Hong Kong eyes new trading rules, adding rebates to spur volume, fight competition

[HONG KONG] Hong Kong Exchanges & Clearing Ltd (HKEX) is considering rule changes aimed at increasing trading, according to chief executive officer Charles Li.

Rebates to market makers, simplified rules for using collateral across multiple positions, and the removal or reduction of stamp duty charges are among measures being considered, Li said in an interview. Some of the changes will require approval from the securities regulator or government, he said.

The exchange operator is eyeing changes as it battles for business with its international rivals. HKEX plans to allow so-called innovative companies with dual-class share structures as part of a slew of measures that could see the biggest changes to its listing rules since 1993. It has also set up three trading links with mainland China, with more in the pipeline, and in November introduced iron ore futures, in a head-on challenge to Singapore Exchange Ltd.

"The objective, if there is an objective, is to really make our market more competitive," Li said in an interview last month. "Our strategy is making our initial public offering market more relevant, make our market more connected, and make our derivatives market more competitive. That really is our three-leg strategy."

HKEX is also working on a plan to sell investment fund products, allowing retail investors to bypass banks, the South China Morning Post reported on Jan 2.

SCMP said that currently more than 80 per cent of fund sales in Hong Kong are conducted through banks, while the rest are sold through fund houses directly to clients, but the Hong Kong Investment Funds Association is working with regulators to allow investors to buy fund products through the stock exchange as well as online channels such as smartphones.

The move comes as China recently opened further its capital markets by relaxing caps on foreign ownership of securities brokerages and asset management joint ventures. This could draw more international fund companies to set up in Hong Kong and the mainland to tap Chinese investors.

HKEX's share price on Monday hit its highest level since July 2015. The stock gained 37 per cent in the 12 months through Friday, outperforming the majority of its peers.

Despite being the world's fourth-biggest stock market, Hong Kong has traditionally lagged behind Singapore Exchange for derivatives trading. Singapore's FTSE China A50 index futures, for example, is often Asia's most traded offshore contract.

One idea under discussion to boost trading is to pay rebates to market makers during new product launches, Li said. A common feature in other developed markets including the US, such payments are restricted by the Securities and Futures Commission.

"We are talking about small scale, incremental, early-stage pilot programs, where people can at least begin to think, 'we could have cash incentives, we could have rebates, we could do this, that,'" Li said.

Another area of debate is cross-margin requirements, Li said without elaborating. In Singapore, traders are able to post less collateral on offsetting positions, which requires less cash to be set aside and can reduce execution costs.

HKEX spokeswoman Wong Sau-ching said more details would be made public in due course.

"We will review the HKEX's proposals when submitted to the SFC," Ernest Kong, a spokesman for the regulator, said by email.

HKEX is also considering whether to ask the government to reduce or remove stamp duty, Li said. Removing the duty, currently 10 basis points (0.1 per cent) on both sides of a trade, could ignite interest from high-frequency trading firms and others that specialize in exploiting tiny movements in share prices. The company's discussions on whether to propose such a change was reported by Bloomberg in October.

The government will want to know who is going to underwrite any shortfall in tax revenue and HKEX doesn't currently have an answer, Li said.

BLOOMBERG