HKFE suggests new member category for market makers
The Hong Kong Futures Exchange is canvassing support for a new membership scheme that will allow up to 500 prospective market makers to trade in non-equity linked products, according to a consultation paper circulated to exchange members.
The scheme, which is expected to generate interest among banks, oil companies and gold traders, is part of the exchange's strategy of diversifying from equity-related products to various Hong Kong dollar-denominated debt derivative products and other new products.
Under that strategy, the exchange has encouraged active trading in Hang Seng Index futures and options and launched rolling forex contracts - a currency futures product - in 1995.
According to the paper, the exchange is also considering introducing several Hong Kong dollar-denominated debt derivatives products such as Hibor (Hong Kong interbank offered rate) futures and Exchange Fund bill and bond futures. Currency options, gold and oil contracts may also be introduced in the near future.
It said that since most exchange members focused on trading equity-related products, futures brokers might find it difficult to allocate resources to handle the development of products that were non-equity related.
This made it important for the exchange to attract parties active in the underlying market to act as market-makers to provide liquidity.
Under the rules, being a shareholder of the exchange is a prerequisite to becoming a member to trade in the exchange's products.
With exchange membership costing about $4 million, most banks or oil companies would consider it too expensive to join merely to trade one or two products related to their business.
To get around that problem, the exchange plans to introduce a membership scheme that will enable a qualifying market-maker to buy a 'non-voting' share at a par value of $10,000 and become a merchant trader of the exchange.
The exchange intends to allocate a maximum of 500 new non-voting shares but only 20 shares will be available for application once the scheme is in place.
In order to protect the privilege of existing members, non-voting members will not be allowed to trade in equity-related products such as index futures and options.
They can only act as market-makers of non-equity products and will have an obligation to quote prices during trading hours to provide adequate liquidity. They will not be allowed to trade for clients.
The shares allocated under the scheme will be non-transferable and may only redeemed at the $10,000 cost. They will not entitle the holder to vote at any general meeting of the exchange.
All applicants will have to be a limited company incorporated in Hong Kong and will be required to have capital of $5 million as a clearing member or $2.5 million for a non-clearing member of the exchange's clearing house.
The consultation is due to end on January 20.
IN FUTURES Consultation paper suggests 500 new non-voting members Scheme is part of strategy to diversify from equity-related products