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A futures contract is a legally binding commitment between two parties to buy or sell a specific financial instrument at a given future date at a price set at the time of dealing. One of the main features of futures is the leverage they provide. With relatively little capital, usually just a small percentage of the contract's value, buyers and sellers are able to participate in the price movement of the full contract. As a result, the leverage can lead to substantial returns on the original investment. However, it can also lead to substantial losses. The risks associated with futures can be significant and investors must fully understand the risks before buying or selling futures contracts.

Generally speaking, futures contracts can serve three objectives: pure trading, hedging and arbitrage.

Pure trading is mainly based on unidirectional investment strategies, where an investor buys or sells a specific quantity of futures contracts based on his own projection of the movement of an underlying stock or an index.

The purpose of hedging is to offset the negative impact of market moves on a portfolio’s overall return.

Arbitrage refers to profiting from the difference between the prices of similar financial instruments in the futures and securities markets by buying low in one market and selling high in another.

What is an option?

There are two types of options: a call and a put. A call option gives the holder the right to buy the underlying asset. A put option gives the holder the right to sell the underlying asset. Therefore, an option holder really has an option to exercise either the right to buy or the right to sell.

While holders have no obligations to exercise their rights, writers are obliged to honour the contracts they have sold if the holders choose to exercise theirs however disadvantages this may be to the writers. When writing options, the writers risk incurring a loss or forgoing a profit. In turn, they receive a premium from the buyers. The options buyers’ exposure (before exercising their rights) is limited to the premium paid for the options.

What are Hang Seng Index futures and options? What are their characteristics?

Hang Seng Index futures and option contracts (commonly known as HSI futures and HSI options in Hong Kong), are equity index products and major products of HKEX’s derivatives market in terms of trading volume. The Hong Kong Futures Exchange (HKFE), a wholly-owned subsidiary of HKEX, first introduced HSI futures contracts in May 1986 and then HSI option contracts in March 1993. The underlying asset of HSI futures and options is the Hang Seng Index which is compiled by Hang Seng Indexes Company Limited. The HSI, a market capitalisation-weighted index, is widely used as a benchmark for the performance of Hong Kong-listed stocks. Basically, there are two types of HSI option contracts, the call option and the put option. A call option gives its holder the right, but not the obligation, to buy the HSI at a predetermined price at expiry, whereas a put option gives its holder the right, but not the obligation, to sell the HSI at a predetermined price at expiry.

HSI futures and options have the following characteristics:

The underlying asset is a benchmark for the performance of Hong Kong-listed stocks. Since the HSI is widely used as a benchmark for the performance of Hong Kong-listed stocks, HSI futures and options can be used as a hedging tool by investors to manage their risks from exposure to the Hong Kong stock market. Investors can also buy or sell HSI futures or option contracts for pure directional trading whenever they are bullish or bearish about the market.
Cost effective
HSI Index futures and options facilitate investment in a cost-effective way as these contracts are traded on a margin basis. The margin to carry an open position is only a fraction of the contract’s value.
Low transaction costs
As the total value of high-capitalisation stocks represented in each HSI futures and options contract is substantial and as commission is only charged once for each transaction in futures or options contracts, transaction costs are low compared to purchasing or selling the constituent stocks.
Clearing house guarantee
Same as other futures and options contracts traded on HKFE, HSI futures and options are registered, cleared and guaranteed by the HKFE Clearing Corporation (HKCC), a subsidiary of HKEX. HKCC acts as the counter-party to all open contracts, which effectively eliminates counter-party risks between HKCC Participants. However, the guarantee does not cover an HKCC Participant’s obligations to its clients. Investors should exercise due care and diligence when deciding through whom they will conduct business.

The contract multiplier for HSI futures and options is 50 per index point. The contract months for HSI futures are spot, next calendar and next two calendar quarter months. The contract months for short-dated options contracts are spot, next two calendar and next three calendar quarter months, whereas those for long-dated options are the next five months of June and December.

For more information, investors can refer to "Hang Seng Index Futures & Options" under "Products & Services - Derivatives Products" on the HKEX website.

How are HSI options traded?

HSI options are option contracts traded on HKFE. They give the holder or buyer the right, but not the obligation, to buy or sell the HSI at a predetermined price (strike or exercise price) on a given date (expiry). The writer or seller of the option, on the other hand, is obligated to sell or buy the HSI to/from the option buyer at a predetermined price when the buyer exercises the option.

The option buyer pays the price of the option, which is called the option premium, for the exercise right from the option seller. The option seller provides the right of exercise to the option buyer in return for the option premium.

The HSI option is a European-style option which can only be exercised at expiry. The HSI option contract is standardised at $50 per index point ($10 per index point for Mini-HSI option contracts). The value of each HSI option contract is equal to the option premium multiplied by $50.

What are Mini-Hang Seng Index futures and options? What are their characteristics?

HKEX introduced the Mini-Hang Seng Index (Mini-HSI) futures on 9 October 2000 and the Mini-HSI options on 18 November 2002.

Same as HSI futures and option contracts, the underlying asset of Mini-HSI futures and options is the Hang Seng Index. The contract multiplier for Mini-HSI futures and option contract is HK$10 per index point, or one-fifth of the size of the HSI futures and option contract.

Mini-HSI futures and option contracts are tailored for individuals who have less risk capital, allowing them to participate in the performance of the constituent stocks in the index with a smaller investment. The margin between the standard HSI and Mini-HSI futures, and between standard HSI and Mini-HSI options can be fully offset, making investment more flexible.

The contract months for Mini-HSI futures and options are spot, next calendar and next two calendar quarter months. For more information, investors can refer to "Mini-Hang Seng Index Futures & Options" under "Products & Services - Derivatives Products" on the HKEX website.

What are Hang Seng China Enterprises Index futures and options? What are their characteristics?

The underlying asset of Hang Seng China Enterprises Index futures and options is the Hang Seng China Enterprises Index (commonly known as “HSCEI,”). HSCEI is a market capitalisation-weighted stock index compiled and calculated by Hang Seng Indexes Company Limited. HSCEI tracks the performance of major H shares.

HSCEI futures and options provide a risk management tool for investors. HSCEI futures and options may to be used to implement hedging strategies (to protect a portfolio of H shares against a declining market) or spread strategies (to profit from the relative performance of two markets, eg HSCEI vs HSI). In addition, HSCEI futures and options allow investors to track the performance of H-share companies in a cost-effective way since the capital outlay is less than that required to buy a basket of HSCEI constituent stocks.

The contract multiplier for HSCEI futures and options contracts is HK$50 per index point. The contract months for futures contracts are spot, next calendar and next two calendar quarter months. The contract months for short-dated HSCEI options are spot, next two calendar and next three calendar quarter months, whereas those for long-dated options are the next three months of June and December.

For more information, investors can refer to "HSCEI Futures & Options" under "Products & Services - Derivatives Products" on the HKEX website.

What are Mini-Hang Seng China Enterprises Index futures? What are their characteristics?

Mini-Hang Seng China Enterprises Index futures were launched on 31 March 2008. The value of one Mini-Hang Seng China Enterprises Index futures contract is one-fifth the value of an Hang Seng China Enterprises Index futures contract. Mini-Hang Seng China Enterprises Index futures have been designed to provide an effective trading and hedging tool for investors interested in tracking the H-shares market with a smaller amount of capital than is required for Hang seng China Enterprises Index futures and to complement the trading of Hang Seng China Enterprises Index futures and option contracts.

The contract months for Mini-Hang Seng China Enterprises Index futures are spot, next calendar and next two calendar quarter months. For more information, investors can refer to "Mini-Hanng Seng China Enterprises Index Futures" under "Products & Services - Derivatives Products" on the HKEX website.

What are Flexible Index Options? What are their characteristics?

Flexible Index Options was introduced on 8 February 2010. Flexible Index Options are Hang Seng Index and Hang Seng China Enterprises Index options contracts which allow market participants to request customised strike prices and expiry months, provided the contracts are bought and sold through the block trade facility.

Some key features of Flexible Index Options are listed below:

Series are created upon the request of an Exchange Participant according to the stipulated procedures and criteria;
Strike prices are in whole index points and subject to other limitations;
Expiry must be on the second to the last trading day of any calendar month and is subject to other limitations;
A series will not be created if there is a standard series with the same strike price and expiry;
Transactions must be through block trades of 100 contracts or more;
No market making as execution is confined to block trades;
Exchange fee, Securities and Futures Commission levy, trading hours, exercise style and settlement method are the same as standard series. Position limits and reporting requirements are also the same and in combination with the standard series; and
There are appropriate risk management measures in place to safeguard the integrity of the clearing house, which is owned and operated by HKEX.

For further details about Flexible Index options, investors can refer to "Equity Index Products" of "Derivatives Products" under the "Products & Services" section on the HKEX website.

What are Dividend Futures? What are their characteristics?

Dividend Futures are based on dividends payoff of stock index constituents over one calendar year.

