Download Changes to Result in Better Framework and Incentive Structure for

Changes to Result in
Better Framework and
Incentive Structure for
HKFE Market Makers
HKEx plans to introduce a new Market Maker (MM)
model for its Hong Kong Futures Exchange (HKFE)
products and revised trading fee discounts for MMs’
trading in stock index futures or options, with the
changes scheduled to take effect 1 February next year.
• MMs who wish to carry MM positions in a client
account must make arrangements with one or more
other corporate entities as client(s). Such corporate
entities will be subject to the following eligibility
requirements and the MMs must demonstrate their
suitability and qualifications:
New Market Maker Model
The new MM model is designed to simplify and improve
the quality of market making services. It focuses on
registration and responsibility of Exchange Participants
(EPs) for MM activities and will discontinue registration
of third parties known as Registered Traders (see chart
on next page). The main features of the MM model are
summarised below.
− be a regulated entity (excepting introducing
agents);
− be a licensed bank;
− have a credit rating of A- or above (Standard &
Poor’s) or A3 or above (Moody’s); or
− have minimum paid-up capital of $50 million and
minimum shareholder funds of $100 million.
• Only HKFE EPs will be registered as MMs and they
will be held responsible for the relevant market
making activities. To be registered as MMs, relevant
EPs must apply and demonstrate to HKFE that they
are proficient in market making activities.
The MM must ensure that the corporate entity
fulfils all the MM requirements and obligations.
If a corporate entity fails to comply with the
requirements and obligations, the arrangement of
the MM with the corporate entity to make markets
may be discontinued.
• MMs must provide quotes in response to quote
requests or on a continuous basis for the market in
which they are registered. They may enjoy trading
fee discounts and other benefits if they meet their
stipulated obligations.
• All Client Registered Traders and Employee
Registered Traders will be deregistered at the
effective date of the new rules and the existing
tripartite agreement they registered under will
be terminated.
• The standardised term Market Maker will be
used to refer to EPs registered with HKFE to
perform MM activities.
Most EPs currently participating in market making are
not expected to encounter difficulties under the new
model. They will be deemed as MMs upon submission
of a simple application, though HKFE may at the time
of application request documentary evidence showing
they are able to comply with the new model.
October 2006
11
Changes to Result in Better Framework and Incentive Structure for HKFE Market Makers
Registered Traders for HKFE Products (as of 30 September 2006)
Client Registered Traders — Individuals
2
Client Registered Traders —
On Behalf of Corporations
(Representing 14 Corporations)
47
Revised Trading Fee Discounts for
Market Makers Trading in Stock
Index Futures or Options
HKFE has prepared a revised trading fee discount
scheme for MMs trading in stock index futures or
options. Under existing HKFE Rules, Registered Traders
(RTs) in a stock index futures or options market enjoy
discounted trading fees in that market when trading for
their own market making accounts. In addition, they
enjoy discounted trading fees when trading in all other
index futures and options (Other Markets) when trading
for their own market maker accounts. The purpose of
this planned revision of the trading fee discounts is
to ensure there will be adequate and appropriate
incentives for market makers in the stock index futures
and options markets.
The following is a summary of the revised trading
fee discounts (note the term “RT” will be replaced
by “MM”):
1) MMs in a stock index futures or stock index options
market will be eligible for trading fee discounts in
Other Markets only when such markets have the
same underlying index (for example, Hang Seng
Index (HSI) Futures/Options and Mini-HSI (MHI)
Futures/Options are contracts having the same
underlying index);
12
October 2006 Employee Registered Traders
(Representing 14 Exchange Participants)
51
2) Subject to (3) below, the maximum number of
contracts eligible for trading fee discounts in Other
Markets in each calendar month is the respective
MM’s trading volume in the stock index options or
stock index futures market in which the MM is
making a market;
3) For an MM in MHI Futures or Options, the maximum
number of other eligible transactions in the HSI
Futures/Options shall be multiplied by one-fifth,
according to the MHI-to-HSI contract size ratio; and
for an MM in the HSI Options, the number of other
eligible transactions in the MHI Futures/Options shall
be multiplied by five, according to the HSI-to-MHI
contract size ratio; and
4) Any monthly trading volume exceeding the maximum
number mentioned in (2) and (3) will be subject to a
monthly claw-back of the “excess” discounted
amount. This is in addition to the existing claw-back
of trading fee discounts where an MM fails to meet
its obligations.