HSI Services, the index vending arm of Hang Sang Bank, is making another attempt at providing the market with a comprehensive series of Hong Kong stock indices adjusted for free float. The launch is designed to stymie the onslaught of a partnership between American indexing behemoth Standard & Poor's and the Hong Kong Stock Exchange (HKEx), which are due to launch the first of their indices in March.

The HSI faces the first real challenge to the dominance of the Hang Seng Index in years. If it fails, the Hang Seng Index could be relegated to a mere retail tool, quoted on CNBC but not widely followed by institutional investors and trading desks. But if it is able to reinvent itself, HSI can continue to dominate the region's most dynamic market.

The Hang Seng Index does not adjust for free float; it is designed to represent the entire market, says Vincent Kwan, director and general manager at HSI Services. Moreover it includes HSBC. Rival vendors such as MSCI do not, so HSI has always enjoyed a certain appeal because arguably HSBC does belong in any Hong Kong portfolio. The HSI's role has been affirmed many times, most notably by the runaway success of the Hong Kong Tracker Fund, managed by State Street Global Advisors.

But among the global index vendors, free float has become necessary: foreign investors need a benchmark of what they can buy, not just every stock. This trend was confirmed two years ago when MSCI finally transitioned to free-float methodology. Since then HSI Services has been vulnerable.

Last year, S&P and HKEx announced their intention to take on HSI Services and provide free-float adjusted indices for Hong Kong that would include HSBC - a one-two punch that could knock out both the Hang Seng as well as MSCI. S&P had hoped to have launched the first products last year, but negotiations and details have dragged the process out. Now, says David Blitzer, New York-based S&P managing director, the first two products, an index covering about 25 blue chips (including H shares) and another for the Growth Enterprise Market, will roll out in March. He adds small- and mid-cap indices will follow in the summer, along with a composite index that he hopes will become the institutional benchmark.

HSI Services reacted in September by launching the Hang Seng Freefloat Index Series. Partly due to poor market conditions, they haven't caught fire. By now there should be more use of futures and derivatives. One reason is that the series was too broad. Investors didn't need the whole market, just an investible representative. So HSI Services went back to the drawing board and have now announced three sub-indices: the Hang Seng Freefloat 50, the Hang Seng Freefloat HK 25 and the Hang Seng Freefloat Mainland 25.

Both sides have advantages. S&P brings its experience in supporting index-related products such as derivatives, warrants and exchange-traded funds. “The key is maintaining liquidity,” Blitzer says. He also notes the HSI excludes H shares. He calls the S&P/HKEx offering the point where 'China meets Hong Kong'. S&P can also claim a global consistency in how it categorizes sectors, a plus for global investors, plus experience in working with other exchanges such as Tokyo, Toronto and Sydney. The HKEx will prove a powerful marketer as well.

But HSI has a few aces. Most importantly, it is established. In the retail field its future is assured. Although S&P would love to mint some ETFs in Hong Kong, taking on the Tracker will be Herculean. And its management is not complacent. It is taking steps to preserve its empire by trying to meet market demand, as the latest product rollout demonstrates. Stay tuned.