HSI Dividend Futures and HSCEI Dividend Futures were introduced on 1 November 2010. The underlying assets are the HSI Dividend Point Index and HSCEI Dividend Point Index respectively, which are calculated by Hang Seng Indexes Company Limited. They measure the total cash dividend value for all constituent stocks of the underlying index – the Hang Seng Index and the Hang Seng China Enterprises Index (H-shares index) – expressed in terms of index points.

Dividend futures are designed to provide investors a tool to hedge the dividend risk of Hong Kong-listed stocks and to complement the existing range of HSI and HSCEI products. The contract multiplier is HK$50 per index point. The minimum fluctuation is 0.01 index point. The listed contract months are the three nearest December contract months (for example, Dec 2010, Dec 2011 and Dec 2012).

For more information, investors may refer to “Dividend Futures” under "Products & Services - Derivatives Products” of the HKEX website.

What are HSI Volatility Index Futures? What are their characteristics?

HKEX introduced trading of HSI Volatility Index (VHSI) Futures on 20 February 2012. The VHSI, which is compiled by Hang Seng Indexes Company Limited, measures the expected volatility of a hypothetical 30-day at the money Hang Seng Index (HSI) options and is quoted in percentage points. The VHSI is calculated based on the Chicago Board of Options Exchange’s Volatility Index (VIX) methodology with modifications, taking into account the trading characteristics of the HSI options market.

VHSI is a direct reflection of the level of short term volatility in the Hong Kong stock market and VHSI Futures give investors a convenient and cost-effective way to hedge and manage volatility exposure.

For more information, investors may refer to “HSI Volatility Index (VHSI) Futures” under "Products & Services - Derivatives Products” of the HKEX website.

What are BRICS Futures? What are their characteristics?

The five exchanges, BM&FBOVESPA from Brazil, Open Joint Stock Company "Moscow Exchange MICEX-RTS" from Russia, BSE Limited from India, HKEX as the initial China representative, and JSE Limited from South Africa, formed the BRICS Exchanges Alliance. In the initial stage of implementation, the exchanges aim to expand their product offerings beyond their home markets and give investors of each exchange exposure to the dynamic, emerging, and increasingly important BRICS economies.

The benchmark equity index futures, including Brazil's IBOVESPA futures, Russia's MICEX Index futures, India's S&P BSE SENSEX Index futures and South Africa's FTSE/JSE Top40 futures, commence trading on the HKEX market on 30 March 2012. They are cash settled futures contracts traded in HKD; the trading hours and holiday schedule follow HKEX’s existing market practice. The contract design enables convergence with home market contracts in terms of last trading day and final settlement price.

For more information, investors may refer to “BRICS Futures” under "Products & Services - Derivatives Products” of the HKEX website.

What is a stock option?

A stock option is a financial contract based on a single underlying stock which is traded on SEHK and cleared through the SEHK Options Clearing House Limited (SEOCH).

A call option buyer has the right to buy the underlying stock at the strike price (ie pre-determined price) on or before the expiry date, while a call option seller has the obligation to sell the underlying stock at the strike price upon exercise on or before the expiry day.

A put option buyer has the right to sell the underlying stock at the strike price (ie pre-determined price) on or before the expiry day, while a put option seller has the obligation to buy the underlying stock at the strike price upon exercise on or before the expiry day.

What is option premium?

The cost of an option or the price at which an option is traded is the option premium. The price of stock options traded on SEHK is quoted on a per share basis. It is the seller who receives the option premium.

What are the factors affecting the option premium of a stock option?

The premium is determined by market forces but there are more factors affecting the market view of the option premium than is the case with prices of the underlying stocks. These factors include:

Underlying stock price - The underlying stock price is normally the most significant factor affecting the price of an option. In-the-money options enable holders to buy or sell the underlying stock at a better price than the prevailing securities market price. They therefore cost more than the equivalent at-the-money and out-of-the-money options because there is more value in them. And whether an option is in-the-money depends solely on the underlying stock’s price because the option’s strike price is fixed. The difference between the strike price of an in-the-money option and the price of the underlying stock is called the intrinsic value. For example, a call option with a strike price of $45 when the underlying stock’s price is $50 has an intrinsic value of $5. However, it is possible that the call option in this case will be traded above $5. Even out-of-the-money and at-the-money options, which have no intrinsic value, will normally have some value in the market. This is because there are other factors determining the value of the option. These are called “extrinsic” factors (or sometimes "time value" factors). The extrinsic factors are time until expiration, dividend expectation, interest rate and volatility.

Time Until Expiration - All other things being equal, the value of an option will diminish as the option approaches expiry, and the rate at which it diminishes will be faster the closer it gets to expiry so that close-to-expiry, out-of-the-money options can lose their value very quickly. It is for this reason that an option is often referred to as a “wasting asset”.

Dividend - The dividend factor generally only applies to stock options because most other underlying assets do not pay dividends. All other things being equal, a cash dividend will lower the share price by the present value of the dividend on the day the stock first trades “ex-dividend”. The larger the dividend, the more the stock price is expected to fall. This change in the stock price in turn affects the option premium.

A higher dividend results in a drop in the premium for the call but a higher premium for the put.

Interest rate - A rise in interest rates will raise the value of call options, and lower the value of put options. Interest rates may be regarded as an opportunity cost. Since an option is a leveraged instrument, a call option holder does not need to pay the full value of the underlying stock, and can invest remaining funds in interest-bearing instruments.

Volatility - Risk is the probability that the price of the underlying stock will move, within the life of the option, from its present value to a point where the option writer incurs losses. The greater the probability that this will happen, the greater the risk and hence the higher the premium, whether call or put.

The degree of expected fluctuation in the underlying stock price determines the extent of the risk. The measure of this fluctuation is most commonly referred to as “volatility”. Implicit in any option premium are assumptions about the likely volatility of the stock. For this reason, one generally speaks of the “implied volatility” of the option premium, ie the likely volatility of the underlying stock is “implied” by the option premium. Expressed as a percentage, volatility is closely monitored by option market users as a vital indicator.

The impacts of the above factors on option premium are summarised below:

What are the elements comprising of a stock option contract?

A stock option contract has three important defining elements: the underlying stock, strike price and exercise period.

Underlying stock
Every option is issued on an underlying instrument which can be one of a wide range of products - for example, a stock, a stock index, a commodity futures contract, a currency, etc. The underlying assets of stock options are individual stocks traded on SEHK. However, not all stocks traded on SEHK are eligible to be underlying assets of stock options. A Stock Option Class List is available in the Derivatives Market section under the Product section on the HKEX website.

Strike price
The strike price, also known as the exercise price, is the price at which the option buyer and seller agree to trade the underlying stock, if the option is exercised. A call option whose strike price is below the price of the underlying stock is in-the-money. Such an option allows the holder to buy the shares for less than the current market price. A call whose strike price is above the underlying stock’s price is out-of-the-money. Conversely, a put whose strike price is above the underlying stock’s price is in-the-money. This means the put holder can sell the stock for more than its current price. A put whose strike price is below the underlying stock’s price is out-of-the-money.

It can be seen from this that only in-the-money options would generally be exercised by their holders because otherwise the holders can buy or sell the stock directly at a better price. If an option's strike price equals the price of its underlying stock, the option is said to be at-the-money (sometimes this term is applied to options whose strike price is very close to the underlying market price but not exactly equal).

Exercise period (expiry day)
Stock options have an exercise period which limits their validity. After the expiry day of that exercise period, the option can no longer be traded or exercised. At the date of publication, option contracts with five different lengths of exercise periods were available for trading at HKEX: at any one time, there will be an expiry in the three nearest months and then the next two or three quarterly months (see Contract Specifications).

There are conventionally two categories of options in relation to exercise - American style and European style. An American style option can be exercised any time from its issuance up to its expiration. A European style option can only be exercised on the expiration day. An American style option offers more flexibility to its holders in terms of exercise; therefore it can command a higher premium than its equivalent European style option. At the date of this publication, stock options at HKEX were all American style. The expiry date is the trading day immediately preceding the last trading day of an expiry month.

What are in-the-money, at-the-money and out-of-the-money stock options?

An in-the-money option is an option that has intrinsic value. Intrinsic value refers to the amount netted by an option holder upon exercise of the option contract. In the case of call options, it is the price of the underlying stock minus the strike price. For put options, it is the strike price minus the underlying stock’s price. In other words, an in-the-money call option has a strike price lower than the underlying stock’s price while an in-the-money put option has a strike price higher than the underlying stock’s price.

An at-the-money option is an option with a strike price equivalent or approximately the same as to the underlying stock's price. It is also called a near-the-money option. There is little intrinsic value in at-the-money options.

Call options that have a strike price higher than the price of the underlying stock or put options that have a strike price lower than the underlying stock’s price are regarded as out-of-the-money and have no intrinsic value, but they have time value.

What are the differences between stock options and derivative warrants?

The table below compares stock options and derivatives warrants.

