A SPIRIT of co-operation at last prevails between Hong Kong Stock Exchange and the Futures Exchange - they have agreed to join forces to provide technical support for the soon to be launched stock futures. The futures exchange sent a five-point letter last night to the local exchange enlisting technical assistance on the new product. In response, the head of the stock exchange vowed to render support to the futures product wherever possible. After drifting apart over the controversial stock futures issue, this informal alliance represented a thaw in the relationship of the two exchanges. The five points which warrant the two parties' co-operation mainly involve the spread of information. The futures exchange wants to disseminate its price information through Teletext, the system used by the stock exchange. 'The futures exchange can use Teletext to inform the market of the trading prices of stock futures,' said Paul Chow, chief executive of the stock exchange. 'Besides, the stock futures market will be greatly benefited if the futures exchange can receive the prices of the cash market, fed directly by the stock exchange. 'The stock exchange can provide on-line information on the prices of the two stocks, that is, HSBC Holdings and Hongkong Telecom, so as to facilitate the trading of stock futures,' he said. Joint market surveillance is the third item for discussion. 'This is to ensure that when either market has a concern, it will inform the other,' said Ivers Riley, chief executive of the Futures Exchange. Co-ordination is also needed in the case of a suspension of the stocks which bear the future derivatives. 'What if the stock involved was suspended on the clearing day? How should the two exchanges react?' asked Mr Chow. The last issue requiring joint effort is cross-margining - the offsetting of members' credit and debit balance on certain products which have high correlation in its price movement. 'Products that have high correlation are individual stock futures and the underlying stock. They are supposed to move in opposite directions and are often considered as a perfect hedge,' said Stephen Rive, executive director for options market development in the stock exchange. Such cross-margining would reduce trading members' collateral requirement, in particular, for the members trading products with high correlation in the two exchanges. 'The stock exchange will definitely render any support needed to help the futures exchange launch this product,' said Mr Chow, who denied the exchange ever opposed the launching of stock futures. However, the two bodies have more than just technical issues to tackle. 'We both feel we should be communicating more closely than before, and we will,' said Mr Riley. The row broke out when the futures exchange announced its plan to launch stock futures by the end of the year. Apparently taken aback by the news, the stock exchange reacted by commenting on the lack of prior consultation, and pointing out the need for a sufficient margin requirement and possible impact on the cash market. Meanwhile, the stock exchange released a white paper on equity options, detailing its proposal on the market structure, participation and financing of the programme. The traded option project, which cost HK$170 million from the exchange's development fund, is supposed to provide a good hedging instrument to investors, enhance liquidity, and reduce volatility in the underlying stock market. The exchange hopes to recoup its investment in three to four years' time. A market-making system will be introduced. Market makers are required to provide firm bid and ask prices for a designated option class in return for a discount in the fees. Initially, six to 10 stocks will be chosen when the product is launched in August. The list to choose from will likely be the list of stocks currently allowed for short-selling.
