Hong Kong Exchanges and Clearing Limited (HKEx) published today (Friday) its consultation conclusions on the proposed introduction of a Volatility Control Mechanism (VCM) to safeguard its securities and derivatives markets and a Closing Auction Session (CAS) in its securities market to facilitate trade execution at securities' closing prices.

HKEx received responses from a broad spectrum of key users of the securities and derivatives markets in Hong Kong including 41 HKEx Exchange Participants contributing 65 per cent and 74 per cent of securities and derivatives market turnover respectively, 15 major global and local asset management companies representing the interests of millions of individual investors in Hong Kong, 10 major industry associations and key market representatives, two major index companies, three other corporate entities and 310 individuals¹. 

Having carefully considered the responses and the rationales behind them, HKEx concluded that there is substantial market support for the introduction of a VCM and a CAS in the Hong Kong market, and it will proceed with the implementation of the two initiatives.

"We are pleased that the majority of respondents from the various market segments supported the implementation of the two market microstructure reforms, which will put us on par with other leading exchanges," said HKEx’s Head of Market Operations Roger Lee.  "We analysed all market feedback, including the reasons given by those who did not support the proposals, and have enhanced our VCM and CAS models to address the key concerns that were raised.  The market will be given an adequate lead time of one year to prepare for the implementation of these two initiatives."

The consultation paper and consultation conclusions are available on the HKEx website along with copies of respondents' submissions.  Further details of HKEx's conclusions are highlighted in the questions and answers on the HKEx website.

Final VCM and CAS Models

The VCM and CAS models to be adopted will be substantially the same as proposed in the consultation paper, with fine-tuning of some features based on market feedback.  The fine-tuning includes the following:

Fine-tuned features for the VCM model based on consultation feedback

• Maximum number of VCM triggers: reduced from the proposed two triggers per trading session to one trigger per trading session; and
• Period excluded from VCM: VCM will not be in effect during the first 15 minutes of the morning and afternoon Continuous Trading Session (CTS), in addition to the last 15 minutes of the afternoon CTS, which was the only period excluded under the proposal in the consultation paper.

Fine-tuned features for the CAS model based on consultation feedback

• Consider rolling out of short selling subject to a tick rule in Phase 2 of the CAS (instead of in Phase 1);
• End the CAS at 4:10 pm instead of 4:12 pm by shortening the Order Input Period to 5 minutes (from 7 minutes); and
• Apply the CAS to all Exchange Traded Funds (ETFs) starting from Phase 1 (instead of from Phase 2, with only ETFs related to Hong Kong stocks in Phase 1).

Implementation

The CAS will be rolled out in two phases.  CAS Phase 1 is tentatively set to include all the Hang Seng Composite LargeCap and MidCap index constituent stocks, the H shares which have corresponding A shares listed on the exchanges in Mainland China and all ETFs.  The list of securities included in the CAS will be confirmed and published before launch of Phase 1.  Phase 2 will be rolled out after a review, tentatively scheduled for six months after Phase 1, and will include all equity securities and funds.

The VCM will cover Hang Seng Index (HSI) and Hang Seng China Enterprise Index constituent stocks in the securities market, and the spot month and the next calendar month HSI, Mini-HSI, H-shares Index (HHI) and Mini HHI futures contracts in the derivatives market.

Respondents' feedback regarding securities market changes indicated the CAS and the VCM should have priority over Trading Halts (TH)².  Accordingly, the VCM and the CAS will be developed and tested together on the AMS/3.8 trading system but rolled out sequentially (CAS Phase 1 first and then VCM) to reduce risk.  Adequate preparation time of about 12 months will be given to the market.  Rollout of the CAS and then the VCM in the securities market is tentatively scheduled to start from mid-2016, while the VCM in the derivatives market has a tentative rollout target of the last quarter of 2016.  All these changes require rule amendments and market readiness.  TH will be introduced on top of HKEx's planned Orion Trading Platform – Cash (OTP-C) infrastructure, which currently has a projected rollout date of not earlier than late 2017.

When the CAS is introduced, the securities market closing time will be extended to 4:10 pm from today's 4:00 pm.  In the derivatives market, the close of the afternoon session for HSI and HHI futures and options, Dividend futures and Volatility Index futures as well as CES China 120 Index Futures will be extended to 4:30 pm from 4:15 pm, and the start time of After-Hours Futures Trading will be changed from 5:00 pm to 5:15 pm.

Additional implementation details will be announced in due course.

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1

Among the 310 individual responses, 138 were from unverifiable respondents and another 120 were from members of a single industry association.Most of responses opposed to the two initiatives were identical submissions or did not state any reasons for the opposition.  Only a few individuals (<15) opposed to the proposals provided independent submissions with reasons for the opposition.

2

HKEx plans to introduce Trading Halts, which are defined in its Stock Exchange's Listing Rules as: "an interruption of trading in an issuer's securities requested or directed pending disclosure of information under the Rules and extending for no more than two trading days", to allow inside information to be adequately disseminated and assessed by the market in a timely manner during trading hours.  At present, issuers are not allowed to publish inside information during trading hours.  If a disclosure obligation is triggered during trading hours now, trading must be suspended immediately and will only be resumed in the trading session following the publication of the announcement.  Additional Trading Halts information is available in the news release.

Ends