Stock options	Derivative warrants
Launched and traded on SEHK and guaranteed by SEOCH	Launched by issuers and traded on SEHK
Both long and short positions are allowed	Only long positions are allowed
A number of strike prices are available. There are at least two option series available with a strike price above or below that of the at-the-money option series. The number of strike prices increases when the market price goes up and down	Each warrant has a strike price which is determined by the issuer
Five or six expiry months are available, including the spot month, the next two calendar months, and the next two or three quarter months	Each warrant has an expiry date which is determined by the issuer

What are the risks inherent in trading stock options?

Risks faced by option holders

1.	Option holders run the risk of losing the full value of the premium they paid for the option.
	The only way an option holder can avoid losing the entire premium is to close out the long position before expiry or to exercise the option before or at expiry.Unlike stocks, there is a limited time period in which to operate.It is therefore important to note the time frame in which the option might become profitable.If the option was acquired to hedge an underlying stock position, a loss of premium may be acceptable from the outset and seen effectively as the cost of insurance.
2.	The closer an out-of-the-money option is to expiry, the greater the likelihood that it will beimpossible to close out or exercise the option profitably.
	Time is not on the side of the option holder, particularly in the case of out-of-the-money options, which might sometimes be tempting to buy because they look “cheap”.In such cases, investors should remember there’s a strong possibility that they will lose the entire premium paid.Many options might appear to be cheap for the good reason that they are very unlikely to ever be profitable.It is particularly important to think carefully before purchasing a large number of such options in the hope of a leveraged profit.
3.	Stock options in Hong Kong are not always automatically exercised on expiry.
	In order to realise any profits from a long option position prior to or on the expiry day in Hong Kong, is necessary for the investor to instruct his or her broker to exercise or close out the option before or on the expiry day. SEOCH does automatically exercise certain deep in-the-money options upon expiry, but brokers are able to override this automatic exercise function.If investors forget to exercise and brokers do not alert them, they may forgo all the profit that would otherwise have been realized.
4.	If investors exercise an option which is not hedged in the stock market they must be prepared to pay for the full value of the stock under the terms of the option contract (in the case of a call option) or to deliver the stock (in the case of a put option).
	Unless investors already have made arrangements to sell the stock immediately on their receipt (in the case of a call option) or already hold the stock (in the case of a put option), they must ensure that they have the funds to meet their delivery obligations.
5.	An investor's broker may have the right to reject his or her exercise instruction.
	Brokers may demand that investors deliver sufficient financial resources to make settlement in respect of an option position and may therefore refuse the investor's exercise instruction until the necessary payment has been made.
Risks faced by option writers
6.	The writers of call options are required to deliver stock on being assigned.
	If a writer’s call option is uncovered (ie the writer does not already hold the stock), the writer, on being assigned, will need to obtain the stock quickly either by buying it in the open market or borrowing it.In either case, the difference between the price at which the stock is acquired and the strike price of the assigned option may be substantial and could represent an outright loss.
7.	The writers of put options are required to take delivery of and pay for stock on being assigned.
	The writer of a put option, on being assigned, will be required to buy the stock at the strike price of that option.The writer may therefore be required to pay substantially more than the market price for the stock, thus incurring significant losses, which may be disproportionate to the income received when the put option was written.
8.	Stock options traded on SEHK are American style and both call writers and put writers may be assigned at any time.
	Although it is generally more profitable to sell an option than to exercise it early, there are exceptions where option holders will exercise early. Writers must be constantly aware of the possibility of early exercise, and the funding that may be required to meet the delivery and settlement obligations, which will generally be significantly greater than the option’s premium value.
9.	All short option positions are subject to sudden increases in margin requirements.
	The leveraged nature of options means that option values and hence margin requirements can increase dramatically over a very short period.A broker is entitled to close out a position and seize any collateral to which the broker is legally entitled in the event that an investor is unable to meet a margin call.
10.	Covered call writers lose the right to any upside in the stock price but remain exposed to losses in the event the stock price falls.
	A covered call writer will not be exposed to losses due to the exercise of the stock option because the writer holds the underlying stock and thus is protected against the risk of being assigned. However, the writer cannot benefit from any upside as long as the short call option position is open.Moreover, if the stock price falls, the writer will suffer losses offset only by the value of the premium received when the option was written.
Other general risks
11.	It may not always be possible to liquidate an existing position.
	An option series can become illiquid for many reasons.If it becomes illiquid, it may be impossible to liquidate an open position and thus unexpected losses could result. Examples include: Trading in a particular underlying stock may be suspended or trading in the whole market may be suspended.In this case, trading in all options on that stock will almost certainly be suspended. Illiquidity may occur when trading in the option is not suspended. Although the stock option market has a Market Maker system, it is possible that an extremely exceptional situation could arise where a Market Maker is not available or fails to meet its obligations.
12.	Stop loss orders may be ineffective as they may be harder to execute with stock options than with other exchange-traded products.
	For the reasons noted above and because of the inherent volatility of option prices, it is important not to place too much reliance on the successful execution of stop-loss orders in situations where failure to execute the stop-loss order would lead to options exposure increasing to unmanageable levels.

What are stock futures?

A stock futures contract is a legally binding commitment under which the contracting parties agree to buy or sell financial exposure equivalent to a specific amount (contract multiplier) of shares of the underlying stock at a predetermined price (contracted price) on a specified future date.

As stock futures contracts are cash settled, there is no physical delivery of shares when the contract expires. Upon expiry, profits and losses are credited or debited to the margin account of the contract holder in an amount equal to the difference between the contracted price and the final settlement price multiplied by the contract multiplier.

The final settlement price is the average of the following values for the underlying stock as quoted on the securities market:

The best bid and offer prices taken at five-minute intervals from five (5) minutes after the start of, and up to five (5) minutes before the end of, the Continuous Trading Session of The Stock Exchange of Hong Kong Limited, or SEHK, a wholly-owned subsidiary of HKEX; and
The closing price as quoted by SEHK.

To offset an open short stock futures position before expiry, a seller of a stock futures contract simply buys back the contract while a buyer sells an identical stock futures contract to close the open long position.

What are marking to market and margin calls?

After the close of trading each day, The SEHK Options Clearing House Limited (SEOCH), a subsidiary of HKEX, values all open positions with the settlement prices of each stock option series and assesses a margin requirement based on this valuation. This process is called marking to market. SEOCH collects this mark-to-market margin on a daily basis but may collect margin at other times as and when necessary. The mark-to-market margin represents SEOCH’s estimate of the cost of liquidating the open position at current market levels. In addition, in order to cover potential future exposures over the period between the last margin collection and the close out of positions following a participant default, SEOCH also collects risk margin. SEOCH may accept as margin collateral cash, securities, Exchange Fund Bills and Notes, etc as designated by the HKEX Board (and subject to change by the Board from time to time) and in such form as may be required by the Board. Investors should ask their brokers about the forms of collateral the brokers will accept.

What is capital adjustment? How does it affect the value of stock option contracts?

When a stock issuer makes changes to the capital structure of the stock by way of a special dividend, capital restructuring, rights issue, bonus issue, etc, the price at which the stock trades changes as soon as it trades ex-entitlement or on the effective date. This can affect open option positions.

All other things being equal, the value of a shareholder’s portfolio will not change on a stock's ex-date. But the same is not true of the holder (or writer) of an option on the stock, unless an appropriate adjustment is made to the terms of the option contract. Without a change to the strike price and/or the number of shares in the option contract, the stock price adjustment will arbitrarily and unfairly affect the value of the option position.

HKEX calculates the adjustment ratio that it believes is required to maintain the fair value of the option contracts in respect of any publicised corporate action. The strike prices of all series in that class are multiplied by the ratio and the number of shares in each contract is divided by the ratio. These adjustments will only be made for substantial changes (such as rights issues, bonus issues, stock splits, mergers and payments of special dividend amounting to 2 per cent or more, not for ordinary dividends. Options Trading Exchange Participants and Options Broker Exchange Participants are required to inform their client of these changes.

Capital adjustments are aimed at maintaining the original option value by adjusting the strike price and the contract size. In the case of a stock split, for example, if a company announces a 1-to-2 subdivision, its stock price will be adjusted to half the original price on the effective date if all other things are equal. In order to maintain the investment value, HKEX will reduce the strike price of all outstanding positions of its stock option series by half and double the contract size.

How are stock options exercised and settled?

Stock options traded on SEHK are American style. Option writers therefore need to be prepared for assignment at any time, including on the same day the option is written. An option position which is exercised or assigned will require the parties to deliver or pay for the underlying stock within the required stock settlement period (the second business day after exercise). It should be noted that at HKEX, the exercise of stock options results in the physical delivery of stock in contrast to other types of options exercise, which result in cash settlement.

In some situations, most stock option positions may either be closed out before expiry or expire unexercised. At other times, exercising an option may be a sensible course for option holders. Option holders and writers therefore need to be sure they are familiar with the process.

