Index launch of exchanges' joint venture clears way for derivatives

Exchange venture begins two indices today that will allow financial firms to issue ETFs, warrants and other products based on the indicators

PUBLISHED : Monday, 18 March, 2013, 12:00am
UPDATED : Monday, 18 March, 2013, 2:17am

A joint venture of Hong Kong, Shanghai and Shenzhen stock exchanges will launch two new indices today and will this month allow the first batch of financial companies to use the indices for launching derivative products.

China Exchanges Services, the HK$300 million joint venture in which Hong Kong Exchanges and Clearing, Shanghai Stock Exchange and Shenzhen Stock Exchange hold equal stakes, will also issue its own futures products in the third quarter.

Those futures products would be traded in the city's futures exchange platform, said the venture's chief executive, Bryan Chan Ping-keung.

"Many fund houses and financial firms have expressed interest in using our indices for issuing exchange-traded funds, warrants and other structured products," Chan said. "We believe the first authorisations would be made this month."

He did not disclose the names of the companies that are expected to get the first shot at the new indices but brokers believe these would be among the companies that have been cleared to issue cross-border ETFs.

ETFs are index funds listed on stock exchanges. They trade like any other stock but the traded units in effect track the broader exchange, allowing investors to invest in a basket of stocks.

Since July last year, Beijing has issued licences to several companies to issue ETFs listed in Shanghai or Shenzhen that track Hong Kong-listed blue chips.

In the same month, the Securities and Futures Commission also allowed several ETFs that track mainland stocks to be listed on the Hong Kong stock exchange.

Chan, who is also a co-head of equities, fixed income and currency of global market at HKEx, said there was a great demand for the indices issued by the joint venture.

"There are many other index compilers worldwide but none of them are like our company, focusing on compiling indices tracking cross-border listed companies on the mainland and in Hong Kong," he said.

Chan also said the companies interested in the indices not only came from Hong Kong but also from Taiwan and South Korea.

The joint venture today launches two new indices: CES China A80 Index, tracking the 80 largest and most liquid A shares trading on the Shanghai and Shenzhen exchanges; and CES China HK Mainland Index, which tracks the performance of the 40 largest Hong Kong-listed mainland enterprises.

The two indices are sub-indices of the CES China 120 Index launched by the joint venture in December. That index tracks the 120 largest stocks listed on the mainland and in Hong Kong.

Chan said the company planned to launch more indices next year that might include some tracking stocks in the same industry such as finance. There were also plans to introduce indices tracking the small and mid-cap cross-border companies.

HKEx would also use the indices to introduce futures in the third quarter, he said, but added that they would only be traded in Hong Kong.

Neither the Shanghai nor the Shenzhen stock exchange has derivatives trading facilities.

The HKEx first announced the planned joint venture in August 2011 during a visit by Premier Li Keqiang, a vice-premier at the time. In June last year, the three exchanges signed an agreement to establish the joint venture as the first step towards co-operation among them.

The joint venture comes as the HKEx struggles with lower turnover and declining initial public offerings. Average daily turnover on the exchange fell 23 per cent last year.

Brokers are hoping the move will boost the exchange's competitiveness and revive its sagging fortunes.