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SCMP Reporter

EVERYONE from governors of the World Bank to politicians looking for a platform have raised questions about the impact of derivatives products on markets.

   This week it was Hong Kong's turn to be assailed by the views of the expert, and not-so-expert, thanks to the decision announced on Tuesday that the Hong Kong Futures Exchange was to commence trading contracts on stocks of HSBC and Hongkong Telecom.

  Rafts of brokers, not previously well-known for their research into delta trading, volatility (implied and historical) and the arcane mathematics of risk, suddenly popped up to warn of the deadly dangers posed by stock futures.

  They claim that stock futures will lead to massive increases in volatility for the underlying stocks.

  A quick glance at the graph above will show this is not supported by evidence. A contract in National Australian Bank shares has traded on the Sydney Futures Exchange since May 19.

   Volatility has emphatically not increased.

  And David Archibald, who has researched Broken Hill Proprietary - another May 19 futures launch - for five years at James Capel, said the futures contract was a non-issue.

  'It has had no effect on volatility,' he said.

  SBCI has done its own research on futures and concludes that volatility is more likely to be reduced.

   The real reason for broker unease is loss of face. The stock exchange has been presented with a fait accompli and doesn't like it.

   Brokers are also worried their clients will perceive the margin trading in futures is a lot cheaper than margin trading through certain brokerages.

  One of the local futures practitioners at SBCI says that fund managers will be looking extremely closely at these products.

   'It is going to twist the stock exchange's arm over the Government's offer to reduce stamp duty when commissions drop,' he said.

   'If it is cheaper to trade futures, the fund managers will do it.'    Among the less expert pronouncements was Chim Pui-chung's. The legislator said he had notified Beijing of the moves. Now everyone knows who to thank for politicising the issue.

  Mr Chim seems to have been representing the interests of a narrow section of the financial services industry in this case. And politicising the issue may be something that he comes to regret.

   But probably not as much as the territory's financial services industry.

    Beijing's mouthpiece in Hong Kong Wen Wei Po also weighed in, claiming that the products would make it easier for British firms lacking in confidence to transfer money out of the territory.

  It also said extra volatility would make it possible for British consortiums to take over Hong Kong companies.

   What, like HSBC and Hongkong Telecom?   Which is about as inexpert as you can get.

   What are they worried about? British companies sneaking out of Hong Kong or sneaking in?    And how exactly do they do these things?   In any case, if China is so against futures why did it open so many futures markets itself?   And why did it borrow on margin to punt so much on the London Metals Exchange?    The fact that the debate on futures has been largely ill-informed is worrying. The votes were being cast yesterday, but the run-up suggested that once again the stock exchange is going to fail to grasp the nettle of divergent interests.

   Hindsight may not be alone in his view that it is time to end the stock exchange monopoly.

   It was lucky there were distractions for the share brokers. They can't have been exactly stretched by what has happened in the market.

   Daily turnover during the week has never been above $2.6 billion and the weekly total was only about $11 billion.

    A chat with John Mulcahy, managing director of UBS Securities, raised some good points for Hindsight.

   John, who's election bid for the Exchange Council came to nought last night, pointed out that on Wednesday the underlying value of futures turnover was itself about $11 billion.

  So any observer can see that even this sort of ratio of futures to cash trading does not necessarily mean mayhem in the underlying market.

    The Futures Exchange has become the market of choice for certain big players, to lay off the risk they create by writing large over-the-counter derivatives, he said.

    'These producers of structured products don't need the cash market,' he said.

  His worry now is that the faultline which has been shown up by this week's ructions could cause serious damage in the future.

   'We have to get to the bottom of the relationship,' he said.

 Although he lost the election, let's hope his view is prevalent on the new council.

  On Tuesday, the gulf between cash and futures was even larger than on Wednesday. The futures market saw record turnover of 42,366 contracts, or about $20 billion in underlying value. The cash turnover was $1.96 billion, a three-month low.

  Even on Thursday afternoon, as it became clear that New World Development was going to produce some pretty special results, there was no buying interest on the cash market.

  New World profits were $4.29 billion, up 24 per cent on last year, with turnover up 39.6 per cent to $18.59 billion.

   Hindsight was surprised at how little property New World sold off last year. Sales of $6.31 billion, or 34 per cent of turnover, sound a lot, especially when the figure was up by 31 per cent on the previous year.

   But it seems as if the top of the property market has been found. The chances of strong growth in the coming year look bleak.

   The other big news this week was the settling of the Carrian case against auditors Price Waterhouse.

   After weeks of ugly words in court, an out-of-court settlement has been reached, which is most unlikely to mean PW will have to admit any liability.

  As above, so below. Auditors in Hong Kong are already entering the situation where they can be limited liability companies, and what they really seem to want is to be paid to audit accounts, but not to bear any responsibility for what the true state of affairs in a company is.

  It is quite right and proper that auditors should get sued when companies collapse.

   The public sees statements such as: 'Such and Such has audited the accounts of a company for the year ended . . . in our opinion the financial statements give a true and fair view of the state of affairs of the company.'    The lay public thinks that means some professionals have thoroughly checked the books and records of the firm in the full knowledge that people frequently attempt to deceive the public.

   Auditors are a vital line of defence against crooked or incompetent managers and directors and the public have the right to hold the accountants to account.

  And we should also remember facts such as the following:   At the end of 1981, Carrian Investments was no longer a going concern, yet Price Waterhouse passed its accounts which stated it made more than $700 million in profit before tax.

   In fact, a court was told earlier this month, this should have been a $270 million loss.

  The shortcomings of the accountants were 'on a staggering and shocking scale', said Christopher Carr QC, who represented the liquidators who sued Price Waterhouse for damages for breach of contract and negligence.

   The evidence was such, said Mr Carr, he wondered why the firm could come to court to deny it.



Facts do not support the brouhaha over stock futures