A stock option holder must instruct his or her broker to exercise the option if he or she wants it exercised. The brokerage firm has a deadline to meet every day after which SEOCH will not accept exercise instructions so the broker is likely to impose an earlier deadline on clients. Although SEOCH has a facility whereby certain deep in-the money options are automatically exercised upon expiry, brokers are able to over-ride this feature. It is therefore important for investors to inform their brokers if they wish to exercise.

When an option is exercised, SEOCH selects, or assigns, on a random basis, the short open position against which it is exercised. If the accounts of an Exchange Participant’s clients are assigned, the Exchange Participant must in turn assign, on a random basis, a short open position of the client. The designated client is then required to deliver (in the case of a call option writer) or buy the underlying stock (in the case of a put option writer). Stock transactions resulting from the exercise of options are cleared under the Continuous Net Settlement System of Hong Kong Securities Clearing Company Limited, or HKSCC, a wholly-owned subsidiary of HKEX. This arrangement not only smoothes the settlement process, but also strengthens cross-market risk management by combining all the stock settlement positions resulting from the exercise of options and transactions from the stock market into the same portfolio for risk management purposes.

Who is responsible for the clearing of stock options?

All stock option contracts traded on SEHK are cleared through SEOCH, a central clearing house and a wholly owned subsidiary of HKEX. By novation, SEOCH acts as a counterparty to its Participants in relation to each option contract traded on SEHK and manages counterparty risk by, amongst other things, requiring margin funds from its Participants. SEOCH may also impose limits on the size and types of positions its Participants may keep. SEOCH is solely engaged in the business of managing risk and contract performance. It has no other business function.

SEOCH's role as counterparty only extends to its Participants. It does not extend to its Participants’ clients or other counterparties. If an Options Trading Exchange Participant or Options Broker Exchange Participant defaults on any of its obligations to its clients, the client’s only recourse is to the Options Trading Exchange Participant or Options Broker Exchange Participant itself. Not all Options Trading Exchange Participants are Participants of SEOCH. Only an Options Trading Exchange Participant which meets certain financial and operating requirements can become a SEOCH Participant.

What are the factors affecting the price of stock futures?

Cost of carry affects the pricing of stock futures. Without the dividend factor, the theoretical price of a stock futures contract is equal to the cost of buying the underlying stock and holding it until the expiry date.

Taking into account the dividend payout of the underlying stock, the theoretical stock futures price is made up of three factors, including:

the underlying stock's price;
the interest cost of holding the underlying stock; and
the dividends paid to the holder of the underlying stock before the expiry of the stock futures contract.

In the event of spin-off, how would the stock futures contracts be adjusted? Is there any limit on the adjustment?

The adjustment on the contract price and contract multiplier would be based on the Adjustment Ratio (AR). The AR is determined using the following formula and it is subject to a floor (details below).

Adjustment Ratio:

AR Floor, Adjusted Contract Price and Adjusted Contract Multiplier

In order to offer additional market protection by preventing the calculated AR to be extremely low, a floor of 0.1 will be introduced to the AR for calculating the adjusted contract multiplier. Please note that an alternative AR floor value may be prescribed by HKFE from time to time, after consultation with the SFC. For details, please refer to the table below.

	When calculated AR ≥ 0.1	When calculated AR < 0.1
Adjusted Contract Price	Old Contract Price x Actual AR
Adjusted Contract Multiplier	Old Contract Multiplier / Actual AR	Old Contract Multiplier / 0.1

In the event of spin-off, how would the stock options contracts be adjusted? Is there any limit on the adjustment?

The adjustment on the strike price and contract size would be based on the Adjustment Ratio (AR). The AR is determined using the following formula and it is subject to a floor (details below).

Adjustment Ratio:

AR Floor, Adjusted Strike Price and Adjusted Contract Size

In order to offer additional market protection by preventing the calculated AR to be extremely low, a floor of 0.1 will be introduced to the AR for calculating the adjusted contract multiplier. Please note that an alternative AR floor value may be prescribed by SEHK from time to time, after consultation with the SFC. For details, please refer to the table below.

	When calculated AR ≥ 0.1	When calculated AR < 0.1
Adjusted Strike Price	Old Strike Price x Actual AR
Adjusted Contract Size	Old Contract Size / Actual AR	Old Contract Size / 0.1

What investment objectives can be achieved with stock futures trading?

Stock futures trading involves a smaller capital outlay that stock purchasing and allows leverage trading both on the upside and downside. Investors only need to pay a margin equivalent to a fraction of the value of the underlying stock, but a number of investment objectives can be attained, including:

Pure Trading
Pure trading is mainly based on unidirectional investment strategies, where an investor buys or sells a specific quantity of futures contracts based on his own projection of the movement of the underlying stock.

Hedging
The purpose of hedging is to offset the negative impact of market moves on a portfolio’s overall return.

Risk management and transfer
Stock futures trading provides an efficient mechanism for allocating price risk from those who wish to avoid the price risk in stock holding to those who are interested in bearing the price risk for a potential return, and hence, can help reduce the price risk inherent in stock investment.

Arbitrage opportunities
Arbitrage refers to profiting from the difference between the prices of similar financial instruments in the futures and securities markets by buying low in one market and selling high in another. Stock futures' prices are linked to the underlying stocks, so any deviation between the price of the underlying stock and the futures is likely to attract the attention of arbitragers.

Spread trading opportunities
Stock futures provide opportunities for investors to trade on the relative performance of difference stocks via spread trading.

How will a stock futures contract be affected if there is any "capital adjustment" to the underlying stock?

Any change of the capital structure of the issuer of the underlying stock by way of rights issue, bonus issue, etc may affect the price of the underlying stock as the stock goes ex-rights or when the change takes effect. Any open interest may be affected as well.

Other factors being equal, the value of a shareholder's portfolio will not change on the ex-date. But for buyers or holders of stock futures, the case is different. If both the contracted price and contract multiplier of the stock futures remain unchanged, any adjustment to the stock price will have an unreasonable and unfair impact on the value of the stock futures position.

The HKFE will decide the adjustment ratio based on the principle of maintaining the fair value of futures contracts, and adjustment will only be made in case of any material change. HKFE will publish the details of any adjustment and its Exchange Participants (ie futures brokers) are required to notify their clients of such adjustments.

Is short selling allowed in stock futures trading?

Short selling of stock futures is allowed. A key at traction of stock futures is that they can be used as a substitute for short selling of the underlying stock. Short selling of underlying stocks is subject to the uptick rule restriction that forbids investors from selling short when a stock's price is below the best current ask price. There is, however, no such restriction in the short selling of stock futures. Besides, according to current market regulations, investors should not sell short a stock unless a stock borrowing agreement is in place. Investors who borrow stock face an added cost as they are required to pay interest to the lender. As stock futures are cash settled, investors are only required to pay margin to establish a short position. There is no need to find a stock lender so stock borrowing costs can be saved.

How are RMB currency products margined? Are there any collateral management services provided?

Same as other HKFE products, HKCC calculates the margin requirements of its participants at the end of each trading day and following the market open of T Session using PRiME, (Portfolio Risk Margining System of HKEX), a SPAN¹ compatible margining algorithm that underpins the margining engine of DCASS.

Clearing Participant can fulfil its margin requirement by any acceptable cash and/or non-cash collateral, provided that at least 50% of the margin requirement is covered by cash in the Settlement Currency (i.e. RMB cash). In addition, Clearing Participants must settle fees and variation adjustment (i.e. mark-to-market loss) in RMB for RMB denominated derivatives. For details, please refer to the following link, http://www.hkex.com.hk/Services/Clearing/Listed-Derivatives/Overview/Collateral-Management?sc_lang=en.

¹ SPAN (Standard Portfolio Analysis of Risk) is a registered trademark of the Chicago Mercantile Exchange

How can participants use RMB currency products to hedge their RMB-related risks?

HKEX’s RMB currency futures and options together allow investors to deploy trading and hedging strategies under various market conditions – they can be utilised in bullish, bearish, range-bound or volatile markets.

Please refer to the product infosheets and related publications for some applications.
http://www.hkex.com.hk/Products/Listed-Derivatives/Foreign-Exchange/USD-CNH-Futures?sc_lang=en#&product=CUS

How do HKEX’s RMB currency futures compare to CNH deliverable forwards offered by banks?

Unlike CNH deliverable forwards which are traded over the counter (“OTC”) facing a bilateral counterparty, HKEX’s RMB currency futures contracts are standardised contracts traded in a central exchange market. Apart from high level of price transparency, the exchange acts as the buyer of all sellers and the seller of all buyers. The counterparty you are facing is always the exchange and therefore counterparty risk is reduced when comparing to trading OTC.

In the case of trading deliverable forwards in the OTC market, documentations like International Swaps and Derivatives Association (“ISDA”) master service agreement and Credit Support Annex (“CSA”) are commonly required. Such documentations are not required to trade in futures market and this greatly simplifies the documentation required to enter futures contract.

How do investors perform calendar rolling?

