Hong Kong’s New Era

New markets, assets dominate 2015 HKEx Hosting Services Ecosystem Forum

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Jonathan Leung_Q2 15Mainland links, regulatory changes and commodities expansion as well as the theme of innovation drove the discussion at this year’s HKEx Hosting Services Forum. Attended by more than 300 market participants, the event departed from prior years focus on technical developments to identify the most pressing issues faced by Hong Kong’s markets.

Jonathan Leung, Senior Vice President and Head of Hosting Services, HKEx opened the forum highlighting the growth in market activity as a result of active take up of HKEx’s hosting services.

A new era of mutual market access beckons, according to Richard Leung, HKEx Managing Director and Co-Head of IT. He presented the current stage of HKEx’s development in the context of a recent history that’s featured more Chinese IPOs, domestic growth and finally opening up to international listings.

Having bought the London Metal Exchange (LME) in 2012, HKEx is now utilizing the LME’s price mechanisms to offer hedging tools to commodities users and traders in China. Connecting with China was a strategic motivation behind the acquisition of LME, according to Rebecca Brosnan, Managing Director and Head of Asia Commodities for HKEx. Brosnan, who helped orchestrate the £1.4 billion deal, has rolled out new commodities derivatives products to the vast commodities flows into China.

Work on the Shanghai-Hong Kong Stock Connect began almost immediately after the LME acquisition was completed, although it was only made public in 2014. After trading began in November 2014, there were many questions and concerns as the aggregate quota use remained relatively low. However, April’s sudden rise in southbound trading has demonstrated the possibilities traders had hoped for.

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Citi’s Endre Markos, Director and Regional Head of Execution to Custody, Markets and Securities Services lead a panel featuring buy-side and sell-side views on the six-month-old trading link between Hong Kong and Shanghai. Although the focus was on how the right balance between regulation and products was found for the initial launch, Tae Yoo, HKEx’s Managing Director and Head of Fixed Income Currency Development and Client Business Development, noted subsequent enhancements will improve the programme.

“The Shanghai-Hong Kong Stock Connect was eagerly awaited by Fidelity. From a fundamental perspective, we are excited about the opportunity to invest in China. From an operational perspective, there were a number of questions we had to address around trading, settlement and other functional areas to be ready to trade on day one, which we were able to do successfully.” said Chris Seabolt, Asia Head of Trading for Fidelity Management and Research.

Emma Quinn, Global Co-Head of Equity Trading for AllianceBernstein, commented that having another mechanism besides QFII to accessing China to service their China funds was a significant benefit.

Many broker’s QFII allocation was fully committed before the Stock Connect launched, and since then, QFII has become available again as firms choose to take positions through Stock Connect, noted Hani Shalabi, Head of Advanced Execution Services for Credit Suisse.

International investors have to become comfortable with an opportunity before they pursue it. Having already integrated QFII into investor disclosures, major fund houses may need to wait a year before beginning the comprehensive task of adding new compliance-approved disclosures about positions taken via Stock Connect, commented Dean Chisholm, Regional Head of Operations for Invesco.

After the forum’s break, HKEx’s PC Wong, Senior Vice President, Derivatives Trading gave an update on the take up of derivatives at HKEx, noting stock options now make up half of trading volume. After 1.2 million contracts were traded on 13 April 2015, Wong is confident that larger cash market turnover will generate further interest in the derivative instruments.

With the consultation period on the exchange’s proposed Volatility Control Mechanism (VCM) and Closing Auction Session (CAS) recently ended, HKEx ’s Senior Vice President for Cash Trading, Sally Kwok, discussed the rationale for the proposals and HKEx’s objectives of protecting market integrity as well as satisfying the needs of all market participants.

Emma Quinn Q2_15While a VCM is standard for trading venues in many different markets, there is open debate on the ideal VCM model and the specific features it should have, such as using dynamic versus static limits for volatility triggers, the number of times a trigger can be activated, and how to exit the VCM’s controls after they are triggered. The CAS is a significant priority for institutional investors required to trade at a closing price. The proposed model is aimed at addressing institutions’ needs as well as possible concerns of other market participants. HKEx anticipates it will publish its consultation conclusions and next steps sometime in 2015.

HKEx’s Winnie Poon, Senior Vice President and Head of Market Data, outlined HKEx’s tiered data offerings before a final panel on risk regulation and technology, moderated by Greg Lee, Barclay’s Director and Head of Equity Electronic Trading, Asia Pacific.

“A big change from our side is that we now make sure risk checks are also done on our side. The issue then becomes coordinating our risk checks with multiple brokers all employing slightly different approaches,” noted Lee Bray, Head of Trading, Asia Pacific, JP Morgan Asset Management.

Brokers also have to consider which regulator is reviewing the order, as retail orders will be assessed by the Hong Kong Monetary Authority with one set of objectives, while institutional orders are evaluated separately by the Securities and Futures Commission, observed Sanji Shivalingam, UBS’ APAC Head of Algorithms and Analytics.

Regulatory, technical and market structure changes have created a buzz around the Hong Kong market that is only surpassed by the din of broken trading records. A new era is underway.

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