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HKEx Seeks to Further Develop its Derivatives Market HKEx is working to build on the strengths of its derivatives market, where turnover was up 79.7 per cent in the first three months of this year from a year ago. Introduction of Hang Seng China H-Financials Index Futures To meet demand for a trading and hedging tool specific to Mainland financial stocks listed on the Stock Exchange, and in line with its strategy of broadening its Mainland China-related derivatives offerings, HKEx introduced Hang Seng China H-Financials Index (HFI) futures on 16 April this year. Key Features of HFI Futures Contract Contract Multiplier $50 per index point Contract Size About $606,000 at the index level of 12119.96 as of 11 April 2007 Trading Hours 9:45 am - 12:30 pm and 2:30 pm - 4:15 pm (2:30 pm - 4:00 pm on Last Trading Day) Contract Months Spot month, next month and next two calendar quarter months Exchange Fee $5 per contract, waived for first three months Commission Levy $0.80 per contract, exempted for first six months Trading in Mainland financial stocks has been active since last year and there is talk of a “five banks and three insurers” concept in the marketplace, indicating a growing interest in the Mainland financial sector. The “five banks and three insurers” comprise the H shares below and were the HFI’s sole constituents as of 31 March this year. At the end of February this year, the eight companies’ market capitalisation accounted for: • 69 per cent all Main Board H-shares’ market capitalisation; and •16 per cent of all Main Board-listed companies’ market capitalisation. In February this year, the total turnover value of the eight companies’ shares accounted for about 18 per cent of the turnover of all shares listed on the Main Board. Derivative warrants on shares of each company are also actively traded. The HFI is a free float-adjusted, market capitalisationweighted index with a 15 per cent cap on each constituent’s weighting. On 21 March this year, the HFI had annualised historical volatility of 27.6 per cent, compared with 25.3 per cent for the Hang Seng China Enterprises Index, which tracks the H-shares universe, and it had a better one-year return (57 per cent versus 41 per cent). HFI Constituents Company Name Stock Code China Construction Bank Corporation 939 Industrial and Commercial Bank of China Ltd 1398 Bank of Communications Co, Ltd 3328 China Merchants Bank Co, Ltd 3968 Bank of China Ltd 3988 Ping An Insurance (Group) Co of China Ltd 2318 PICC Property and Casualty Co Ltd 2328 China Life Insurance Company Ltd 2628 April 2007 13 HKEx Seeks to Further Develop its Derivatives Market Additional Stock Option Classes and Stock Futures Contracts On 19 March this year, HKEx started offering trading of options and futures on the stocks below. The initiative further expanded HKEx’s China-related products and gave market participants a broader range of futures and options for hedging and trading. HKEx’s derivatives market now offers trading in 45 stock option classes and 44 stock futures contracts. The table below shows the products’ growing popularity. New Option Classes and Futures Contracts Market Growth (Jan-Mar 2007 vs Jan-Mar 2006) End Turnover Quarter Open Interest Company Name Stock Code Product China Communications Construction Co Ltd 1800 Stock options (contracts) +102% +103% Foxconn International Holdings Ltd 2038 PICC Property and Casualty Co Ltd 2328 Stock futures (contracts) +1,417% +932% Additional Expiry Months in Selected Stock Option Classes To cope with the growing demand for longer-dated expiry months, HKEx began offering a third calendar quarter expiry month in the five stock option classes below from 2 April this year (standard expiry months are the spot month, the next two calendar months and the next two quarterly months). HKEx will consider introducing a third calendar quarter expiry month or any other longer-dated expiry months in more selected stock option classes, should demand warrant. Stock Option Classes with Additional Expiry Months Company Name Stock Code Cheung Kong Holdings Ltd 1 HSBC Holdings plc 5 Hutchison Whampoa Ltd 13 China Mobile Ltd 941 China Life Insurance Co Ltd 2628 Revised Market Making Obligations in Stock Options and Stock Futures HKEx revised the market making obligations in its stock options and stock futures markets on 2 April this year after a review of the obligations. The revised obligations enable market makers to better manage their market making risks, and they underline the HKEx’s commitment to quality market making services. The revised obligations are on the HKEx website at: http://www.hkex.com.hk/tradinfo/futurescontract/mmo.htm. Adjusted Position Limits for H-shares Index Futures and Options Contracts Position limits for H-shares Index futures and options contracts were adjusted on 30 March this year after amendments to Hong Kong’s securities and futures rules. An overall 12,000 long or short position limit delta for the contracts, all contract months combined, now applies. The previous limit was 6,000 open futures contracts in any one contract month or 6,000 open option contracts in any one option series. The delta limit approach has now been standardised for all equity index products. The Securities and Futures Commission’s Guidance Note on Position Limits and Large Open Position Reporting Requirements is available on the SFC’s website (www.sfc.hk). 14 April 2007 Development of Renminbi Exchange Rate Futures HKEx is proposing the introduction of renminbi exchange rate futures (RMB futures) to help banks, other financial institutions, trading companies, manufacturers and investors manage their risk associated with the RMB’s exchange rate movements. Risk management tools on exchange rate risk are important under the managed floating rate regime of RMB. Without proper risk management tools, further development of Mainland China’s international trade and investment could be adversely affected as overseas business people and investors struggle with the uncertainty of the RMB exchange rate. RMB futures as an exchange rate risk management tool involves the transfer of exchange rate risk from RMB users who want to avoid exchange rate risk to those RMB users with opposite needs or investors who are willing to take up the risk for potential profit opportunities. HKEx’s proposed RMB futures are non-deliverable contracts, based on the RMB/Hong Kong dollar (HKD) and RMB/US dollar exchange rates, which are to be cash settled in HKD, with trading, margining, clearing and settlement conducted in Hong Kong. Since there is no RMB delivery involved, trading of RMB futures would not involve RMB fund flows, ensuring that the monetary system and exchange rate mechanism on the Mainland would not be affected. On the last trading day, the final settlement price of the two contracts would be based on the central parity as announced by the People’s Bank of China (PBC). This contract design ensures that trading of RMB futures would eventually be anchored to the official exchange rates determined according to the PBC’s monetary and foreign exchange policies. The PBC currently has capital account controls on the onshore market, preventing the flow of speculative offshore money from affecting the RMB exchange rate. HKEx’s proposed RMB futures are largely similar to the RMB non-deliverable forwards (NDF) that have been trading in the over-the-counter, or OTC, markets in Hong Kong, Singapore and Tokyo for years, but exchange-traded RMB futures offer much higher transparency to investors and regulators than OTC RMB NDF trading. RMB futures contracts would be traded electronically on the HKATS system, where all orders are matched based on price and time priority. Bid, offer and transacted prices on HKATS, as well as order depth, are disseminated in real-time to the public, providing the highest level of price and market transparency for investors and regulators. In addition, exchange trading is subject to a comprehensive regulatory regime, supporting market stability and investor protection. Statutory reporting requirements for large open positions enable regulators to monitor the identity of beneficiary owners of large positions effectively. Marking positions to market on a daily basis also facilitates risk management. HKEx has been inviting views and comments of regulatory authorities on this proposal. Feasibility Study on Trading of Commodities Derivatives and EmissionsRelated Products in Hong Kong HKEx has shortlisted consultants to submit proposals for a study of the feasibility of trading commodities derivatives and emissions-related products in Hong Kong after receiving qualifications information from consultants in response to a request for expressions of interest in the project. HKEx is in the process of selecting the successful consultant(s) to perform the study and will announce its decision by July this year. April 2007 15