Calendar spread combos have been used actively in futures trading, especially approaching the end of each calendar month for calendar rolling purposes. Calendar spread execution can also be adopted for trading applications, such as to pre-position for a flattening/steepening of forward curve ahead of different volatility scenario.

Investors can utilise the standardised calendar spread combinations (combos) offered on HKATS. Each calendar combo is the simultaneous purchase and/or sale of two different calendar months with the same underlying. Calendar combos offer 40% reduction in margin requirements. Calendar combos can be facilitated by price makers through on-screen or block-trade execution.

HKEX offers a full suite of 45 calendar spreads for USD/CNH futures, covering any pair of the 10 listed contract months, effective from 19 June 2018.

How do participants execute block trade?

HKATS’s Block Trade Facility allows participants to execute a large-sized order with price and execution certainly, and reduction of counter-party risk through central clearing. The minimum block trade volume threshold for RMB currency futures and options is 50 contracts.

Please refer to HKEX website for block trade procedures, and contact 2840 3524 or FICD@hkex.com.hk for execution enquiry.

How should Exchange Participants or Clearing Participants handle principal exchange at expiration of USD/CNH futures and options?

Clearing Participants are required to set up USD and RMB clearing accounts with the HKCC in order to handle the principal exchange of USD/CNH futures and options. At contract expiration, Exchange Participants, Clearing Participants and their clients can obtain currency exchange services from their corresponding banks to meet the delivery obligations within the two business days from the last trading day to the final settlement day.

Brokers are advised to set up procedures to alert clients regarding the delivery obligations ahead of the last trading day and inform their clients on the settlement procedures upon contract expiration. If their clients are not intended to make or take delivery, brokers should advise their clients with outstanding positions in USD/CNH futures and options to close out expiring positions or roll over to other contract months on or before expiration.

Is there any participation restriction in HKEX’s RMB currency products?

No - The contracts are traded on HKEX’s derivatives market and offered by over 120 international, Mainland and local exchange participants (i.e. brokers). Any investors are able to trade the products via exchange participants.

Exchange participants are required to have USD (applicable for trading USD/CNH futures and options and CNH/USD futures) and/or RMB (applicable for trading all RMB currency products except CNH/USD futures) settlement capability in order to trade the RMB currency products market and offer these products to their clients.

What are Renminbi (RMB) currency futures? What are their characteristics?

RMB currency futures are futures contracts based on the exchange rates between RMB and other currencies. HKEX’s first RMB currency futures contract is based on the currency pair USD/CNH. CNH refers to the RMB circulated in Hong Kong. They are the first exchange-traded currency futures settled in RMB.

HKEX's RMB currency futures contract is designed to provide a way for investors to hedge RMB exposure. It requires delivery of USD by the seller and payment of the Final Settlement Value in RMB by the buyer at maturity. Contract is quoted in RMB per USD and margined in RMB, with the trading and settlement fees charged in RMB. The final settlement price of the contract is based on the spot USD/CNY(HK) fixing published by the Treasury Markets Association (TMA) at 11:15 am on the Last Trading Day. The Last Trading Day is two business days prior to the Final Settlement Day, which is the third Wednesday of the Contract Month.

What are the margin levels of RMB currency products?

Traded on margin basis, the RMB currency products provide capital efficiency, and reduce market funding costs for trading the products. The margin level of each product is regularly reviewed with reference to historical price volatilities, current and anticipated market conditions. Please refer to current margin levels at
http://www.hkex.com.hk/eng/market/rm/rm_dcrm/riskdata/margin_hkcc/HKCC_Margin_Levels_Eng.xlsx

Exchange Participants should set the margin level of each RMB currency product according to each client's individual circumstances. Investors are reminded that the margin levels may change from time to time due to the change of market conditions and should consult their respective Exchange Participants for the latest margin levels.

What are the trading hours of the RMB currency products? Does HKEX have any plan to extend the trading hours? What is the holiday schedule?

For RMB currency futures, the trading hours are 8:30 a.m. to 4:30 p.m. for day session and 5:15 p.m. to 01:00 a.m. (next day) for after-hours trading session. For RMB currency options, the trading hours are 9:00 a.m. to 4:30 p.m. for day session, with no after-hours trading session.

As part of the continual product enhancements, HKEX plans to extend the trading hours of the RMB currency products to overlap with the overseas markets in due course.

RMB currency products are traded according to Hong Kong holiday schedule.

What happens to the position holders in physically-settled contracts (such as USD/CNH futures and options); and cash-settled contracts (such as cash-settled RMB currency futures) on final settlement?

Prior to expiration, position holders can choose to close out expiring positions or roll over to other contract months; or otherwise hold the outstanding positions to expiry for final settlement.
On final settlement day, the following procedures apply to the position holders:-

For the physically-settled USD/CNH futures, the contract will be settled on the final settlement day by principal exchange, i.e. contract size in US dollars versus final settlement value in RMB (contract size multiplied by final settlement price¹). Delivery of US dollars will be made by short-position holder (i.e. seller); and payment of the RMB will be made by long-position holder (i.e. buyer). Please refer to the illustration of final settlement procedures on HKEX website.

The physically-settled USD/CNH options are European style, with only “in-the-money”² options to be exercised at expiry. The contract will be settled on final settlement day by principal exchange, i.e. contract size in US dollars versus final settlement value in RMB (contract size multiplied by strike price). Delivery of US dollars will be made by call option writer or put option holder; and payment of the RMB will be made by the call option holder or put option writer. Please refer to the illustration of final settlement procedures on HKEX website.

	Holder	Writer
Call Options	Payment of the Final Settlement Value in RMB	Delivery of US dollars
Put Options	Delivery of US dollars	Payment of the Final Settlement Value in RMB

For the cash-settled EUR/CNH, JPY/CNH, AUD/CNH and CNH/USD futures, the contract will be settled on the final settlement day by cash settlement for difference in the settlement currency.

¹ For USD/CNH futures (options), final (official) settlement price is the USD/CNY (HK) spot rate published by the Treasury Market Association in Hong Kong at or around 11:30 a.m. on the Last Trading Day

² A call option is in-the-money if the official settlement price is greater than strike price. A put option is in-the-money if the strike price is greater than official settlement price.

What is the impact of recent regulatory changes in the OTC space?

New rules in Europe (EMIR¹) and the United States (CFTC²) are affecting existing OTC participants. From 1 March 2017, all in-scope counterparties (primarily financial entities and systemically important non-financial entities) with uncleared OTC portfolios must exchange variation margin daily. This requirement is relatively new for many users of OTC products, and the requirement to exchange initial margin is being made mandatory in stages over time towards full implementation by September 2020.

RMB exchange-traded derivatives provide capital efficiency to investors as a result of their comparative advantages in various aspects vis-à-vis the OTC market. See the table below as comparison between exchange-traded RMB derivative products and OTC products.

Comparison between RMB exchange-traded derivatives products and RMB OTC derivatives products
Item	RMB OTC derivatives	RMB exchange-traded derivatives
Price transparency	Relatively less transparent — Need to contact each counterparty to get the price	Highly transparent —prices are available on the HKEX website for free, and through information vendors and trading platforms of brokers
Counterparty credit risk	Bilateral without central clearing, facing counterparty credit risk of each counterparty	Central clearing and acting as the counterparty for both sides of transaction, facing only counterparty credit risk of HKCC
Collateral Arrangement	Need to negotiate collateral arrangements with each counterparty	List of acceptable collaterals is published on HKEX website
Settlement risk	RMB is not an eligible currency in CLS³, therefore cannot utilise the CLS system for payment netting	Payment is made to HKCC on a net basis per settlement currency

¹ European market infrastructure regulation (“EMIR”) is the regulatory technical standards pursuant to Article 11 European Market Infrastructure Regulation (EU) No. 648/2012 of the European Parliament and of the Council.

² Commodity Exchange Act of the U.S. Commodity Futures Trading Commission (“CFTC”).

³ Continuous Linked Settlement System — a global clearing and settlement system for cross-border FX transactions

What is the market making arrangements for RMB currency products?

HKEX has appointed market makers / liquidity providers for the RMB currency products contract to provide two-way liquidity for the contract. For USD/CNH futures, market makers provide continuous two-way prices with a maximum quote spread from 20 pips (0.0020).

The different types of market makers of RMB currency products include Chinese and regional banks, securities firms and international liquidity providers.

Refer to the market making arrangements for further details
http://www.hkex.com.hk/Products/Listed-Derivatives/Market-Maker-Program/Market-Maker-Obligations-and-Incentives?sc_lang=en

What is the “spot month charge” for USD/CNH futures and options?

A “spot month charge“ is an additional charge imposed on the spot month physical delivery contract during the last four business days before the business day immediately preceding the final settlement day. The “spot month charge” for USD/CNH futures and options covers additional risk that may arise from physical delivery during the period leading up to the final settlement day. Clearing Participants should ensure that their back office systems can support the calculation of spot month charge as part of the margin calculation process.

