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HONGKONG EQUIT

Y AND D

EBT

MARKETS

B Y P A NK A J K U M

A R B A I D

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LOCATION

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Source: HK Ex3

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HISTORY

• The Hong Kong Stock Exchange (SEHK) is a stock exchange located in Hong Kong.

• It is Asia's third largest stock exchange in terms of market capitalization behind the Tokyo Stock Exchange and the Shanghai Stock Exchange, and the sixth largest in the world

• HKEx is the holding company of• The Stock Exchange of Hong Kong Ltd • Hong Kong Futures Exchange Ltd • Hong Kong Securities Clearing

Company Ltd• The Hang Seng (HSI), started in 1969, is the

leading index for shares traded in the HKSE.

• Source :International Research Journal of Finance and Economics - Issue 62 (2011) 51

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TRADING HOURS

The trading day consists of:

A pre-opening auction session from 9:00 am to 9:30 am. The opening price of a security is reported shortly after 9:20 am.

A morning continuous trading session from 09:30 am to 12:00 pm

An extended morning session from 12:00 noon to 1:00 pm, also referred to as the lunch break.

An afternoon continuous trading session from 1:00 pm to 4:00 pm

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TRADING PLATFORM

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)

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BIG FOUR REGULATORSHong Kong Monetary Authority (HKMA) 

Office of the Commissioner of Insurance

Mandatory Provident Fund Schemes Authority.

Hong Kong Securities and Futures Commission (SFC) 

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CURRENT RATES OF TOP 20 COMPANIES (TURNOVER)

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TYPES OF SHARES

H shares  : refers to the shares of companies incorporated in mainland China that are traded on the Hong Kong Stock Exchange. Many companies float their shares simultaneously on the Hong Kong market and one of the two mainland Chinese stock exchanges.

A shares are specialized shares that are purchased and traded on the Shanghai and Shenzhen stock exchanges.

B Shares :which are owned by foreigners who cannot purchase A-shares due to Chinese government restrictions.

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HKEX & SFC

HKEX The front-line regulator of listed companies except for

takeovers, share repurchase and privatization, 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

PRODUCTS OFFERED

Equity

Debt

Exchange-traded Fund

Warrants

Hang Seng Index Futures & Options

Nasdaq Stocks

NASDAQ STOCKS ON HKEX

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

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BRIEF ON HSI

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The Hang Seng Index ("HSI") is one of the earliest stock market indexes in Hong Kong. Publicly launched on 24 November 1969, the HSI has become the most widely quoted indicator of the performance of the Hong Kong stock market.

To better reflect the price movements of the major sectors of the market, HSI constituent stocks are grouped into Finance, Utilities, Properties, and Commerce and Industry Sub-indexes.

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Debt securities listed on the Stock Exchange can also be categorized as follows:

• Corporate Bonds

• Convertible Bonds

• Exchange Fund Notes (EFN) - EFN are Hong Kong dollar fixed income bonds issued by the Hong Kong Monetary Authority (HKMA) on behalf of the Hong Kong Special Administrative Region Government for the account of Hong Kong’s Exchange Fund under the Exchange Fund Ordinance. Whenever the HKMA arranges the listing of an EFN on the Stock Exchange, investors may participate in the tendering for the new issue. Investors should contact their brokers for details. 

EFN trading is similar to stock trading and investors may trade EFN through their usual stock accounts. Like all debt securities traded on the Exchange, EFN are quoted in units of $100 of their nominal value. The buyer of an EFN has to pay to the seller the accrued interest calculated from the last interest payment date to the settlement date.

• Government/Supranational bonds (GSB) - GSB are debt securities issued by a government or supranational organization such as the People’s Republic of China or China Development Bank.

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ISSUER OF GOVERNMENT BONDS

Government bonds are issued by the Government of the Hong Kong Special

Administrative Region of the People’s Republic of China (HKSAR Government).

The HKMA is tasked to implement the issuance of government bonds under the GB

Programme.

Government bonds under the institutional bond issuance programme are sold at

auctions by means of a multiple-price auction mechanism. Investors may submit a

competitive bid through Primary Dealers. The bids are made in terms of the bid price

and the quantity applied for. Competitive tenders accepted will normally be allotted in

descending order of the bid price indicated in the applications.

