As efforts in the US seek to move derivatives trading from over-the-counter markets onto exchanges, Hong Kong is also looking at ways to improve transparency and reduce counterparty risk.
Hong Kong Exchanges and Clearing (HKEx) intends to introduce listed equity options with flexible payment structures by the end of the year, said HKEx chairman Ronald Arculli last week at a conference on market infrastructure organised by Citi.
Arculli cites US efforts to standardise credit-default swap contracts and enable them to be centrally cleared as a reason for Asian exchanges to host more transactions that are currently done OTC.
The exchange is having a pretty good year. Investor risk appetite has returned, helping boost daily average turnover from $6.4 billion at the start of 2009 to $9 billion as of the end of August. Hong Kong has become the most lucrative venue worldwide for IPO and post-IPO fundraising, and the Hang Seng Index is up 40% year-to-date, making the listed HKEx the third-largest exchange in the world by market capitalisation.
The main goals are to streamline the process for attracting H-share listings, particularly in the mining and resource sector; facilitate mainland China's qualified domestic institutional investor (QDII) programme by hosting mainland exchange brokers in Hong Kong; and list more exchange-traded funds, including possibly ones covering Greater China markets.
What he didn't mention in his speech, however, was an effort to reduce trading spreads, which remains a priority for many fund managers.
The exchange is closely monitoring what happens in other markets and is well aware of how competition in the US and elsewhere is changing the landscape. Arculli notes that the American regulation NMS (for 'national market system' plan), requiring all stocks to trade at the best price regardless of venue, has seen NYSE's market share in total equity turnover fall from 78% in 2004 to 28% last year.
The same proliferation of alternative trading venues will not occur in Asia, due both to tighter regulation and the vertical silo model of integrated trading, clearing and settlement that is typical throughout the region.
But Arculli says tie-ups -- such as Bursa Malaysia's deal with the Chicago Mercantile Exchange to list palm oil contracts or Singapore Exchange's decision to form a JV dark pool with Chi-X Global -- are changing the playing field. He adds that Australia's recent decision to shift supervision of market participants from its stock exchange to its securities regulator is the first step to allowing rival exchanges to set up shop there. "This may have implications for Asia," Arculli says.
He is aware that institutional investors want better services from exchanges for computerised trading, which has led to new methods such as dark pools, high-frequency or flash trading, and co-location of trading servers physically near to the exchange.
However, such developments raise questions that exchange officials and regulators need to consider, Arculli warns. These uncertainties include whether such trading methods create asymmetric information, a risk due to opacity, heightened volatility or other unfair advantages.
Arculli says exchanges provide unique advantages, by helping companies raise capital via listings, which create liquidity and boost market depth. Exchanges also mitigate counterparty risk by providing central clearing and a single location for access to information on market participants' potential liabilities.
Alternative venues, he suggests, are opaque and tend to fragment liquidity. Arculli acknowledges market demand for best execution and pre- and post-trade services, but he wants to see them done on the exchange. For buy-side traders hoping to see Hong Kong open to direct competition to drive down costs, Arculli offers no sign that he would support such a move.