What is the Spot USD/CNY(HK) Fixing of Treasury Markets Association (TMA)?

The Spot USD/CNY(HK) Fixing of TMA is the benchmark for market exchange rate of USD against CNY(HK). The Spot USD/CNY(HK) Fixing is published at around 11:15 am Hong Kong time each business day (excluding Saturdays) on TMA’s website (www.tma.org.hk).

What is the USD/CNY (HK) spot rate of Treasury Markets Association?

The USD/CNY(HK) spot rate of Treasury Markets Association (TMA) is the benchmark for market exchange rate of USD against CNY(HK). The USD/CNY(HK) spot rate is published at around 11:30 a.m. Hong Kong time each business day (excluding Saturdays) on TMA’s website and by Thomson Reuters.

Please refer to the TMA’s website for further details:
https://www.tma.org.hk/en_market_info.aspx.

What is the user group of the RMB currency products?

RMB hedging demand increases amid the currency’s increased two-way volatility, and a diverse and growing group of real users and RMB hedgers are more active in managing the RMB-related risks.

HKEX’s RMB currency products, both futures and options, can be used by any individual or institution that needs to manage foreign exchange risk exposure associated with RMB. The potential users of RMB currency products includes banks, fund managers (in particular QFIIs and QDIIs), companies with RMB related trading business and individual investors who want to gain or manage RMB exposures are the target.

What is the WM/Reuters Intra-Day Spot Rate?

The WM/Reuters Intra-Day Spot Rate was launched in 1994, and is generally recognised as the FX market benchmark¹. The EUR/USD, JPY/USD and AUD/USD WM/Reuters Intra-Day Spot Rates are used for calculating the final settlement price for HKEX’s EUR/CNH, JPY/CNH and AUD/CNH futures.

Please refer to the Reuters website for further details:
https://financial.thomsonreuters.com/en/products/data-analytics/market-data/financial-benchmarks/spot-rates.html

¹ As cited by a report of the Financial Stability Board in 2014 http://www.fsb.org/wp-content/uploads/FX-Benchmarks-progress-report.pdf

What RMB currency products are offered by HKEX? What is the underlying currency pair for these products?

HKEX offers a diversified suite of RMB currency products contracts based on the exchange rates between RMB and other currencies. Our first RMB currency futures, USD/CNH futures, was launched in September 2012, as the world’s first deliverable RMB currency futures product.

HKEX also offers cash-settled RMB currency futures – EUR/CNH futures, JPY/CNH futures, AUD/CNH futures and CNH/USD futures contracts. Complementary to the family of RMB currency futures, HKEX launched RMB currency options – USD/CNH options in March 2017.

The RMB currency products are financial instruments for managing RMB exchange rate risk exposure.

When will these RMB currency futures and options be settled?

For USD/CNH futures and options, the final settlement day is set on the third Wednesday of the contract month (subject to any holiday arrangement), which follows international market convention of currency derivatives.

For cash-settled RMB currency futures, the final settlement day is set on the first business day prior to the third Wednesday of the contract month (subject to any holiday arrangement).

Where can we access real-time data of the products?

The real-time market prices are available on the HKEX website (http://www.hkex.com.hk/Products/Listed-Derivatives/Foreign-Exchange/), via information vendors (see access codes) and trading platforms of EPs.

5-Year China Government Bond Futures

What is HKEX’s China Government Bond Futures (“HKEX’s CGB Futures”)?

HKEX’s 5-Year HKEX’s CGB Futures is an on-exchange interest rate risk management tool in the RMB fixed income space for offshore investors, traded and cash settled in RMB. Being the only China Government Bond Futures contract listed in the offshore market, it aims to address the growing interest rate risk management and trading needs from offshore investors.

What are the key differences between HKEX’s CGB Futures and China Financial Futures Exchange’s China Government Bond Futures?

While both products are China Government bond futures, they are traded separately in the offshore and onshore market. There are also notable contract specification differences between the two in areas such as contract size, trading days and hours, trading mechanism, position limit, and settlement arrangements.

Please refer to the Official Circular for further details on HKEX’s CGB Futures.

Why trade HKEX’s CGB Futures?

The HKEX’s CGB Futures provides a tool for investors to achieve their trading and risk management objectives, including hedging against interest rate movements, managing the duration for their portfolio, gaining exposure to treasury yields, and executing credit spread strategies.

Will there be any fee discount offered to early participants?

A market wide trading fee discount and two incentive programs will be offered from product launch 3 August 2026 to 30 Jul 2027 (both dates inclusive).

Please refer to the Incentive Programs Circular for further details.

What is the underlying instrument for HKEX’s CGB Futures?

The underlying instrument of the HKEX’s CGB Futures is a standardised virtual onshore Five-Year China Government Bonds with 3% coupon rate and annual coupon payment.

What is the HKEX’s CGB Futures Bond Basket and how is it determined?

The Bond Basket is used to determine the FSP, where it shall be composed of bonds in the Bond Universe which fulfils the following criteria:

Publicly issued by the China Ministry of Finance and denominated in RMB;
Tradable in the China Interbank Bond Market (“CIBM”);
Book-entry treasury bonds with fixed coupon rates (annual coupon payment); and
With original term to maturity of no more than 7 years, and remaining term to maturity greater than 4 years and less than 5.25 years as of the Last Trading Day of the futures contract

The two most liquid bonds with the highest Average Daily Turnover (“ADT”) in the observation period will be selected from the Bond Universe to construct the Bond Basket. The observation period shall exclude the bond’s first CIBM trading day, and be measured by the immediately preceding 10 CIBM trading days from the Bond Basket Confirmation Day. Bonds with an observation period of less than 10 CIBM trading days will not be considered as a Bond Basket constituent.

You may reference the below for Bond Basket selection illustration:

How to settle the futures contract and what is the Final Settlement Price (“FSP”)?

HKEX’s CGB Futures is a cash-settled product upon contract expiry, the FSP is based on the Bond Basket of the futures contract, which is determined and announced on the last trading day (“LTD”) (the second Friday of contract month) for each contract. If the LTD is not a Trading Day or it falls on a Chinese Mainland public holiday, the LTD shall be the preceding Trading Day which is also a business day in Chinese Mainland.

ChinaBond Pricing Center Co., Ltd (“CBPC”) is a benchmark pricing platform for bonds with its data widely used by both onshore and offshore participants. The HKFE Clearing Corporation Limited (“HKCC”) will determine the FSP for each contract which shall be the reference price of the relevant Bond Basket provided by CBPC on the LTD. The formula of FSP is as follows:

When will HKEX’s CGB Futures Bond Basket be announced?

The Bond Basket will be confirmed and published on HKEX’s website by day-end on the Bond Basket Confirmation Day (a day which is 20 HKFE trading days prior to the Last Trading Day of such contract). If such a day is not also a CIBM trading day, the Bond Basket Confirmation Day will be the preceding HKFE trading day which is also a CIBM trading day. Once confirmed, the Bond Basket for a futures contract shall remain unchanged until contract expiry.

Prior to the Bond Basket announcement, HKEX may publish an indicative Bond Basket on HKEX's website daily to indicate what the confirmed Bond Basket could be. The constituents of the indicative Bond Basket may be adjusted in response to changes in liquidity rankings.

You may reference the below for Bond Basket announcement illustration:

The methodology will be reviewed from time to time to ensure the Bond Basket remains suitable and representative, allowing market participants to achieve their hedging / trading objectives.

The Bond Basket constituents and other relevant information of each futures contract is available under the “Bond Basket Information” section of the HKEX 5-Year China Government Bond Futures product webpage.

What are the trading calendar and trading hours for HKEX’s CGB Futures?

The HKEX’s 5-Year CGB Futures will be a Holiday Trading Product (“H Product”), it will follow the same trading calendar for other H Products and be traded on all weekdays (Monday to Friday) except New Year’s Day. Only Holiday Trading Exchange Participants can trade the H Product.

The trading hours will be from 9:30 a.m. to 4:30 p.m. After-Hours trading is not applicable at this stage.

Please refer to HKEX’s Trading Calendar webpage for further details.

What are the error trade arrangements?

Investors can file error trade claims to the Exchange if the trades deviate from the predefined Error Trade Price Parameters. The error trade parameter is 2% from Notation Price. Large-Scale Error Trade claims (“LET”) are also available. HKEX will consider factors such as the number of trades, counterparties, and contract series involved, to determine whether the claim should be handled as a LET claim. A product specific requirement for LET is that the LET price must deviate at least 4% from the Notation Price.

Please refer to HKEX’s Error Trade Handling and Large-Scale Error Trade Handling Procedure webpages for further details.

What are the block trade arrangements?

Block trades consist of large buy and sell orders that are privately negotiated outside of the public auction market. The minimum volume threshold for a block trade is set at 50 contracts, and the permissible price range for these trades is within 2%.

Please refer to HKEX’s Block Trade Facility webpage for further details.

What are the standard combination order arrangements?

