HKEx is the recognised exchange controller under the SFO. It owns and operates the only stock exchange and futures exchange in Hong Kong and their related clearing houses, namely HKSCC, SEOCH and HKCC. During the year, the Group acquired control of LMEH and its subsidiaries. One of its subsidiaries, LME, is an exchange for the trading of base metals forward and options contracts operating in the UK.
Business Review - For the year ended December 31, 2012
Review of Listing Rules
After taking into account the market comments collected from a public consultation, the Corporate Governance Code was revised with effect from 1 April 2012. New Code provisions were introduced, including, inter alia, the requirement of publishing updated lists of directors with their roles and functions identified, and the terms of reference of issuers' nomination, remuneration, and audit committees. A vast majority of issuers had adopted the new Code provisions before the effective date.
Environmental, Social and Governance Reporting Guide
The consultation conclusions on the Environmental, Social and Governance Reporting Guide (ESG Guide) were published in August 2012 after a 4-month consultation. The ESG Guide was introduced as a recommended practice applicable to issuers with financial year ended after 31 December 2012. Subject to further consultation, HKEx plans to raise the obligation level of some requirements to ˇ§comply or explainˇ¨ by 2015.
Throughout 2012, HKEx provided talks and seminars, and participated in conferences organised by professional bodies and industry groups to explain the ESG Guide to interested parties.
Guide on Enhancing Regulation of Listed Structured Products Market
In July 2012, HKEx published the Guide on Enhancing Regulation of the Listed Structured Products Market, which embraces a number of regulatory enhancement measures focusing on: (i) the enhancement of issuers' internal controls and the standardisation of listing documents; (ii) the improvement of liquidity provision standards; and (iii) the management of issuers' credit risks.
The Guide was introduced to foster higher standards across structured products issuers and liquidity providers with the ultimate objective of strengthening protection for investors and promoting the healthy long-term development of the listed structured products market in Hong Kong.
Communication with Issuers
The Exchange has continued its programme of issuer education and market outreach to issuers and other stakeholders with a view to promoting issuers' self-compliance with the Listing Rules and facilitating mutual understanding of regulatory issues through continued dialogue. Some of the key events held in 2012 are highlighted below.
The following table summarises the Exchange's service standards for monitoring and guidance actions as well as its subsequent responses to issuers' actions. It is the Exchange's objective to continue improving the transparency, quality, efficiency, and predictability of its service.
In the enforcement of the Listing Rules, the Exchange adopts the strategy of (i) referring cases of egregious conduct which may involve a breach of the SFO to the SFC; (ii) referring cases of suspected violations of laws and other rules and regulations to the appropriate law enforcement agencies such as the Independent Commission Against Corruption and the Commercial Crime Bureau of the Hong Kong Police; (iii) taking disciplinary actions against serious breaches of the Listing Rules; and (iv) issuing warnings or taking no action for other less serious conduct, where appropriate.
When the SFC commences an investigation of a case, the Exchange will normally suspend its investigation and provide support to the SFC. After the SFC's completion of an investigation, the Exchange will consider if a reactivation of its investigation is required. Under this arrangement, the Exchange has suspended the investigation of 12 cases.
The Exchange will also provide other law enforcement agencies with technical advice on the application of the Listing Rules in given circumstances, and witness statements to support their prosecutions.
Compliance with the Listing Rules is the collective and individual responsibility of directors whether they hold executive or non-executive roles in the management of the issuer. Compliance with some of the important obligations can be achieved through compliance systems and internal controls. Directors may be subject to disciplinary sanctions should they be held liable for substantive breaches of Listing Rules by the issuer. In addition, they may be subject to disciplinary sanctions should they be held liable for failing to create and maintain adequate internal controls by which compliance can be achieved.
During 2012, a number of investigations arising from breaches of the Listing Rules were completed, leading to the imposition of public and private sanctions on the issuers or directors by the Listing Committees. There are currently 6 cases at different stages of the disciplinary process. The number of disciplinary hearings and review hearings increased from 10 in 2011 to 20 in 2012 (14 hearings regarding disciplinary actions were concluded in the year and 6 hearings for those disciplinary actions which remained ongoing as at year-end), resulting in the need for a heavy commitment of regulatory resources.
To further improve the efficiency of investigations, training on investigation techniques was offered to staff of the Listing in 2012. Improvements continue on the internal decision-making structures so as to enable earlier identification of serious misconduct and breaches of the Listing Rules. This helps facilitate the delivery of regulatory outcomes as quickly as possible while observing the principles of natural justice and due process. Continued improvements have been made to enhance transparency of the disciplinary process by providing the market with increasing details in the announcements of any disciplinary actions taken. The relevant information as to the imposed public sanctions is available on the HKExnews website.
