivative" anything that is a financial product listed in s764A (other than a derivative). Para (c) of the definition of "security" in s761A defines a legal or equitable right or interest in a share or debenture of a body to be a security and therefore a financial product captured by s764A(1)(a). CA s764A(1)(b)(ii) captures within the list of specific financial products a legal or equitable right or interest in an interest in a registered managed investment scheme (ie a managed investment product). CA s764A(1)(ba)(ii) similarly captures a legal or equitable right or interest in an interest in an unregistered managed investment scheme, other than one that is exempt (or if the scheme is operated outside Australia, one that if operated in Australia would be exempt) from registration under s601ED(1) (ie a wholesale managed investment scheme).
The effect of s761D(3)(c), therefore, is to exclude from the definition of derivative a legal or equitable right or interest in a share, debenture, managed investment product or interest in an unregistered wholesale managed investment scheme.
So the definition of "warrant" effectively boils down to a transferable derivative or a transferable legal or equitable right or interest in a share, debenture, managed investment product or interest in an unregistered wholesale managed investment scheme. You can think of this latter category as a derivative-like interest in a share, debenture, managed investment product or interest in an unregistered wholesale managed investment scheme.
This notion of transferability is central to the definition of "warrant" and what differentiates this category of financial products from futures and other derivatives. Futures and non-warrant derivates are not generally transferable. If you want to dispose of your interest in a futures contract or non-warrant derivative, rather than transfer it, you enter into an equal and opposite contract on the relevant market that has the effect of netting out, or cancelling, the original position. This is referred to as "closing out" the position.
| CR r7.9.07A Who is the Issuer of a Warrant? | ||
| (1) | This regulation applies in relation to warrants. | |
| (3/4) | If the financial product is entered into, or acquired, on a financial market through an arrangement made by a financial services licensee, or an authorised representative of a financial services licensee, acting on behalf of another person: | |
| (a) | the financial services licensee is not taken to be the issuer of the financial product; and | |
| (b) | the warrant issuer is taken to be the issuer of the financial product. | |
| (8) | In this regulation: warrant issuer, in relation to a warrant, means the person who determines the terms of the warrant, including the rights and conditions of the warrant, and is responsible for obligations owed under the terms of the warrant. | |
| CR r7.9.07A(1) and (2) Requirement to Have PDS for Warrants | ||
| (1) | This regulation applies in relation to warrants. | |
| (2) | S1010A of the Act [which excludes securities from the PDS disclosure regime in Part 7.9] is modified by adding after s1010A(1): | |
| (1A) Despite subsection (1), this Part applies in relation to a financial product to which regulation 7.9.07A of the Corporations Regulations 2001 applies.. | ||
The effect of this is to ensure that warrants that may also happen to fall within the definition of security in CA s761 are caught by the PDS disclosure requirements for financial products in Part 7.9 rather than the prospectus disclosure requirements for securities in Chapter 6D. There is a corresponding provision in the regs under Chapter 6D (r6D.5.01) that excludes warrants from the disclosure requirements in that Chapter.
| CR r7.9.07A(5) Modification of PDS Requirements for Warrants | ||
| The following information may be taken into account for s1013F: | ||
| (a) | information that is, or is required to be, disclosed to the market in relation to the underlying thing from which a warrant derives its value, including information published by a market operator in relation to financial products (including warrants and types of warrants) in the form of market data or educational material which is generally made available to the public by the market operator; | |
| (b) | other information that a market operator is required to disclose to the market, in accordance with the Act, including: | |
| (i) | information that was required to be disclosed to the market operator; and | |
| (ii) | information that the operator was required to disclose in order to meet its obligations under the Act; and | |
| (c) | information that is generally made available to the public by a market operator in relation to financial products, including information published about a warrant that is entered into or acquired on a financial market in the form of market data or educational material. | |
CA s1013F is the section which provides that information is not required to be included in a PDS if it would not be reasonable for a person considering, as a retail client, whether to acquire the product to expect to find the information in the PDS. The factors that can be taken account of for these purposes include the extent to which the product is well understood by the kinds of person who commonly acquire products of that kind as retail clients and the kinds of things such persons may reasonably be expected to know.
| CR 7.9.07A(6) and (7) - Ongoing Disclosure for Warrants | |
| (6) | A way in which the warrant issuer may notify a holder of a matter to which s1017B(3)(c) (continuous disclosure requirements) applies is by giving the relevant information to the operator of the financial market on which the warrant was entered into or acquired. |
| (7) | Part 7.9 of the Act applies in relation to a warrant as if the words "but not more than 3 months after, the change or event occurs" in item 1 of the table in s1017B(5) of the Act were omitted. |
ASIC has issued a Class Order CO 03/957, which addresses the inconsistent treatment of managed investment warrants, compared to the treatment of share warrants and stapled security warrants, under Part 7.9 of the Corporations Act. The class order harmonises the regulatory regime for warrants by removing the additional disclosure requirements that only applied to warrants over managed investment products under the Act.
