Features of Warrants
As warrants are tailored to meet the needs of different types of investors, they do not have standardised terms. The terms may vary significantly between different warrant types, different series of the same type, and different issuers.
For each warrant series, the terms are specified by the warrant issuer in the disclosure document (also known as an Offering Circular or a Product Disclosure Statement)..
Warrants may only be issued by institutions approved by ASX. The ASX Market Rules set out criteria for an institution to be approved as an issuer.
You should note that ASX does not guarantee the performance of the warrant issuer. You are therefore exposed to the risk that the issuer will not perform its obligations under the warrant.
For a current list of warrant issuers and their contact details, visit the Warrant issuers.
Warrants are issued over an underlying instrument. This can be a share, basket of shares, index, currency or commodity.
Depending on the type of warrant you may exercise the warrant to receive (or deliver) the underlying instrument. Otherwise a cash equivalent will be paid to you upon expiry.
The expiry date is the date on which trading in the warrant ceases and the right to exercise lapses. If the warrant has been exercised the issuer will be obliged to deliver or take delivery of the underlying instrument, or make a cash payment according to the warrant's terms.
Warrants are either American style or European style exercise.
American style means you can exercise the warrant at any time on or before the expiry date. European style means you can only exercise the warrant on the expiry date of the warrant. Occasionally warrants are a mixture of American and European. For example they may be European up to a point and then American thereafter.
This is the amount of money which must be paid upon exercising the warrant.
The exercise price is paid by the holder to the warrant issuer (in the case of a call warrant) or by the warrant issuer to the holder (in the case of a put warrant) for the transfer of the underlying instrument.
The exercise price is generally fixed when the warrants are issued. However, the exercise price of some types of warrants may be variable. For example, the exercise price of endowments and some instalments are not fixed.
The conversion ratio refers to the number of warrants that must be exercised in order to transfer the underlying instrument.
The terms of issue may require one warrant to be exercised to trigger settlement. Alternatively, a number of warrants may need to be exercised.
The conversion ratio will affect the absolute price of the warrant on a per share basis. It is therefore important to know the conversion ratio of a warrant series before investing.
A warrant may be deliverable or cash settled.
Deliverable warrants are settled by transferring the underlying instrument.
Cash settled warrants are settled by a cash payment by the warrant issuer to the holder. Some deliverable warrants may also provide for cash settlement in certain circumstances.
These features listed above are common to most warrants, however some warrants may also have their own unique features.
Some types of warrants, in particular knock-out warrants, have a barrier feature. A barrier level is a specified level where a breach may cause some event to occur. Prior to listing the warrant the issuer must nominate the barrier level. This can be set above or below the exercise price of the warrant. The issuer has the discretion to call such an event once the barrier level is triggered, with the consent of ASX.
The triggering of the barrier may result in one or more of the following:
- termination of the warrant before the original expiry date
- an adjustment to the exercise price and/or barrier level
- the payment of a cash amount by the warrant issuer to the warrant holder
- an early reset date in the case of Rolling Instalments
The consequences of triggering a barrier level will be specified in the Disclosure Document.
Some warrants have their upside potential capped at a certain level. A cap level is fixed by the issuer at the time the warrant is issued.
Cap levels do not cause the warrant to terminate but will limit the upside profit potential of the warrant. If the value of the underlying instrument is above the cap level on exercise or at expiry, settlement of the warrant is based on a return equal to the cap level.
The holder may be entitled to a cash payment or a transfer of the underlying instrument at a value equal to the cap level.
A warrant is said to be covered if the warrant issuer places the underlying instrument in a trust or similar custodial arrangement on behalf of the holder.
The securities are held in trust for the benefit of the holder so that you may be assured that on exercise of the warrant, the underlying securities will be available for delivery. Instalments are an example of a covered warrant, as the underlying share is held in trust for the instalment holder.