Hong Kong Exchanges and Clearing Limited (HKEx)

Agenda

• Background

• Products traded

• Mechanism

• Future challenge & opportunites

Background

Structure

HKEx is the holding company of

• The Stock Exchange of Hong Kong Ltd

• Hong Kong Futures Exchange Ltd

• Hong Kong Securities Clearing Company Ltd

History

• In 1999 Budget Speech, Hong Kong's Financial Secretary announced a reform of the stock and futures markets

• Under the reform, 3 companies merged under a single holding company, HKEx

• The merger was completed on 6 March 2000 and HKEx listed its shares by introduction on the stock exchange on 27 June 2000

Merger

• Advantage:

- cost-effective

- efficiency

- joint-product

- participants can hold their seats while transferring the shares

• Disadvantage:

- no fund from government

- monitored by the public

- more information disclosed

- double roles

Aims & objective

• To maintain an orderly marketplace with transparent, fair, flexible and supportive regulations

• To operate and develop the Hong Kong securities and derivatives markets to meet the highest expectations of market users

• To be the leading international financial centre in Asia

Products traded

HKEX & SFC

• HKEX– the front-line regulator of

listed companies except for takeovers, share repurchase and privatisation, which are the responsibilities of SFC.

– responsible for Exchange and Clearing House Participant regulation in relation to management of business risk, market surveillance and the enforcement of their trading and clearing rules.

• SFC– an independent statutory

body responsible for safeguarding market integrity, enforcement of securities and futures market legislation, investor protection and market oversight.

– Is responsible for matters relating to the conduct of Exchange Participants, new investigations and disciplinary matters concerning disputes between participants and clients

Product Offered

• Equity

• Debt

• Exchange-traded Fund

• Warrants

• Hang Seng Index Futures & Options

• Nasdaq Stocks

Equity

Ordinary shares• Having vote rights• Receiving various

dividends

E.g.H-share, Red chip,

Blue chip ELN

(equity linked note )

Preference shares• No vote rights• Fixed dividend

Equity referred to as shares, comprise ordinary shares and preference shares

Debt

• Debt securities listed on the Exchange include bonds and notes which represent debts or loans to an entity

• It is promised to repay the bondholder the total amount borrowed at maturity

• E.g. The Exchange Fund Notes issued by the HKMA

Exchange-traded Fund

• ETFs listed on the Exchange give investors in block-sized units in cash in return for securities approximating the composition of the underlying portfolio.

• The Hong Kong Tracker Fund (“TraHK”) is an ETF listed on the Exchange.

Warrants

• A corporate-created option to purchase a stated number of securities at a fixed price on or before a future date

• There are two kinds of warrants listed on the Exchange: equity warrants and derivative warrants.

Equity warrants

• Equity warrants listed in Hong Kong are generally U.S.-style warrants

• It is exercised at any time prior to maturity

• European-style warrants may only be exercised upon maturity of the warrant

• 1 year < Term < 5 year

Derivative warrants

• The majority of derivative warrants in Hong Kong are settled in cash and they may be call or put warrants

• Derivative warrants may also be issued over assets other than equity securities, for example, currencies and commodities

Hang Seng Index Futures & Options

• The Hong Kong Futures Exchange (HKFE) provide investors with a set of effective instruments to manage portfolio risk and to capture index arbitrage opportunities.

Nasdaq Stocks

• The Pilot Programme introduced in May 2000, Seven Nasdaq stocks listed on Nasdaq and have been admitted to trading on the Hong Kong stock market

• Seven Nasdaq stocks are: Amgen, Applied Materials, Cisco, Dell, Intel, Microsoft, and Starbucks

Mechanism

Trading mechanism

• Trading will be carried out through the Stock Exchange's Automatic Order Matching and Execution System (AMS)

- the third generation

• It is an order-driven ( ask –bid)

• No market-makers

AMS/3- launched in October 2000

• Connects investors, Stock Exchange Participants, other market participants and the central market through eCommerce facilities

• Benefits for investors- can enjoy faster and easier access to the central market through electronic channels developed either by HKEx, Stock Exchange Participants or service vendors. I- can place trading requests electronically and the requests are automatically routed to Stock Exchange Participants for approval and submission to the central market for matching and trade generation.

Ask-Bid

The system accepts at action and at-auction limit orders ONLY.– At auction orders

• An order with no specified price

• Entered into the trading at the final IEP

– At auction limit order• An order with a specified price

Clearing Services (結算 )

• CCASS( 中央結算系統 ) clearing services provides settlement services under which securities are credited or debited to participants' CCASS stock accounts and funds are recorded in the participants' money ledgers on settlement day

Settlement Services

• All Exchange trades are required to be settled on T+1. SI transactions are settled on the settlement day stipulated by both participants. Securities settlement is effected either by scheduled daily batch settlement runs or immediately on-line by the input of Delivery Instructions (DIs). Provided that there are sufficient stocks in the stock account of the delivering participants, settlement of ISIs will be immediately effected on the settlement day specified by the broker or custodian participants once the investor participants make the affirmation.

Future challenge & suggestion

Challenge

• Real-time market information (such as real-time quotation) is not provided by HKEx directly. Investors can only obtain the information from information vendors whose names are available on HKEx website.

• 24-hours trading due to internationalize and e commerce

• Competition from alliance: Singapore & AMEX• Speculation for the link-exchange rate system• Auditing problems

Opportunities

• Cooperate with China Market

• Remove GEM to Shenzhen

• Regional financial centre

Conclusion

• In the future , HKEx will maintain the trading , cleaning and settlement service for different products for the investors to ensure the trading in the transparent, fair, flexible and supportive environment