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HKEx Provides Additional AHFT Information to Legco Panel

28 Jan 2013

Hong Kong Exchanges and Clearing Limited (HKEx) provided additional information on its planned After-hours Futures Trading (AHFT) to the Legislative Council’s Panel on Financial Affairs (Legco's PFA) today (Monday) during a panel meeting.  HKEx’s Head of Global Clearing Gerald Greiner, Co-head of Equities, Fixed Income and Currency Calvin Tai and Co-head of Clearing Risk Management Felix Wang represented HKEx at the meeting.

Below are key points from the information HKEx prepared for today's meeting.

HKEx's consultation process and communications with stakeholders

  • Between October 2010 and February 2011, HKEx conducted informal consultation with over 130 Exchange Participants on the demand and possible models for AHFT.
  • HKEx conducted a public consultation in May to July 2011 on a consultation paper in which key operational and risk factors were outlined.
  • HKEx's public consultation found a large majority of the market supports AHFT and HKEx published its consultation conclusions in December 2011.
  • HKEx attended a meeting of Legco's PFA on 10 July 2012 to explain its AHFT plan and discuss AHFT with panel members.
  • HKEx updated Legco's PFA today on its preparation for implementing AHFT.

Why AHFT is important to Hong Kong

  • Investors will benefit by being able to hedge or adjust their positions in response to market-related developments during Europe’s business day.
  • People who work in Hong Kong’s financial services industry or want to work in the industry will benefit from increased job opportunities, and the industry as a whole will benefit from increased business opportunities.
  • Hong Kong will benefit because its financial services sector will be even more competitive.  In fact, the city’s competitiveness will increase in two ways.  First, Hong Kong will enjoy the benefits of AHFT for the initial products. Secondly, it we will gain essential infrastructure to offer global asset classes, such as RMB, interest rates and commodities, in an additional trading session.

Risk management

  • It is important to note Hong Kong is an international financial centre so it is exposed to potential risk beyond its regular trading day now and has been for many years.  HKEx is aware of that and has adopted measures such as risk-based margining methodology to address it.
  • HKEx’s existing margining methodology, which has proven its effectiveness during periods such as the sub-prime mortgage and euro debt crises, will provide a firm foundation for HKEx’s AHFT risk management.  Moreover, there are more than 80 Futures Exchange Participants (FEPs) with night trading desks so the industry has a lot of experience managing risk after HKEx’s morning and afternoon trading sessions.
  • To address concerns about any unusual volatility in the AHFT session, HKEx has opted for an additional risk management measure in the form of a price limit of 5 per cent.

Market readiness

  • More than 120 FEPs have informed HKEx they are ready for AHFT since HKEx conducted two thorough tests to help them with their preparations.

HKEx plans to introduce AHFT in late March, subject to Securities and Futures Commission (SFC) approval.

HKEx will hold comprehensive briefing sessions on AHFT before it is introduced to ensure HKEx’s Participants are fully aware of all the arrangements.

Attached are Questions and Answers on the key points of HKEx’s AHFT discussions with its Participants.

Questions and Answers on the key points of HKEx’s AHFT discussions with its Participants

Regarding Financial Stability and Trading Matters

1. Will AHFT affect Hong Kong’s financial market stability?
  • AHFT will allow futures investors to manage their overnight market risks.  Major derivatives markets have had AHFT in place for years.  There is no evidence from the experience overseas that AHFT undermines financial market stability.
  • On the contrary, investors and intermediaries in Hong Kong will benefit from having a platform to hedge or adjust their positions in response to market news and events in the European and US time zones during AHFT, resulting in better and more efficient risk management.
2. Will AHFT allow opportunities for big players to manipulate the market?
  • In Hong Kong, market manipulation is a criminal offence. All trading activities in the AHFT session will be closely monitored by both HKEx’s surveillance team and the SFC as with all other sessions.
  • Also, market participants will monitor market prices during AHFT for trading or hedging opportunities.  In the event that there are any abnormal price deviations, these market participants will consider these as profit opportunities and trade to counter the price deviations.
3. Will low trading liquidity in AHFT result in undue excessive price movement?
  • HKEx notes there is strong support for AHFT from market participants, who will contribute sufficient market liquidity; this means abnormal price deviations will be adjusted by market forces.  The proposed price limit of +/-5% will also prevent excessive movement during AHFT.  Various overseas stock index futures markets with less notional turnover than HKEx have managed to conduct AHFT successfully.
4. Will AHFT increase futures market volatility in the opening of the following day’s trading?
  • With AHFT, some futures trading and hedging needs in response to overnight news will be satisfied with AHFT.As such, overnight buying and selling pressures in the futures market will not be concentrated during the following day’s opening and the volatility and magnitude of the futures market price movements will be reduced.