In addition, the Exchange continues to make recommendations to the Listing Committees on remedial action to correct breaches and to improve corporate governance in the future, including: (i) an obligation to retain external assistance in the creation of adequate and effective compliance structures or revisions resulting in such structures; and (ii) a requirement for directors to undergo training at recognised professional bodies for specific periods of time to improve their knowledge of, and performance in, compliance matters. Proposed revisions to the procedures for the disposal of disciplinary matters were submitted to the Listing Committees for their consideration in November 2012, after which a soft consultation involving legal practitioners has been commenced. The consultation findings will be reported to the Listing Committees who will decide how and when to proceed.
During 2012, a total of 5,982 DW listing applications (2011: 7,089) and 6,090 CBBC listing applications (2011: 5,394) were processed. In addition, a total of 109 new debt securities (2011: 50), including Exchange Fund Notes and Government Bonds, were listed in 2012.
In 2012, 52 companies were newly listed on the Main Board (including 2 transfers from GEM), and 12 on GEM. Total capital raised, including post-listing funds, reached $305.4 billion. As at 31 December 2012, 1,368 and 179 companies were listed on the Main Board and GEM respectively with a total market capitalisation of $21,950.1 billion. In addition, there were 3,747 DWs, 1,214 CBBCs, 100 ETFs, 9 REITs, and 269 debt securities listed as at 31 December 2012. The average daily turnover value in 2012 was $53.7 billion on the Main Board and $135.8 million on GEM, a decline of 23 per cent and 47 per cent respectively as compared with 2011.
ETF Market Development
Hong Kong's ETF market had a record year in 2012 in terms of both the number of new ETF listings as well as developments in product variety and trading mechanisms.
There were 35 ETFs newly listed on the Exchange during the year (2011: 8), including the first 4 RQFII ETFs, which are all traded in both RMB and HKD counters, and the first silver and platinum ETFs. The new ETFs track a diversified range of underlying benchmarks. As at 31 December 2012, HKEx had 100 listed ETFs, 21 ETF managers, and 24 ETF market makers.
In 2012, the total turnover of ETFs amounted to $522 billion (2011: $545 billion), accounting for 4 per cent of the total market turnover (2011: 3 per cent). There was a higher turnover of ETFs in the fourth quarter of 2012 which contributed more than 6 per cent of total market turnover during the period (2011: 3 per cent). The increase was mainly attributed to a higher turnover of 4 RQFII ETFs after their HKD counters commenced trading in the fourth quarter and increased trading in the Tracker Fund of Hong Kong.
The Group is honoured to have received the ˇ§Best Asian Exchange for Listing ETFsˇ¨ award for the second consecutive year from ˇ§etfexpressˇ¨, a website that covers the ETF industry.
New Trading Hours
Following a series of market simulations in February 2012 to assist EPs and IVs in verifying their readiness, the second phase of the new trading hours in the Cash and Derivatives Markets was implemented smoothly on 5 March 2012.
Tightening of Eligibility Criteria for Designated Securities for Short Selling
As a result of the growth in the average market capitalisation of listed companies in Hong Kong and the increase in market turnover velocity in the past decade, HKEx implemented changes to the criteria for designated securities for short selling in July 2012. The new criteria are related to the minimum market capitalisation and turnover velocity, now $3 billion (previously, $1 billion) and 50 per cent (previously, 40 per cent) respectively.
Trade Reporting Requirements for Automated Trading Services Transactions
An automated trading services (ATS) transaction is a transaction executed or concluded or entered into through ˇ§automated trading servicesˇ¨ provided by an EP under a licence granted by the SFC for trading in listed securities. To improve the market transparency of ATS transactions, EPs with ATS operations are required, with effect from October 2012, to report their ATS transactions with an identifier into AMS/3 immediately, and in any case, within 1 minute after the conclusion of the transactions. The aggregate ATS transaction turnover value is published on the HKEx website on a monthly basis.
In 2012, the turnover of H-shares-related products was noteworthy, with all-time highs in some cases. Various other contracts also reached new record levels, setting new standards for one-day volume and open interest.
After-hours Futures Trading
In November 2012, HKATS introduced a Dynamic Price Banding mechanism for Mini-HSI Futures. This enhanced feature is aimed at mitigating risk arising from input errors by rejecting all limit buy/sell orders outside the prevailing upper/lower price band. With this system refinement in place, HKEx's trading and clearing systems are all ready for the implementation of AHFT. Simulation tests were held for EPs and CPs intending to participate in AHFT to verify the readiness of their trading and clearing activities and associated operations. With the SFC's approval of the related rule amendments, HKEx plans to introduce AHFT on 8 April 2013, under which HSI and H-shares Index Futures will be available for trading from 17:00 to 23:00 (after-hours trading) in addition to the regular trading sessions (ie, 9:15 to12:00 and 13:00 to 16:15). Mini futures contracts and Gold Futures will be considered for inclusion in AHFT at a later stage. HKEx will arrange briefing sessions for Participants in early March 2013 to explain the trading, clearing and risk management arrangements for AHFT.
