Answer:
(a)
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(b)
An active derivative market is a positive feature and a natural development of a sophisticated financial market as long as the risk management systems and the regulatory aspects involved have been fully addressed. Warrants and derivative warrants provide companies alternatives for raising capital. They also add to the range of products available to the investing public, and are useful instruments for hedging and spreading risks.
There has been growing demand from retail investors for derivative warrants in particular. The trend is indicative that warrants have provided them access to certain securities which used to be the preserve of institutional investors and high net worth individuals.
Hong Kong's warrants and covered warrants market is now relatively mature and is one of the most active in Asia. Studies by academics and market professionals have indicated that the introduction of derivatives has not affected the trading volume of the underlying securities or increased their volatility. While there is evidence of futures-induced short-run volatility, such as that occuring on futures contract expiration days, such volatility does not appear to carry over to longer periods of time. On the contrary, since warrants have a limited life, transaction volumes would be increased when new warrants are replaced or re- issued after expiration of the old warrants. In general, the development of the market has helped to consolidate Hong Kong's position as a premier regional financial market.
There is a comprehensive set of rules governing the listing and trading of warrants and covered warrants. These rules aim at ensuring the quality and independence of the issuers, the appropriateness of the underlying shares for the issue of such warrants, and the number of warrants that may be issued on particular securities. For example:
Issuers or guarantors must be of suitable financial standing with net assets of over $1 billion if regulated by specified bodies (namely, the Hong Kong Monetary Authority, overseas regulatory authorities acceptable to the Stock Exchange of Hong Kong Ltd (SEHK), or those which are regulated by the SFC as registered dealers under the Securities Ordinance), or $2 billion otherwise.
Controlling shareholders are prohibited from issuing warrants on their own shareholdings.