HNW investors in equity-linked securities, whose use has mushroomed since the global financial crisis began in 2008, are to receive additional regulatory protection from sharp practice and credit risk.

The FSC wants to set up a monitoring system to allow securities houses to manage and scrutinise the issuance and operation of equity-linked securities more effectively, although its policy paper does not explain how one might ‘operate’ a security. They will have to manage hedged assets and client-owned assets separately. The FSC is going to look at ways to make hedged assets and client-owned assets legally distinct from one another and to protect investors’ assets effectively – a sign that it does not think that “investor protection” is remotely effective at the moment. It wants to oblige firms to report information about the issuance and operation of equity-linked securities and derivatives-linked securities to it every month.

To reduce issuers’ credit risks, the regulator will also discourage securities houses from issuing short-term equity-linked securities and derivatives-linked securities ‘excessively’ with maturities of three months or less, in order to prevent overheated competition in the markets. Such securities with such short maturities accounted for 20% of all issuances in 2012 – the latest year for which the regulator seems to have figures. The FSC might, at times, limit their issuance to a certain ratio of the issuers’ equity capital. It intends to promulgate a ‘Best Practice Guideline on ELS/DLS Issuances and Internal Control’ by the end of this month.