Standard Combination Order is the simultaneous purchase and/or sale of two different series with the same underlying. There will be one standard combination between the two available quarter months. Each standard combination series is pre-defined by HKEX as a combination strategy with two legs in HKATS.

What is the HKATS order size limit?

HKATS set order size limits for each product to maintain market integrity. Orders that exceed the prescribed limit will be rejected by the system. The maximum order size limit for entering orders into HKATS is 1,000 contracts.

Please refer to HKEX’s Order Size Limit webpage for further details.

What is the market-making arrangements for HKEX’s CGB Futures?

HKEX has appointed Liquidity Providers (“LP”) and Active Traders (“AT”) to support the product. LP are responsible for providing continuous two-way price quotations for all outstanding futures contracts, thereby facilitating trading activities. AT contributes to building stable liquidity for investors.

Please refer to the Liquidity Providers section of HKEX’s CGB Futures product webpage for further details.

What are the Position Limits and Large Open Positions (“LOP”) reporting level for HKEX’s CGB Futures?

Exchange Participants (“EP”) are required to adhere to position limits. For the 5-Year HKEX's CGB Futures, the position limit is set at 22,000 net contracts in all Contract Months combined, per Exchange Participant for the Exchange Participant’s own behalf; and 22,000 net contracts in all Contract Months combined per Client.

EP holding positions in excess of the Reporting Level for its own account or for any client shall file a LOP report. The threshold for LOP reporting for HKEX's CGB Futures is 2,500 open contracts in any one Contract Month, per EP for the EP’s own behalf; and 2,500 open contracts in any one Contract Month per Client.

Please refer to HKEX’s Large Open Positions and Position Limits webpage for further details.

How is the Daily Settlement Price determined for HKEX’s CGB Futures?

The daily settlement price of the product is determined based on the latest available market price before Market closes, if it is not available the daily settlement price shall be calculated in accordance with the HKCC’s waterfall methodology.

Please refer to the Clearing and Settlement Procedures section of the Rules and Procedures of HKCC for further details.

What are the margin levels of HKEX’s CGB Futures?

Similar to other HKFE products, HKCC shall calculate the margin requirements of its participants at the end of each trading day.

Chinese Mainland holiday margin will be implemented during trading days over Chinese Mainland holidays. It will be different to the margin level on normal trading days to cater for the overnight risks in the onshore market.

Please refer to the Margin table section of HKEX’s CGB Futures product webpage for further details.

How to fulfil the margin requirements of HKEX’s CGB Futures?

Clearing Participant must fulfil its initial margin requirement by any acceptable cash and/or non-cash collateral, where at least 50% of the margin requirement must be covered by RMB cash.

Please refer to the Revision of Cash Collateral Policy Circular for further details.

What are the acceptable collaterals for HKEX’s CGB Futures?

Acceptable collaterals for initial margin include cash collateral (in HKD, EUR, RMB, and USD) and non-cash collateral (such as Exchange Fund Bills and Notes, and US Treasuries). For variation adjustment, only cash collateral in the settlement currency (i.e. RMB) is accepted.

When the currency of the cash or non-cash collateral is different from the settlement currency of the contract, a haircut will be applied to the collateral at a pre-determined rate.

Please refer to HKEX’s Collateral Management webpage for further details.

Where can participants view market information related to HKEX’s CGB Futures?

HKEX’s website contains the necessary information in relation to the futures contract as well as its Bond Basket. Participants may refer to information vendors’ platform for China Government Bond data, where the historical Bond Basket and theoretical contract price can be constructed and calculated accordingly.

Please refer to HKEX’s Derivatives Market Access Codes webpage for further details.

Who can trade HKEX’s CGB Futures?

Eligibility is consistent to HKFE’s current guidelines for listed derivatives; investors may refer to HKFE’s rules and procedures for requirements. EPs shall perform due diligence on their clients to ensure trading eligibility. Investors should also perform their own trading eligibility assessment.

For instance, HKEX’s CGB Futures are considered to be foreign security futures products by the U.S. SEC and the U.S. CFTC. As the underliers of HKEX’s CGB Futures are bonds issued by a foreign government eligible to be registered with the U.S. SEC under Schedule B of the Securities Act of 1933, HKEX’S CGB Futures are qualified to be exempted from registration by the U.S. SEC under its order issued on 30 June 2009 (the “SEC Order”). Only eligible U.S. market participants (primarily “qualified institutional buyers”) may trade these foreign security futures products in accordance with the terms and conditions of the SEC Order and subsequent guidance issued by the U.S. CFTC in 2010. U.S. persons and persons located in the United States should review carefully the eligibility requirements and make their own determination. Additional information is available at HKEX’s CGB Futures product webpage.

HIBOR

What are HIBOR Futures?

HIBOR futures are linked to the Hong Kong Interbank Offered Rate. There are two types of HIBOR futures: the One-Month HIBOR and Three-Month HIBOR futures contracts.

The Hong Kong Interbank Offered Rate (HIBOR) is the rate on which Hong Kong dollar-denominated instruments are traded between banks in Hong Kong. Rates (ranging from one-month to 12-month rates) are set at 11:00 am on Hong Kong business days based on HIBOR quotations provided by 20 banks designated by the Hong Kong Association of Banks.

Commodities

Why should HKEX launch commodities products?

Commodities are one of the three core pillars of HKEX’s multi-asset strategy
The launch of commodities products is to promote commodity market in the Asian time zone to reflect Asian supply and demand
It will give customers of HKEX exposure to the commodities sector

What are the benefits of trading these commodities futures contracts on HKFE platform?

It facilitates hedging and arbitrage in the Asian time zone
It gives exposure to a network of over 30 HKFE participants with Mainland backgrounds and their ability to attract Mainland commodity investors
Exposure to liquidity from global financial market players who trade commodities

Who are the target participants?

Physical end users and sector participants looking to hedge their market exposure
Cross-market arbitrageurs
Retail and Financial investors with an appetite to invest in the commodities sector

What are HKEX Gold Futures? What are their characteristics?

Gold Futures are futures contracts based on the precious metal market to help build Hong Kong into a mature, comprehensive capital market that can serve as a risk management centre for both Mainland investors and international participants.
HKEX Gold Futures are designed to help gold end users, like refiners, fabricators, and jewelers, hedge gold price risk, as well as for banks, fund managers and traders to invest in the precious metals market. HKEX's Gold Futures underlying is a 1 kilogram gold bar of at least 0.9999 fineness.
HKEX Gold Futures are quoted in USD and off shore RMB (CNH), and are the first physically delivered commodity futures contract in Hong Kong. The final settlement price is the volume weighted average price of all trades in the expiring Contract Month during the last thirty minutes of trading on the Last Trading Day.
For more information, investors can refer to "Gold Futures" under"Products - Listed Derivatives - Commodities"on the HKEX website.

What are HKEX Iron Ore Futures? What are their characteristics?

Iron Ore Futures are futures contracts based on seaborne iron ore that is the raw material for steel making. HKEX’s iron ore futures underlying is the seaborne TSI index 62% Fe CFR China, which is a medium-high grade iron ore.
HKEX Iron Ore Futures contracts are designed to provide a way for financial and physical investors to hedge their iron ore price exposure and invest in the commodity.
HKEX Iron Ore Futures contract is quoted in USD, cash settled and the final settlement price is based on the arithmetic average of all TSI index 62% Fe CFR China index values published in that contract month. The last trading day is the last Hong Kong business day of a calendar month that is not a Singapore public holiday. Both monthly and quarterly contracts are provided in HKEX to enhance exposure.
For more information, investors can refer to "Gold Futures" under"Products - Listed Derivatives - Commodities"on the HKEX website.

What are HKEX London Metal Mini Futures? What are their characteristics?

London Metal Mini Futures are based on six base metals (Copper, Aluminum, Zinc, Nickel, Tin and Lead) on the London Metal Exchange, the world premier industrial metals trading exchange.
HKEX London Metal Mini Futures offers Asia time zone trading facilities and are designed to give the market another channel to hedge against adverse price movements. HKEX aims to develop commodities trading in Hong Kong in cooperation with LME, to bring together both the physical and financial communities.
HKEX London Metal Mini Futures are quoted in USD and off-shore RMB (CNH), cash settled and are a smaller size than the LME contracts. The final settlement price is based on the LME’s Official Settlement Price which is established during the 2^nd Ring Close
For more information, investors can refer to "London Metal Mini Futures" under "Products & Services - Derivatives Products" on the HKEX website.

How will the block trade facility work?

HKATS’s Block Trade Facility allows participants to execute a large-sized order with price and execution certainty; and reduction of counter-party risk through central clearing.
The minimum block trade volume threshold for commodities are as follows:

London Metal Mini Futures (USD and CNH): 50 contracts
Gold Futures (USD and CNH): 30 contracts
Iron Ore Futures: 50 contracts

Criteria for Block Trades, Information Dissemination, Clearing Arrangements and Market Surveillance can be found
https://www.hkex.com.hk/Services/Trading/Derivatives/Overview/Trading-Mechanism/Block-Trade-Facility?sc_lang=en

What is TMA pricing?