5. Will AHFT be used by the big players to affect the opening of the securities market on the following day?
  • Both futures and securities market openings will depend on the market demand and supply at the moment the market opens, taking into account overnight market news and factors and the market outlook.  As such, overnight futures market movement will only be one of the factors that may be considered by investors when they make investment decisions.
Regarding the Design of AHFT
6. The proposed +/-5% price limit is too wide to cap excessive price movement during AHFT.  Should the proposed price limit start with +/-2.5% in a controlled manner instead?
  • The proposed price limit of +/-5% is in line with international standards.  Major overseas derivatives markets, such as CME, SGX, ASX and OSE, are either not imposing price limits or are imposing price limits greater than +/-5%.  A narrow price limit might undermine the price discovery function of the futures market and take away the opportunity for investors to manage their positions beyond the price limit, which defeats the purpose of having AHFT.
7. Should HKEx implement AHFT for gold, forex or commodity asset classes, but keep stock index futures untouched, as they might affect the securities market?
  • Equity market risk needs to be managed by Futures Exchange Participants.  Therefore, AHFT for stock index futures is important to satisfy market demand.
8. Should the proposed AHFT session be implemented progressively, for example, close at 6 pm at the start?Then it could be pushed later subject to market demand?
  • The purpose of AHFT is to cover most of the European trading hours and the start of US hours so that investors can react to market news released in this period of time.  A progressive extension of AHFT would not meet this purpose.
9. Should HKEx launch Mini-Hang Seng Index futures and Mini-H-shares Index futures at the start as retail investors will also need to manage their exposure at night?
  • Mini futures contracts sometimes rely on the trading liquidity of the standard futures contracts.  HKEx plans to introduce Mini contracts for AHFT after the trading liquidity of the standard contracts has been built up.

10. Why are stock index options excluded in the current plan for AHFT?
  • Stock index options contracts rely on the trading liquidity of the corresponding stock index futures contracts.  HKEx will consider stock index options for AHFT after the trading liquidity of the standard contracts has been built up.  In the meantime, investors can manage the delta risk of stock index options portfolios using stock index futures.

Regarding Risk Management Matters

11. Will brokers have difficulties managing clients’ trading risk during AHFT when normal banking services are not available?
  • Many local brokers have been operating night desks to support their clients trading in overseas derivatives markets.  They may set a higher client margin level for clients or apply trading limits to clients according to their financial strength.  Some brokers might require their clients to deposit additional margin funds, if considered necessary, to safeguard their positions via online banking transfer facilities, ATM or PPS during AHFT sessions.
12. Would excessive price movements in AHFT exhaust client margins and could brokers be exposed to the risk of client defaults?
  • The proposed price limit of +/-5% in AHFT will prohibit any transactions beyond the range and deter any excessive price movements.  In general, the minimum client margin for stock index futures is 6% (minimum clearing house margin is 5%).  If the price limit is set at +/-5%, brokers will have an additional safeguard in terms of client margin management.After the market opens on the next day and banking services are available, brokers can handle their clients’ margins in the usual way.
13. Without stock index options mark-to-market prices by the close of AHFT sessions, brokers will not be able to calculate the client risk exposure on a portfolio basis.  Will brokers be able to calculate client exposure accurately?
  • HKEx will provide the Risk Management SPAN file before the AHFT session for brokers to estimate stock index option value.  HKEx will not collect margins and variation adjustments during AHFT.  HKEx will collect margins the following morning based on the Calculated Opening Price for margin and variation adjustment, or VA, calculation.
14. What would HKEx do if there were volatile movements in the US or European markets due to extreme events such as a stock market crash or financial crisis?
  • The purpose of AHFT is to provide investors with the opportunity to manage their risk exposures in response to financial news or events during the business day in Europe or the US.  As such, the AHFT session, with the price limit of +/-5%, will be open for trading as usual.  HKEx believes the price limit of +/-5% will prevent excessive price movements during the session.  Also, as always during times of market volatility, HKEx will closely monitor market activities and step up its efforts in scrutinising the exposure of its Clearing Participants (eg additional ad-hoc capital based position limit monitoring) and take any appropriate measures if necessary.
Regarding Brokers’ Businesses and Operations
15. Will AHFT bring more business to the derivatives market?
  • According to overseas statistics, trading volume in AHFT sessions versus day sessions ranges from 10 per cent to 40 per cent.  HKEx believes AHFT will bring new business to the brokerage industry in Hong Kong.
16. Will AHFT increase operating costs for small brokers and force them out of business?
  • There will be additional operating costs for brokers who wish to participate in AHFT.  For Exchange Participants that are already operating a night desk, participation in AHFT will bring little change.  There are brokers offering to execute and clear after-hours trades on behalf of brokers who decide not to open for business during AHFT.  This may alleviate brokers’ operational concerns.  For brokers whose futures revenue is only a small portion of their overall business, there is no impact to them.  Some smaller brokers do not solely rely on futures business to maintain their operations.
17. Is HKEx taking away the business of small brokers in favour of large brokers?
  • According to HKEx’s understanding, there are at least 87 Futures Exchange Participants operating night desks.  Among these Participants, 45 per cent are medium size or small brokers.  For small Futures Exchange Participants currently operating a night desk, AHFT will have little impact on their operations.  Small brokers who are interested in AHFT but do not want to set up AHFT operations may consider execution services offered by other brokers.
18. Will AHFT add pressure to the employees of the brokerage industry as they will have to work late into the night?
  • It is anticipated that there will be two shifts for brokers: one to operate the day sessions, and one for the AHFT session.
  • Staff in the futures industry may need to change their working hours, but HKEx does not anticipate staff working excessively long hours in the brokerage industry as a result of AHFT.
  • There should also be additional job and business opportunities for the futures industry due to AHFT.
19. Is AHFT a measure to pave the way for a further extension of trading hours for the cash market?  Is there any plan to introduce after-hours trading for the cash market?
  • HKEx has no current plan to introduce after-hours trading for its cash market, or extend trading hours for its cash market.


Updated 28 Jan 2013