Controversial scheme draws mixed reaction from market

THE controversial new stock futures contracts yesterday came under renewed fire from stock exchange loyalists but met cautious support among derivative users in the market.

The Hong Kong Futures Exchange told the stock exchange on Monday, one day before the public announcement, that it was launching two individual stock futures contracts after working on the plan secretly with the Securities and Futures Commission and the Financial Services Branch.

The announcement caught the stock exchange wrong-footed and aroused its ire - it has been struggling to develop its own stock options programme for almost two years.

Edward Lo, managing director of Bankers Trust (Asia) welcomed the new contracts. 'I think they're good. They offer more choice, which has to be a good thing for the market,' he said.

Candidates for seats on the stock exchange council yesterday denounced the new contracts as high-risk, claiming the exchange's stock options were a better bet.

Henry Chan of Sanfull Securities, in constituency C of the council election, said investors would use the futures market for speculation, not just hedging.

He defended the stock exchange, which had been accused of dragging its feet over its own planned options. Stock options needed special equipment, 'and it takes money to do a consultancy programme', he said.

William Kwong Wai-tim of New China Hong Kong Securities, in constituency B, also said stock futures were risky, and he favoured stock options, which he would promote, if elected.

Because they were risky instruments, time and money would be needed to study them, he said.

Chen Po-sum, vice-chairman of the stock exchange, said the exchange studied many issues in its work on stock options, and added stock options were less risky than stock futures.

But the stock futures contracts - a first in the region - are meeting a qualified welcome elsewhere in the market.

'It's great to have another type of instrument in the market,' said Lionel Kwok, who is in charge of derivatives at Peregrine Securities.

'It will improve transparency and liquidity and give participants another choice,' he said.

Virginia Mumford, a director with Jardine Fleming Futures, has had experience of stock futures through contact with Jardine Fleming's office in Sydney.

'I can't predict how successful it will be but it will find a core of people using it to hedge risk in Hong Kong,' she said. She rejected claims it was a high-risk investment.

Holders of futures contracts whose original investments had been wiped out by a fall in the price of the underlying share had to put more money in or close out their positions. 'It's a fairly conservative system,' Ms Mumford said. 'You always pay out your losses on a day-to-day basis.'