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HKEX to Work to Revise its Stock Option Position Limit Model

Market Operations
20 Jun 2016

Hong Kong Exchanges and Clearing Limited (HKEX) announced today (Monday) that it will work to revise its stock option position limit (SOPL) model.

HKEX published a consultation paper (CP) on 29 April 2016 to seek market views on proposed revisions of its SOPL model to align Hong Kong’s SOPL regime more closely with international practices and ensure the relevance of the individual position limits at HKEX in the long run.  HKEX’s consultation conclusions were published today.

The vast majority of the corporate respondents (32 out of 34, or 94 per cent) and all of the individual respondents (2 out of 2, or 100 per cent) to the CP supported HKEX’s proposed revisions and agreed they would bring Hong Kong’s SOPL regime more in line with international practice, thus enhancing the competitiveness of Hong Kong’s derivatives market.

The respondents comprised 23 Exchange Participants (representing 67 per cent of the stock options turnover at HKEX), five asset management companies, five professional and industry associations, one listed company and two individuals.

"We were pleased to receive responses from various market segments and to receive strong support for our proposals," said HKEX’s Head of Markets Roger Lee.  "A revision of our stock option position limit model not only can further improve Hong Kong’s derivatives market but also enhance the competiveness of Hong Kong as an international financial centre."

The proposals reflect feedback from a wide spectrum of market participants as well as recommendations from the Financial Services Development Council in its recent report titled "Hong Kong’s Derivatives Position Limits Regime – The Need for Revision".

Key features of HKEX’s proposed revision of its SOPL model are summarised below:

Three-tier framework to address the de facto single position limit issue.  A contract equivalent number will be calculated for each stock option class based on the underlying stock’s market capitalisation and liquidity and other factors. Each stock option class will be assigned to one of three tiers comprising limits of 50,000, 100,000 and 150,000 contracts based on the contract equivalent number.

Regularly scheduled reviews. The position limits for all stock option classes will be reviewed annually and adjusted when necessary to ensure they remain in line with the market’s development.

Adjustment upon corporate action.  Following a corporate action such as share split or consolidation that affects the underlying stock, the contract size of the affected stock option may be adjusted to maintain the notional value of the options contract.

As the adoption of the proposed revisions requires changes to HKEX’s rules as well as the Securities and Futures (Contracts Limits and Reportable Positions) Rules, HKEX will provide the results of its consultation to the Securities and Futures Commission (SFC) and have further discussions with the SFC on its proposals.

The consultation paper and the consultation conclusions are available on the HKEX website along withcopies of respondents’ submissions.


Updated 20 Jun 2016