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SCMP Reporter

THE introduction of options trading at the Hongkong Futures Exchange (HKFE) marks an important step in the territory's development as a world financial centre.

  From today, both retail and institutional investors will be able to trade options on the Hang Seng Index (HSI) for the first time.

  Ultimately, the development of this new product will allow investors to hedge risk and enhance portfolio performance by exploiting arbitrage opportunities involving call and put options.

  The decision to go ahead with options trading was made a few years ago according to the HKFE chairman, Mr Leong Ka-chai.

  ''After restructuring the exchange [following the 1987 stockmarket crash], we looked at the possibility of introducing new products,'' Mr Leong said.

  ''We considered the status of Hongkong as a major financial centre in the Asia/Pacific region and its active role as an axis of economic activity with China.

  ''As a lot of international money is coming into Hongkong, we decided that options would provide the most appropriate risk management tool for these investors.''   Options allow investors to choose the level of risk they want to take and, since they only involve a relatively small premium, potential losses are minimised.

  The HKFE embarked on the design and implementation of an options system last year but, since then, it has made rapid progress.

  The exchange has installed the latest state-of-the-art clearing system from the Options Clearing Corporation in Chicago. According to Mr Leong, this is the most efficient system available and will help enhance risk management.

  The exchange has also introduced a Registered Traders' system for options trading.

  Under this system, staff of member companies must first take courses and pass relevant examinations before they can deal in options. They also have to be prepared to provide continuous markets in all the different option series quoted at the exchange.

  In addition to member representatives responsible for sales and floor trading, member companies also need to train some of their staff to become Registered Options' Principals (ROPs) and Clearing Options' Principals (COPs).

  ROPs are responsible for running the whole options desk and need a thorough understanding of both the theory and practice of options trading.

  COPs are responsible for members' back office work, including clearing and settlements.

  The advantage of a Registered Traders' system is that it provides liquidity and guarantees that investors can always obtain a trade price even when the underlying HSI is moving rapidly, or when there is no matching client order.

  ''Traders must be on the floor for a minimum of 80 per cent of their time and they must be committed to closing a deal,'' Mr Leong said.

  HSI options will be traded using an open outcry system. This has proved popular in the HSI futures market.

  Initially, both call and put options will be available for April, May, June and September.

  In an effort to familiarise brokers and members of the public with the concept of options trading, the HKFE has been running a series of educational courses for the past few months.

  Dummy-run trading sessions have also been going on almost every day during the past three weeks to ensure there will be no major hitches when the real thing gets underway today.

  Each trade will be registered and guaranteed by the clearing house for the exchange, the HKFE Clearing Corporation.

  In the unlikely event that a member defaults, there are $200 million in reserve funds to ensure the completion of each contract.

  So far, the response to traded options from international stockbroking houses had been good, Mr Leong said.

  But smaller local stockbroking companies had been less enthusiastic.

  Another director at the HKFE, Mr Frank Wong, agreed: ''Initially, small investors will be at a disadvantage. Sophistication takes time to develop; it doesn't come overnight.''   Nevertheless, some of the larger locally based stockbroking companies, such as Peregrine and Wardley James Capel, are expected to play an active role in the new HSI traded options.

  These companies already have years of experience dealing with index options and futures overseas such as S & P Index options in New York and Nikkei Index options in Tokyo.

    According to the senior vice-president at Wardley James Capel, Mr Stephen Ng, interest in HSI options initially will be confined to professional and institutional investors.

  ''Index options are a new concept to retail clients. It will take time before they come in,'' Mr Ng said.



New future in the life of exchange