TMA is Hong Kong’s Treasury Markets Association
The pricing is the benchmark of the spot USD/CNH rates in Hong Kong published at 11:15 am each business day
The pricing is determined by averaging the middle quotes after excluding the highest 3 quotes and lowest 3 quotes from the 18 contributing banks (subject to changes by TMA from time to time)

Please note the following disclaimers and copyright notice regarding information provided on the Treasury Markets Association's website

While the Treasury Markets Association (TMA) will make all reasonable efforts to ensure a continuous, accurate and timely service, the TMA and other data providers make no warranties, representations or undertakings, expressed or implied by law or otherwise, in relation to the price fixings and reference rates and are not responsible for any errors or omissions, or losses caused by disruptions in the service or late publication of the daily rates or inaccuracy of the daily rates or otherwise arising from the use of or reliance on the price fixings and reference rates.

What is the margin call arrangement for the new products?

Please refer to the HKEX website
( https://www.hkex.com.hk/Services/Clearing/Listed-Derivatives/Risk-Management/Margin/Margin-Tables?sc_lang=en ) for the existing margin call arrangement which is also applicable for the LME Mini Futures contracts

What is the margin level of these products?

The latest margin levels for the Commodity Futures contracts can be found at

https://www.hkex.com.hk/Services/Clearing/Listed-Derivatives/Risk-Management/Margin/Margin-Tables?sc_lang=en

USD Gold Futures

For contracts entering the spot month, what are the expectations of HKCC/HKFE to Exchange Participants (“EPs”) or Clearing Participants (“CPs”) (collectively “the Participants”)? What internal controls should participants have in place to monitor both their own and their clients’ positions to ensure they avoid excessive exposures (particularly from LTD-2 to LTD+2)?

For HKEX Gold Futures contracts entering the spot month, the Participants are required to have internal controls to manage their own /clients’ positions and such control should aim to mitigate risks of carrying excessive positions.

Non-Delivery Participants (“NDPs”) should ensure no open positions by end of LTD-1, no trading or accepting any transfer of any spot month contracts after the T Session on LTD-1 (except for closing existing open positions). A 0.25% fine of the Final Settlement Price multiplied by the Contract Size will be imposed and warning letter might be issued for NDPs breaching position restrictions on LTD-1 and LTD.

Delivery Participants (“DP”) should ensure Acceptance/Delivery Notice is submitted to HKCC by LTD 17:00.

The Seller CP needs to confirm the delivery details with HKCC by LTD+1 10:00 and ensure the gold is ready for earmark by LTD+1 noon. For any failure to receive the full amount of gold, Buyer CP should notify HKCC by LTD+2 14:30.

From morning of LTD-2 onwards, a physical delivery charge (10% of contract value) will be applied to any open positions held by the end of LTD-3 as additional margin, serving as early alert for all CPs to close /roll over positions should there be no intention of delivery.

There is a predefined matching logic to minimize impact to DPs. For non-performing DP, Cash Compensation (price differential + 3% of contract value of spot month contract on Final Settlement Day (“FSD”)) to be paid to the performing CPs to work out alternative solutions when impacted (e.g. purchase from spot market), with non-delivery charge (7% of the Reference Price multiplied by the Contract Size) to be payable to HKCC.

Will there be distinct monitoring near delivery period compared to the non-delivery period done by HKFE / HKCC?

HKCC will monitor CPs’ outstanding positions as contracts approach the delivery period, and will impose measures such as delivery margins from LTD-2, as well as potential fines and warning letters on NDPs that keep open positions or accept new trades from LTD-1.

What essential operational preparations must HKCC Clearing Participants make participate in USD Gold Futures clearing?

To become DPs, who have physical delivery capability for final settlement of USD Gold Futures Contracts, participants should

Have USD settlement capability,
Set up physical settlement arrangement with each of the Approved Depositories i.e. Open a depository account with each of the Approved Depositories (i.e. Brink’s HK initially); or Line up Delivery Agreement with Delivery Agent i.e. Appoint another HKCC Participant who has depository accounts with all Approved Depositories as Delivery Agents.

To become NDPs, who do not have physical delivery capability for final settlement of Gold Futures Contracts, participants should

Have USD settlement capability,
Restrictions - subject to HKCC Rule 606A, NDP should not
- Carry the spot month contracts by the end of LTD-1
- Trade or accept any transfer of spot month contracts after T session on LTD-1 unless for the purpose of closing out existing open positions of the NDP

Regarding LTD-2, what are delivery margins and how should these be treated differently from other margins?

A physical delivery contract charge in the amount of approximately 10% of the contract value is imposed on all open spot month Gold Futures Contracts from the morning of the second business day prior to the Last Trading Day (i.e., LTD-2) until such contracts are closed out or settled, to mitigate the risk of physical delivery.

The physical delivery contract charges for Gold Futures are reviewed and updated by the Clearing House on a regular basis and are published in the Margin Tables - Margin Levels for Futures Contracts - Current. For details on the margin calculation for Gold Futures, please refer to the PRiME Margining Guide.

On LTD, in what condition will fines and warning letters be issued?

Warning letters and fines will be issued to NDP who:

Maintain open positions by the end of LTD-1^[1];
Trade or accept any transfer of any spot month contracts after the T Session on LTD-1 (not for closing existing open positions); or
Maintain open positions by the end of LTD

^[1] After the System Input Cutoff time (i.e. 20:30) on LTD-1

Does the earmarking extend to CP's client depository account? As such, does the CP need to specify the end client's depository account details?

No, the earmarking does not extend to the CP’s client depository account. Accordingly, the CP is not required to specify the end client’s individual depository account details for this purpose. The earmarking requirement is fulfilled at the CP level, and there is no obligation to look through to, or disclose, the underlying client account information.

During the delivery period, could you outline the matching logic for physical deliveries, the process for cash compensation, and any associated charges?

HKCC’s matching process with Clearing Participants is designed based on below considerations:

In order to maximise the chances of physical delivery, DP will be pooled and matched amongst themselves first; the same applies for NDP.
If there is more than one Approved Depository, priority will be given to deliveries in the same depository for the convenience of DP.
For efficiency, short and long positions of the same quantity will be matched first.

For fairness, in case there are multiple positions of the same quantity, the positions will be matched on a random basis.

Clearing Participant	Scenario	Cash Compensation and Charges
DP	Delivery Failure - Seller DP unable to deliver gold	Make Cash Compensation to the matched, performing CP Price Differential with reference to Final Settlement Value and contract value of spot month contract on Final Settlement Day (FSD) and 3% of contract value of spot month contract on FSD, where applicable Pay non-delivery charge (7% of the Reference Price multiplied by the Contract Size) to HKCC
Payment Failure - Buyer DP unable to pay
NDP	NDP holds open positions by end of LTD

Clearing Participant

Scenario

Cash Compensation and Charges

Delivery Failure - Seller DP unable to deliver gold

Make Cash Compensation to the matched, performing CP
- Price Differential with reference to Final Settlement Value and contract value of spot month contract on Final Settlement Day (FSD) and
- 3% of contract value of spot month contract on FSD, where applicable
Pay non-delivery charge (7% of the Reference Price multiplied by the Contract Size) to HKCC

Payment Failure - Buyer DP unable to pay

NDP

NDP holds open positions by end of LTD

For LTD+2, what procedures are followed if a NDP still holds open positions at the end of LTD, thereby entering settlement or delivery?

NDP is required to pay non-delivery charge (7% of the Reference Price multiplied by the Contract Size) to HKCC, and make Cash Compensation to the matched, performing CP including:

Price Differential with reference to Final Settlement Value and contract value of spot month contract on FSD and
3% of contract value of spot month contract on FSD, where applicable

If a CP holds both long and short positions on behalf of different underlying clients, will these be included in the same matching process, or is the CP required to net off the positions internally first?

The matching process is based on DCASS accounts. Therefore, if the underlying clients’ positions are held in separate DCASS accounts, they will not be netted in the matching process. In such cases, long and short positions maintained for different clients will be treated independently, and the CP should follow the matching results from the clearing house for submission.

If after matching, a seller CP cannot deliver the physical gold, how can they resolve the issues with the buyer CP? What are the logistics for working out alternative solutions?

If the seller CP cannot fulfil delivery obligation, they will need to pay cash compensation (price differential on top of 3% of contract value of spot month contract on FSD compensation) to the buyer CP, and a 7% of the Reference Price multiplied by the Contract Size non-delivery charge to HKCC. The buyer CP may also follow up with the seller CP and seek arbitration with HKCC facilitating the process. Further details are available in HKCC Procedures 2A.3.3(a) and 2A.3.5(k).

Where can participants find the forms for acceptance notice and delivery notice?

The relevant forms (e.g. MF04, MF05, MF06) can be found under the Operations & Technical section of our webpage here.