Hong Kong Exchanges and Clearing Limited (HKEx) announced today (Tuesday) plans to introduce Flexible Index Options in the first quarter of next year, pending regulatory approval.
Flexible Index Options are Hang Seng Index and Hshares 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.
At present, large deals in some overthecounter (OTC) contracts with the same strike prices and expiry months as exchangetraded contracts are already executed as block trades in HKEx’s derivatives market. HKEx is seeking to expand that part of the market by allowing flexibility in strike prices and contract months.
HKEx believes its introduction of Flexible Index Options would provide OTC market participants with an attractive counterparty risk alternative. OTC players using exchangetraded futures contracts to hedge their OTC option positions would realise collateral and margining efficiencies when they book relevant positions with HKEx. HKEx also believes offering Flexible Index Options would help increase market transparency by attracting more OTC deals to its block trading facility. Increased market depth is another potential benefit.
Some key features of Flexible Index Options are listed below:
- Expiry must be on the second to the last trading day of any calendar month and is subject to other limitations (please see Appendix II of the information paper for examples of possible expiry months);
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- A series will not be created if there is a standard series with the same strike price and expiry;
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- Transactions must be through block trades of 100 contracts or more;
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- No market making as execution is confined to block trades;
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- Exchange fee, 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
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- There are appropriate risk management measures in place to safeguard the integrity of clearing house.
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An information paper posted on the HKEx website describes the key features of Flexible Index Options, the proposed operating arrangements and the benefits of adding the options to HKEx’s derivatives market.