THE year for derivatives in Hong Kong was a mixed one. There were some major achievements in the territory, including the launch of stock options at the stock exchange. Internationally, derivative markets were dominated by huge losses in trading, culminating in the collapse of British merchant bank Baring Brothers and a record loss at Japanese Daiwa Bank of US$1.1 billion. Derivatives trading the the name Nick Leeson has become synonymous ever since the Baring's trader in Singapore drained the bank of capital trying to support Nikkei futures. The shock waves in the wake of the Barings collapse in the first quarter sent regulators and chief executives with derivative operations the world over into an immediate frenzy of risk management reviews. In Hong Kong, regulators and brokerages put their heads together over the fateful last weekend in February when Leeson's trading strategy unravelled. The potential for the fiasco in Singapore to trigger a melt-down in Hong Kong was successfully avoided by co-ordinated planning between brokerages and the Securities and Futures Commission, along with the stock and futures exchanges. On successfully traversing these turbulent waters, Hong Kong began a programme of checks which also brought in the Hong Kong Monetary Authority and the banks. Stricter guidelines on reporting exposure to investments or holdings using derivatives were issued in the summer. The Hong Kong Monetary Authority recommended more information on derivatives and other forms of off-balance sheet risk in reporting of profit. A survey by the de facto central bank found the total exposure of the banking sector was $13 trillion in December last year, out of which $5,000 billion was in interest rate contracts and the rest was exchange rate contracts. Another indication of the size of the derivatives business and its significance to the territory's financial system came in another survey reported during the year. Involving the authority and the Bank of International Settlement in Basle, the survey reported average daily turnover of foreign exchange in Hong Kong reached US$91 billion, up more than 30 per cent from the last time the survey was conducted three years ago. The figure made it the third largest trading centre in the region after Tokyo and Singapore. Of this total turnover, a significant proportion involved derivatives or derivative-associated instruments. In equities, Hong Kong has become a leader in equity-linked derivative trading in the region. Figures are hard to come by, but practitioners estimate Hong Kong is the region's leading centre for international and regional equity-linked derivatives. Domestically, the territory is a major warrant-trading centre and has an established Hang Seng index futures trading facility. Hang Seng index options were launched two years ago and are still building on turnover. The launch of stock options on HSBC and Cheung Kong at the stock exchange is set to add to the already growing liquidity in exchange-traded equity-linked derivatives. Together, these markets have firmly established the territory's domestic exchange-traded derivatives. What is potentially more significant, and far more difficult to measure, is the explosive growth in the last three to four years in the Over-the-Counter (OTC) derivatives equity-linked business. Hong Kong, starting in 1990, emerged as a centre for trading OTC regional derivatives after the collapse of the Japanese share and warrant market. Investment banks transferred quite a number of derivative professionals to the territory in the belief there was a growing appetite for derivatives in Hong Kong and around the region. And they were right. Practitioners estimate the turnover of the OTC business dwarfs that of the exchange-traded activity. Regional corporates have also switched some of the cash-raising activity to debt securities and this emerging market is set to provide another avenue of growth for derivative activity.