Photographer: David Paul Morris/Bloomberg

Hong Kong Exchange Eyes New Trading Rules to Spur Volume

Updated on
  • Aim is to make market more competitive, says exchange CEO Li
  • Stamp duty, cross-margin requirements also being examined

Hong Kong Exchanges & Clearing Ltd. is considering rule changes aimed at increasing trading, according to Chief Executive Officer Charles Li.

Rebates to market makers, simplified rules for using collateral across multiple positions, and the removal or reduction of stamp duty charges are among measures being considered, Li said in an interview. Some of the changes will require approval from the securities regulator or government, he said.

The exchange operator is eyeing changes as it battles for business with its international rivals. HKEX plans to allow so-called innovative companies with dual-class share structures as part of a slew of measures that could see the biggest changes to its listing rules since 1993. It has also set up three trading links with mainland China, with more in the pipeline, and in November introduced iron ore futures, in a head-on challenge to Singapore Exchange Ltd.

“The objective, if there is an objective, is to really make our market more competitive,” Li said in an interview last month. “Our strategy is making our initial public offering market more relevant, make our market more connected, and make our derivatives market more competitive. That really is our three-leg strategy.”

HKEX’s share price closed up 3.5 percent on Monday, its highest level since July 2015. The stock gained 37 percent in the 12 months through Friday, outperforming the majority of its peers.

Despite being the world’s fourth-biggest stock market, Hong Kong has traditionally lagged behind Singapore Exchange for derivatives trading. Singapore’s FTSE China A50 index futures, for example, is often Asia’s most traded offshore contract.

Li said in response to a question that one idea under discussion is to pay rebates to market makers. A common feature in other developed markets including the U.S., such payments are restricted by the Securities and Futures Commission.

“We are talking about small scale, incremental, early-stage pilot programs, where people can at least begin to think, ‘We could have cash incentives, we could have rebates, we could do this, that,’” Li said.

Another area of debate is cross-margin requirements, Li said without elaborating. In Singapore, traders are able to post less collateral on offsetting positions, which requires less cash to be set aside and can reduce execution costs.

“We are looking at various ways to make our derivatives markets more competitive, by making it easier and more cost effective for people to trade. We will discuss our ideas with our regulator in due course,” HKEX spokeswoman Wong Sau-ching said in an email.

Regulatory Review

“We will review the HKEX’s proposals when submitted to the SFC,” Ernest Kong, a spokesman for the regulator, said by email.

HKEX is also considering whether to ask the government to reduce or remove stamp duty, Li said. Removing the duty, currently 10 basis points (0.1 percent) on both sides of a trade, could ignite interest from high-frequency trading firms and others that specialize in exploiting tiny movements in share prices. The company’s discussions on whether to propose such a change was reported by Bloomberg in October.

The government will want to know who is going to underwrite any shortfall in tax revenue and HKEX doesn’t currently have an answer, Li said.

— With assistance by Viren Vaghela

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