Launch Date: 5 November 2018

Introduction

In stock investing, the return and risk profile for shareholders has two components: stock price appreciation and dividend.   The conventional stock Index futures such as the Hang Seng Index (HSI) futures and Hang Seng China Enterprises Index (HSCEI) futures are risk management tools based on index calculated from prices of constituent stocks only.    The introduction of total return index (TRI) futures aims to meet the trading and risk management needs of investors who adopt an investment strategy on a total return basis, i.e. the cash dividends of index constituent stocks are re-invested into the index stock portfolio according to their respective market capitalisation weightings. 

There are four TRI futures contracts to be listed in the Hong Kong Futures Exchange Limited (HKFE):

• Hang Seng Index (Gross Total Return Index) Futures (“HSIGTRI Futures”)

• Hang Seng Index (Net Total Return Index) Futures  (“HSINTRI Futures”)

• Hang Seng China Enterprises Index (Gross Total Return Index) Futures  (“HSCEIGTRI Futures”)

• Hang Seng China Enterprises Index (Net Total Return Index) Futures  (“HSCEINTRI Futures”)

Gross TRI replicates the index portfolio performance that all announced dividends available on the ex-dividend day will be re-invested into the constituent stocks portfolio.  The net TRI replicates the index portfolio performance with dividend re-investment on after dividend tax basis.  In Hong Kong, all H-shares are subject to dividend withholding tax.

These TRIs are compiled by the Hang Seng Indexes Company Limited (“HSIL”) on the basis of same constituent stock weighting as HSI and HSCEI and disseminated every 2 seconds.

Who should be the users of TRI Futures

The potential users of TRI futures are as follows:

• High networth investors:  Replicate the total return index performance without the hassle of accessing the constituent stocks, related stamp duty and taxes of stock holding, and transaction cost / efforts required for dividend reinvestment.

• Index fund managers: Reduce tracking error through cash equitization, i.e. gaining TRI exposure for the cash portion of the index fund;

• ETF managers: Manage exposure during the index rebalancing period;

• Index futures based ETF managers: Replicate physical stock index portfolio with lower capital cost and transaction cost using TRI futures as the underlying investment vehicle;

• Hedgers:  Manage downside market risk

• Arbitrageurs: Make profits when there are pricing discrepancies among, price index futures, ETF and TRI futures.

Advantages of Trading TRI Futures

TRI futures are becoming a popular trading instrument for institutional investors to replicate the economic return of TRI swaps traded in the OTC market as a result of global regulatory tightening of capital and swap margin requirements. The benefits of trading listed TRI futures are as follows:

1. Market transparency - with screen pricing supported by market makers / liquidity providers and daily mark-to-market by the Clearing House;

2. Lower Margin Requirements - Futures margining by the Clearing House is much lower than the swap margin requirements in the OTC market;

3. Low transaction cost – The trading fee of TRI futures is about 0.1 basis point on notional value traded only; and

4. Capital efficiency - Margin offset available among price index futures / options and TRI futures;

5. Position limits are calculated on a net delta basis among price index futures / options and TRI futures.