This undated photo shows the Hong Kong Exchanges and Clearing building on Dec 1, 2018. (PHOTO / VCG)
Hong Kong Exchanges and Clearing is readying for the rollout of its first A-share derivatives contract next month, giving foreign investors a new risk management tool.
This product, due in the wake of robust trading in derivatives, also represents another step in cementing HKEX’s status as Asia’s premier derivatives hub.
Equity and financial derivatives trading revenue in the first half was HK$1.73 billion (US$220 million), accounting for 16 percent of HKEX group revenue. Cash market revenue was HK$3.20 billion, making up 29 percent of group revenue.
The new futures contract, based on the MSCI China A 50 Connect Index, will be launched on Oct 18. An important feature is a sector-balanced exposure to the A-share market
The new futures contract, based on the MSCI China A 50 Connect Index, will be launched on Oct 18, and the bourse has worked with market participants and regulators to test technical and market readiness.
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The MSCI China A 50 Connect Index, tracks 50 of the largest Shanghai and Shenzhen stocks that can be accessed through the northbound Stock Connect.
An important feature is a sector-balanced exposure to the A-share market. The MSCI China A 50 Connect Index mirrors the sector weight allocation of the MSCI China A Index, offering a broad sector diversification reflecting the Chinese economy, according to HKEX.
Contemporary Amperex Technology, Kweichow Moutai, Longi Green Energy and Wanhua Chemical Group are among constituents.
The underlying index is highly correlated to key Chinese mainland A-share indexes, and it complements HKEX’s China-related products and services, including Stock Connect, structured products, exchange-traded funds, and derivatives, allowing investors to consolidate China exposure in one venue.
HKEX Chief Executive Officer Nicolas Aguzin has described the futures contract as one that “further strengthens’’ the bourse’s long-term partnership with MSCI and reflects the bourse’s “commitment to developing Hong Kong as Asia’s premier derivatives hub”.
Last year, in partnership with MSCI, the HKEX launched a suite of MSCI Asia Emerging Market futures and options.
HKEX has reported that average daily volume of stock futures and stock options recorded over 11,000 contracts and 687,000 contracts respectively, as of early July 2021. These are new milestones.
READ MORE: Hong Kong exchange to launch first A-share futures contract
Wilfred Yu, HKEX managing director and head of markets, said in a podcast on Friday, that the product is an important step in “building HKEX’s offshore mainland equity derivatives in Hong Kong”.
The derivatives market has had strong and sustained growth over the past few years, supported by the healthy development of the market ecosystem and product suite, Yu said. This includes the launch of many futures and options products including MSCI’s Asia emerging market derivatives and Hang Seng Tech Index futures and options, he said.
Alexander Siu, the co-head of equities product development, said that through one product, customers can manage their exposures, trade the cash market, and manage risk
The Hang Seng Tech Index Futures and Options were the first exchange-traded derivatives contracts to track the index of 30 largest tech companies.
Yu noted increasing interest among global investors in China’s domestic Ashares.
“This gives rise to the need for an effective risk management tool in Hong Kong,” he said.
Alexander Siu, the co-head of equities product development, said that through one product, customers can manage their exposures, trade the cash market, and manage risk.
“We observed this through the trading turnover of Stock Connect. We feel the product is heavily demanded by investors. They have indicated the need for hedging tools, they need the risk management tools.”
Siu is looking forward to a positive outcome at the launch.
“We have been working with regulators and market participants for technical and market readiness and we expect a smooth launch on Oct 18.”
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The new tool complements the ecosystem the HKEX provides, and will expand the product scope. This helps strengthen Hong Kong’s offshore yuan businesses and deepen the collaboration between the two capital markets.
Wilfred Yu, HKEX managing director and head of markets
Yu said the HKEX has the most robust cash and equities offering.
“We have the connect program connecting to the domestic A-share market and also China flows into the market. And we have Hong Kong China shares listed on the main board. On the derivatives side, we have the flagship Hang Seng Index. Now, with the MSCI China A 50 Connect Index futures and dollar CNH products — a complete China offering to our clients.” This is important in the China anchoring strategy of the HKEX, Yu said.
Being China anchored, globally connected, and technology empowered are the three pillars of HKEX’s strategic plan.
“The new tool complements the ecosystem the HKEX provides, and will expand the product scope. This helps strengthen Hong Kong’s offshore yuan businesses and deepen the collaboration between the two capital markets,” Yu said.
“It allows different intermediaries to create products and additional products to be put on the shelf. This is critical.”
Siu said the bourse expects a more diverse and complete ecosystem over time.
“We have been putting a lot of effort into improving our market microstructure. We wish to create a friendlier and more accessible market for international investors to manage their exposures in Hong Kong.”
Market microstructure is the functional set up of a market, and improvements to it help bolster market liquidity and global competitiveness of a stock market.