| CR r7.9.63A(2) Confirmation of Purchases and Sales | |
| A transaction: | |
| (a) | that is not the issue of a financial product (other than a derivative that is not a warrant); |
| (b) | in which a financial services licensee deals in the financial product on behalf of the holder of the financial product; and |
| (c) | by which the holder acquires or disposes of all or part of the financial product; |
| must be confirmed by the financial services licensee. | |
| CR r7.9.63A(3) Confirmation of Issues |
| A transaction: |
| (a) to which CR r7.9.63A(2) does not apply; and |
| (b) by which a financial product is issued to a holder; |
| must be confirmed by the issuer of the financial product. |
The combined effect of the words in italics in CR r7.9.63A(2) and r7.9.63A(3) is that where a warrant is issued, the warrant issuer must confirm the transaction. Where a warrant is sold or purchased through a licensee then the licensee must confirm the transaction. (This is to be compared with the situation that applies for other derivatives - if a financial services licensee arranges the issue, purchase or sale for a client of a derivative that is not a warrant, then the licensee must confirm the transaction.)
| What is a Warrant? | |
| | A transferable option or other derivative issued by a third party issuer and listed by the ASX under Schedule 10 of the ASX Operating Rules |
| | Trading warrants - shorter dated (eg knock out warrants) |
| | Investment warrants - longer dated (eg instalment warrants, endowment warrants and structured investment products) |
Click here for a copy of the ASX Operating Rules Schedules. Click here for a copy of the ASX explanatory booklet for warrants: Understanding Trading and Investment Warrants.
Warrants don't include: (1) options to acquire a security or managed investment product by way of issue from the issuer; or (2) exchange traded options (ETOs) and contracts for differences (CFDs), which are standardised derivative contracts created and entered into under the trading rules of the Exchange.
| The Basic Features of Most Warrants | |
| | Issuer |
| | Underlying instrument - a security, share price index, commodity or currency |
| | Expiry date |
| | Exercise style American or European |
| | Exercise price |
| | Conversion ratio |
| | In some cases, barrier or cap levels |
| | In some cases, capital guaranteed |
| | Security for exercise covered or uncovered |
| | Settlement method deliverable or cash settled |
| | Transferability (see ASX OR Schedule 10.7) |
A warrant is said to be covered if the warrant issuer has placed the underlying instrument in a trust or similar custodial arrangement on behalf of the holder.
Warrants do not have standardised terms. Terms may vary significantly between different warrant types, between different series of the same type, and between different issuers. For each warrant series, the terms are specified by the warrant issuer in the offering circular.
| Market Making Obligations | |
| | Each warrant series must have an adequate and reasonable spread of holders (this is to ensure there is a liquid market for warrants). |
| | In most cases, the warrant issuer satisfies this requirement by providing an undertaking to ASX that it will maintain a bid on a continuous basis during the life of the warrant. |
| ASX OR Schedule 10.2 - Approved Warrant Issuers | ||
| Warrants may only be issued by: | ||
| 1. | An ADI under the Banking Act 1959 (Cth); | |
| 2. | A government; | |
| 3. | An entity that: | |
| | holds an AFS licence or a licence in another jurisdiction which makes it subject to adequate supervision of capital standards; | |
| | has an investment grade long term debt rating from an acceptable ratings agency; | |
| | has sufficient NTA in the opinion of the ASX to support the proposed issue; and | |
| | is acceptable to ASX; | |
| 4. | An entity guaranteed by an entity referred to in 1, 2 or 3; | |
| 5. | An entity issuing fully covered warrants that is otherwise acceptable to the ASX; or | |
| 6. | An entity accepted by ASX and not objected to by ASIC. | |
| ASX OR Schedule 10.6 Warrant Issuer Reports | |
| A warrant issuer must: | |
| | immediately notify ASX of any information which, if not disclosed, might lead to the establishment of a false market in its warrants or that would be likely to materially affect the price of its warrants (ASX OR Schedule 10.6.3); and |
| | except in the case of fully covered warrants, lodge a statement of assets, liabilities and equity within 75 days of the end of the half year (ASX OR Schedule 10.6.6 and Procedure 10.6.6) and, in all cases, its printed annual report with the ASX within 3 months of year end (ASX OR Schedule 10.6.5 and Procedure 10.6.5). It must also make a copy of its annual report available to warrant holders on request (ASX OR Schedule 10.6.7). |
These reporting obligations also apply to any guarantor of the warrant issuer.
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