
Trump ban on Chinese stocks sinks demand for index options in Hong Kong
- The Biden administration has not unwound its predecessor’s executive order against China Mobile, China Unicom, CNOOC and SMIC
- Asset managers and banks are cutting H-share index option trades, which were notionally valued at US$1.4 trillion last year
The impact of a Trump administration executive order banning securities it said were linked to China’s military has lingered in Hong Kong.
Investors and banks dealing in options contracts referencing the Hang Seng China Enterprises Index (HSCEI) have been cutting exposure, which has depressed trading volume by 60 per cent since February.
“Traditionally, the HSCEI is the main index for many investors and fund managers to gain pure option exposure to China. With the several Chinese stocks that are index constituents entering into the US banned list, suddenly the index options market becomes off-limits to a subset of market participants,” said Govert Heijboer, co-chief investment officer of True Partner Capital, a hedge-fund manager focused on volatility as a trading strategy.
Options contracts that reference the so-called H-share index have been a popular product for bourse operator Hong Kong Exchanges and Clearing (HKEX). The contracts offer hedge-fund managers leveraged exposure to trade market volatility, and are also useful for asset managers hedging against risks in their China portfolios. Last year, the notional value of H-share index options traded totalled HK$11.1 trillion (US$1.4 trillion).
The drop has come despite the index’s volatility staying at high levels compared to the past five years’ average. Its 30-day historical volatility has hit the 30 level for the past three months, which is higher than the past five-year average of 19.3. Normally, elevated volatility levels should attract higher trading demand for index options.
Moreover, the implications of the ban reverberate beyond US banks and brokerages. Even asset managers that are not deemed “US persons” are also forced to divest as they heed calls from their US clients to cut exposure, the Post has learned.
Among all banned-entity lists, Trump’s November executive order is the most troublesome for markets, because it affects a big ecosystem of institutional players such as hedge funds, asset managers, insurance firms and prime brokerages, industry players said.
A person familiar with the situation at a US investment bank confirmed that it had been advising clients to close out option positions on the H-share index since January, as these derivatives are considered securities that fall within the scope of the US executive order. Futures contracts, however, are unaffected.
Hang Seng Indexes Company said that it understands that some clients were facing certain restrictions when investing or managing Hong Kong equity products due to some regulatory requirements. “[We] continue to discuss with our clients and explore customised index solutions enabling them to comply with applicable laws and regulations,” a spokeswoman said.
HKEX is fully committed to continually enhancing the attractiveness and competitiveness of its markets, a spokesman said. “As Asia’s risk-management hub, we are always looking at new product ideas, working with the market, and we will update on new developments accordingly,” he said.
