On 25 July 2022, SIX Swiss Exchange introduced the new equity trading segment “Global Depository Receipts” (Hinterlegungsscheine, GDRs). Designed to increase the attractiveness of the SIX Swiss Exchange for listing and trading of GDRs, the new trading segment comes with a regulatory framework comparable to those of other trading venues. It also opens the Swiss capital market to Chinese issuers via the China-Switzerland Stock Connect program.
The first four Chinese issuers made use of the newly introduced equity trading segment and commenced trading of their GDRs on the SIX Swiss Exchange on 28 July 2022. Two more followed in September 2022 by listing their GDRs on the SIX Swiss Exchange. In total, the six Chinese issuers raised capital of around USD 1.9 billion through their GDRs, confirming the success of the new trading segment.
In this article, we want to shed some light on GDRs by answering some key questions regarding the listing and trading of GDRs on SIX Swiss Exchange.
What are GDRs?
In a nutshell, GDRs are tradable certificates issued to represent deposited equity securities that permit the (indirect) exercise of the membership and economic rights attached to the deposited equity securities. They are listed and traded independently of the underlying equity securities.
What are the listing requirements for GDRs?
While in principle the requirements and procedure involved in the listing of GDRs follow the general provisions of the Listing Rules (LR), there are a number of specific rules for the listing of GDRs, particularly regarding the requirements for the depository, the deposit agreement and the prospectus.
To list GDRs, the issuer of the underlying equity securities must deposit a certain number of equity securities with either a bank within the meaning of the Swiss Banking Act (BA), a securities firm according to the Financial Institutions Act (FinIA) or a depository that is subject to equivalent foreign supervision.
The deposit agreement between the issuer and the depository must provide for the underlying equity securities to be held by the depository on a fiduciary basis (or on the basis of similar arrangements under applicable law) on behalf of the investors with rights to the GDRs in question. The agreement must ensure that the depository can exercise all economic and membership rights attached to the underlying shares in the interests of the investors and that the underlying equity securities can be separated and segregated in favor of the investors in the event of the depository’s debt restructuring or insolvency. Further, the deposit agreement must oblige the depository to provide SIX Exchange Regulation and/or the Regulatory Board, upon request, all the information and documentation in connection with the implementation of the deposit agreement.
The GDR prospectus must contain the same information as required for regular equity securities, and must additionally provide appropriate information about the GDRs, the depository and the deposit agreement. This includes in particular information about the rights of the investors under the deposit agreement, the insolvency protection and the risks related to the GDR construct.
In order to facilitate access for Chinese issuers under the China-Switzerland Stock Connect program, the new rules now also recognize the Chinese Accounting Standards for Business Enterprises (ASBE) in addition to the international accounting standards IFRS and US GAAP for issuers that are not incorporated in Switzerland.
What special rules must be observed for the maintenance of the GDR listing?
The revised regulations contain certain special requirements regarding the maintenance of a GDR listing on the SIX Swiss Exchange. These relate in particular to the disclosure of management transactions, information relating to corporate governance and the ad hoc publicity obligations.
Accordingly, regarding the disclosure of management transactions, issuers that list their GDRs on the SIX Swiss Exchange must disclose all transactions both in GDRs and in the underlying equity securities by their members of the board of directors and executive management. Also, the Directive on Information relating to Corporate Governance (DCG) is not applicable. The issuer is only required to declare – in both the GDR prospectus and the annual reports – that it adheres to the corporate governance standards of its domestic market. And finally, issuers listing GDRs are subject to the ad hoc publicity obligations not only for their GDRs listed on the SIX Swiss Exchange but also for their underlying equity securities listed on their domestic market.
What must be considered when trading GDRs?
A separate GDR trading segment with shortened trading hours has been created, mainly so as to enable Chinese issuers to publish price-sensitive information regarding their GDRs and underlying equity securities outside of the critical trading hours in Switzerland and China, thus complying with all applicable ad hoc publicity obligations. Accordingly, for GDRs the Trading Parameters Guideline of SIX Swiss Exchange provides for opening from 15:00 CET (with a randomized opening within two minutes) and continuous trading until 17:20 CET. Subsequently, the closing auction runs from 17:20 to 17:30 CET (with a randomized closing within two minutes). The “trading-at-last” (TAL) trading session commences after the closing auction and allows market participants to buy and sell GDRs at the official closing price until 17:40 CET.