HKEx to Further Strengthen its Derivatives Market

Market Operations

01 Mar 2007

Hong Kong Exchanges and Clearing Limited (HKEx) will offer additional expiry months in selected stock option classes starting in the second quarter of this year.

Under the scheme, a third calendar quarter expiry month will be introduced for trading in the following five stock option classes from 2 April:

Cheung Kong
China Life Insurance
China Mobile
HSBC
Hutchison Whampoa

As a result, the expiry months available for trading in the five stock option classes from 2 April will be April, May, June, September, December 2007 and March 2008.

“We are monitoring the market for signs of demand for the third calendar quarter expiry month or other longer-dated expiry months in the other option classes and may consider introducing additional expiry months in more selected stock option classes to further expand the choices available to investors,” said HKEx Chief Operating Officer Gerald Greiner.

HKEx will introduce revised market making obligations in its stock options and stock futures markets on 2 April in a separate initiative (the revised obligations are attached below).

“These revisions underline our commitment to quality market making services,” said Mr Greiner.

Revisions in Market Making Obligations in Stock Options

1.	Market Making Spread Requirements in Stock Options with Reference to the Best Bid/Ask Spread in the Underlying Stock
	a)	Liquidity Level 1

Option Series	Rule	Existing Spread Rules (whichever is lower)	Revised Changes(whichever is lower)
Spot with 3 days or less to expiry	%	20% of option bid price	No change
Spot with 3 days or less to expiry	Max	Best B/A Spread + 1 Minimum Spread	Best B/A Spread x 3
Spot month with 4 days or more to expiry; two next expiry months	%	10% of option bid price	No change
	Max	Best B/A Spread + 1 Minimum Spread	Best B/A Spread x 3
The next two quarter months	%	20% of option bid price	No change
The next two quarter months	Max	Best B/A Spread + 1.5 Minimum Spreads	Best B/A Spread x 4
The third calendar quarter months and any other longer-dated expiry month as the Exchange deems necessary (new)	%	N/A	20% of option bid price
	Max	N/A	Best B/A Spread x 8

Liquidity Level 2

Option Series	Rule	Existing Spread Rules (whichever is lower)	Revised Changes (whichever is lower)
Spot with 3 days or less to expiry	%	20% of option bid price	No change
Spot with 3 days or less to expiry	Max	Best B/A Spread + 2 Minimum Spreads	Best B/A Spread x 4
Spot month with 4 days or more to expiry; two next expiry months	%	10% of option bid price	No change
	Max	Best B/A Spread + 2 Minimum Spreads	Best B/A Spread x 4
The next two quarter months	%	20% of option bid price	No change
The next two quarter months	Max	Best B/A Spread + 2.5 Minimum Spreads	Best B/A Spread x 6
The third calendar quarter months and any other longer-dated expiry month as the Exchange deems necessary (new)	%	N/A	20% of option bid price
	Max	N/A	Best B/A Spread x 12

Minimum Spread Requirements

Underlying Price	Existing Rule	Revised Changes
> = $100	Minimum Spread + $0.10	Best B/A Spread + $0.10
< $100	Minimum Spread + $0.05	Best B/A Spread + $0.05

Minimum Quote Size Requirements in Stock Options

MM Minimum Quote Size Requirements	Existing Determining Method	Revised Determining Method
30 contracts	Tier 1	Liquidity Level 2
60 contracts	Tier 2	Liquidity Level 1

Methodology in Determination of Liquidity Levels

Liquidity Level	Existing Mechanism		Revised Mechanism
Liquidity Level 1	(a)	More than 50% of the time with the best B/A Spread equal to the minimum cash spread; and	(a)	Unchanged; and
	(b)	More than 50% of the time with the underlying order size at the best B/A spread larger than the required MM quote size, i.e. 30 contracts in Tier 1 options and 60 contracts in Tier 2 options.	(b)	More than 50% of the time with the underlying order size at the best B/A Spread larger than 60 contracts.
Liquidity Level 2	(a)	50% or less of the time with the best B/A Spread equal to the minimum cash spread; or	(a)	Unchanged; or
	(b)	50% or less of the time with underlying order size at the best B/A spread equal to or less than the required MM quote size, i.e. 30 contracts in Tier 1 options and 60 contracts in Tier 2 options.	(b)	50% or less of the time with underlying order size at the best B/A Spread equal to or less than 60 contracts.

Market Making Performance Eligible for Trading Tariff Discount

MM Obligations	MM Performance per Month	Existing Rate	Revised Rate
Responding to Quote Requests	Passing Rate	> = 50%	No Change
Responding to Quote Requests	Response Rate with Trading Tariff Discount	> = 80%	> = 70%
Providing Continuous Quotes	Passing Rate	> = 50%	No Change
Providing Continuous Quotes	Quote Rate with Trading Tariff Discount	> = 70%	No Change

Revisions in Market Making Obligations in Stock Futures

Market Making Obligations in Responding to Quote Requests in Stock Futures

Market Making Obligation	Existing Parameters	Upcoming Changes
Maximum Bid/Offer Spread	$0.15 or 2 minimum underlying spreads, whichever is greater	$0.15 or 4 times the best bid/offer spread in the underlying stock, whichever is greater
Quote Size	10 contracts	No change
Response Time	1 minute	10 seconds
Display Time	5 seconds	20 seconds

Market Making Obligations in Providing Continuous Quotes in Stock Futures

Market Making Obligation	Existing Parameters	Upcoming Changes
Maximum Bid/Offer Spread	$0.15 or 2 minimum underlying spreads, whichever is greater	$0.15 or 4 times the best bid/offer spread in the underlying stock, whichever is greater
Quote Size	5 contracts	10 contracts
Display Time	5 seconds	20 seconds

B/A = Bid/Ask
Max = Maximum
MM = Market Making

Updated 01 Mar 2007