Row over stock futures move

Sean Kennedy

HONG KONG yesterday became the third country to allow controversial trading in the futures of individual stocks, sparking a row between the territory's Futures Exchange and the Stock Exchange.

Only exchanges in Australia and Sweden so far trade this kind of high-risk product.

The law was changed by the Executive Council early yesterday to pave the way for trading before the end of the year.

The move was planned in secret by Futures Exchange chief executive Ivers Riley with the Financial Services Branch and the Securities and Futures Commission (SFC).

Futures contracts will initially be offered on the shares of Hongkong Telecom, which has a huge overseas following, and HSBC Holdings, almost every day the most actively traded share by value.

The Stock Exchange, informed of the move only on Monday at 11.30 am, was furious.


The exchange has been struggling to develop options on shares, a similar type of derivative, since November 1992.

But the Futures Exchange approached the SFC in secret as little as three months ago and the new products were thrashed out.

When a small initial investment known as the margin is made in a futures contract it makes the exposure to an investment many times larger.

This means profits can be big and come fast - but a small drop in share price can wipe out initial investment and lead to demands for more cash or the position to be closed.


'These contracts will retain many of the same features as the currently growing and successful Hang Seng Index Futures Contract, but they will differ in one very important respect,' Mr Riley said.

'The value of the contract will be determined by the price of the individual company shares, rather than the combined prices of an index or basket of stocks.


'Thus, holders of the HSBC Holdings plc and the Hongkong Telecom will have a new mechanism for directly controlling the price of holding stock.' Robert Gilmore, executive director of the SFC, said that Australia and 'a place to the south of here' - meaning Singapore - had introduced or looked poised to introduce stock futures and there was a chance business would be lost to these markets.

'Stock futures are the latest hot product in the world's derivative markets and a number of other major markets are currently examining the trading of such products,' he said.

But the Stock Exchange expressed fears that the contracts would mean higher risk and volatility for the Hong Kong market.


The Stock Exchange council held a special meeting on Monday night and its concerns about volatility and risk management were relayed to Financial Secretary Sir Hamish Macleod at a meeting yesterday morning, a Stock Exchange spokesman said.

'Many overseas markets have considered this product before, but eventually they did not introduce it because the product is very risky,' said Stock Exchange chief executive officer Paul Chow Man-yiu after a council meeting yesterday.

He added that the product would also affect the spot market.


'We feel that it's better the market should be consulted before the launch.' But Mr Gilmore rejected that view.

'I do not believe that futures in themselves will create greater volatility, they will introduce more fire exits,' he said.

'When a lot of people are trying to get in or out of a market and there is only one gateway it gets real crowded. With three or four exits, the flow is easier.'