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MAJOR INITIATIVES TAKEN IN BOND MARKETS SINCE THE ASIAN FINANCIAL CRISIS

1. Product development

2. Market infrastructure

3. Tax and regulation

4. Regional cooperation

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1. PRODUCT DEVELOPMENT

Government issues

Securitised debts

Bond funds

Retail bonds

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GOVERNMENT ISSUESExchange Fund Bills and Notes (EFBNs) HK$ debt instruments issued by the HKMA Benchmark yield curve Good liquidity in the secondary market Banks collectively hold about 85% of the outstanding

EFBNs for

favourable risk weighting and can be used as collateral to borrow from the HKMA

Government bonds The Government successfully launched its first global

bond offering in July 2004 Total HK$20 billion of which US$1.25 (around 50%) in a 10-

year US$ denominated bond

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SECURITISED DEBTSThe Hong Kong Mortgage Corporation Established by the Hong Kong SAR Government in March

1997 To promote development of a secondary mortgage

marketmortgage purchasedebt issuancesecuritisation of mortgage loansmortgage insurance

In May 2004, the Government sold HK$6 billion (US$770 million) of securitisation bonds, backed by toll revenues from 5 tunnels and 1 bridge to finance infrastructure projects

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BOND FUNDS

An EMEAP initiative : AsianBondFund1 (2003)

Closed-end: Confined to investment of the central banks only

USD-denominated sovereign and quasi-sovereign bonds in the region

ABF2 (2005)

Open to any interested investorsDomestic currency-denominated bonds in the region

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RETAIL BONDS

The Hong Kong Mortgage Corporation first offered bonds to retail investors in October 2001

The HKMA operated a pilot scheme to stimulate retail investment in Exchange Fund Notes in 2003

The programme was refined in 2005 under which the fee structure was simplified and retail distributors were appointed

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SOME OF THE LISTED BONDS

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2. MARKET INFRASTRUCTURE

Benchmark yield curve

Hong Kong bond settlement system

On-line access to market information for retail investors

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BENCHMARK YIELD CURVE

A domestic yield curve gradually took shape when the HKMA began issuing Exchange Fund papers in 1990s

Considerable effort has been directed at maintaining a smooth and continuous yield curve in designing the EFBN issuance programme

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HONG KONG DOLLAR BOND SETTLEMENT SYSTEM

Central Moneymarkets Unit (CMU) Established in 1990 to provide computerised clearing and settlement

facilities to debt securities Linked with other major international securities settlement systems

To foster cross-border bond trading and investment

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CLEARING AND SETTLEMENT SYSTEM

USDRTGS

(2000)

DvP

CMU HKDRTGS

(1996)

Clearstream

AustraClear- Australia

AustraClear- New Zealand EURO

RTGS(2003)

DvP

KSD- South Korea

PvP

PvP

PvP

DvP

Euroclear

2003

2002

1997

1998

1999

1994

1994

CDC- China

200

4

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ON-LINE ACCESS TO BOND PRICESCMU Bond Price Bulletin website Launched in 2006 Provides convenient access to indicative bond prices quoted by major

banks in Hong Kong

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CMU BOND PRICE BULLETIN

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3. TAX AND REGULATION

Demand side: Tax concessions to bond buyers

Trading profits from bonds with a maturity period of 7 years or more (issued after 5 March 2003) were exempted totally from profits tax (previously 50% tax concession)

Minimum maturity requirement for the 50% tax concession was relaxed from 5 to 3 years

Supply side: simplified issuance process for fund raisers

The Government and the Securities and Futures Commission have together streamlined regulations and procedures for issuing and listing debt securities

Enabled issuers to market their offers with greater flexibility and effectiveness to the public

Lowered issuance costs

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4. REGIONAL COOPERATION

APEC Initiative on the Development of Securitisation and Credit Guarantee Markets

Asian Bond Market Initiative (ABMI)

Asian Bond Fund (ABF)

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AFTER ALL THESE…

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HONG KONG DOLLAR BOND MARKET

Steadily growth over the past decade

Outstanding Hong Kong dollar bond reached US$85 billion at end-2005 and 225bn$ at end of 2011

Almost 50% of GDP

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Size of LCY Bond Market in USD

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Size of LCY Bond Market in % of GDP

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LESSONS AND IMPEDIMENTS: ANY MORE WE CAN DO?

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IMPEDIMENTS TO THE HONG KONG DOLLAR BOND MARKET

Supply Issuance of Exchange Fund papers is limited Government issuance is politically sensitive Lack of corporate issuers

Business sizeCredit bureaux

Demand Mutual funds invest mainly in equities Currency board system