Introduction of New Futures and Options Contracts
HSI Volatility Index Futures was introduced for trading in February 2012 to provide investors with a single futures contract for hedging volatility risk in, or obtaining pure volatility exposure to, Hong Kong's stock market.
On 30 March 2012, the Futures Exchange introduced 4 HKD-denominated benchmark equity index futures ˇV Brazil's IBOVESPA futures, Russia's MICEX Index futures, India's Sensex Index futures, and South Africa's FTSE/JSE Top40 futures. These contracts enable investors to get exposure to the BRICS markets through HKEx. Meanwhile, HSI and/or H-shares Index futures were cross-listed on each of the BRICS exchanges.
To further broaden the option classes at HKEx, 3 new stock option classes, Galaxy Entertainment Group Limited, Sands China Ltd, and Standard Chartered PLC, were introduced for trading in 2012, while stock options for the HKD-traded CSOP FTSE China A50 ETF and ChinaAMC CSI 300 Index ETF were introduced in early 2013.
At the end of 2012, there were 550 SEHK Participants and 185 HKFE Participants, including 22 SEHK Participants and 16 HKFE Participants admitted in 2012.
HKEx and the HKSI jointly organised 15 Continuous Professional Training courses on HKATS operations and trading procedures in 2012. There were also 7 training courses related to AMS/3. In addition, a total of over 6,400 people participated in 64 briefing sessions and 30 seminars on derivatives organised under HKEx's joint promotion programme with EPs.
Introduction of RMB Products
In 2012, a number of milestones were set in HKEx's RMB product development which reinforced Hong Kong's position as a leading offshore RMB centre.
Following the Mainland's approval in April 2012 of the use of the RQFII quota to issue RMB-denominated ETFs tracking A-share indices for listing on the Exchange, 4 RQFII A-share ETFs were listed on the Exchange in 2012, and all of them are traded under the Dual Counter model (ie, HKD and RMB counters). The addition of RQFII A-share ETFs broadens HKEx's RMB product offerings and provides investors with an additional product choice of investment in A-shares. The Dual Counter model facilitates investors' trading in RMB.
In October 2012, the listing of RMB-traded shares issued by Hopewell Highway Infrastructure Limited on the Exchange (in addition to its HKD-traded shares) marked the debut of the first RMB-traded equity security outside the mainland of China. In December 2012, the first DW traded in RMB was listed on the Exchange.
The RMB Currency Futures contract introduced for trading by HKEx in September 2012 is based on the currency pair, USD and CNH, and was the world's first deliverable RMB currency futures to be quoted, margined and settled in RMB. The new futures contract provides RMB users a tool for managing RMB exchange rate risk exposure. Regulatory approval of the relevant rule amendments has been obtained for the introduction of RMB-traded options on RMB-traded equity securities listed on the Exchange, and those products will be introduced when opportunities arise.
Enhancements to trading and clearing infrastructure
In 2012, HKEx further enhanced its trading and clearing infrastructure to support the launch of RMB products.
The registration process for TSF Participants was streamlined in January 2013, whereby EPs which fulfil the TSF registration criteria with overall readiness may apply to be TSF Participants directly without the need to complete the mandatory system testing prescribed by HKEx. As at the end of 2012, there were 6 TSF securities and 45 TSF Participants.
Trading volume in LME contracts rose by almost 10 per cent in 2012 coming on the back of a 22 per cent increase in 2011 and resulting in truly impressive compound growth, especially when compared with the exchange industry more generally where any increase in turnovers was a rare event during 2012. This positive outcome was mainly due to the fact that commodities and metals in particular, are essential to the growth of emerging economies, and the work done to modernise and stabilise the IT aspects of the trading infrastructure, making LME more accessible to participants.
Implementation of the Exchange User Fee
Upon the approval of a new Exchange User Fee to be charged on client contracts in December 2011, the Exchange User Fee was refined to exclude short-dated carries (anything from Tom (ie, the next business day) to 15 days inclusive), and was set at US$0.79 per lot. Implementation of the new Exchange User Fee allows LME to maintain an appropriate investment programme, to maintain its regulatory capital requirements, and to continue to grow in an increasingly competitive market. The impact on LME of the introduction of the Exchange User Fee will be kept under constant review.
Operation of LME's Approved Warehouses
In April of 2012, the load out rate for the largest warehouses was doubled to 3,000 tonnes per day. As a consequence, the LME warehouse network delivered out 2.3 million tonnes of aluminium alone during 2012. Nevertheless, LME decided that a further revision to load out rates would be appropriate, requiring that in certain circumstances from 1 April 2013, an additional 500 tonnes per day of a metal other than the dominant metal in any given warehouse should be loaded out, and on top of that, up to 60 tonnes per day of nickel and tin (combined) should be loaded out. These, all amount, in some instances, to an increase in the load out rate of nearly 140 per cent since March 2012.
LME will keep the operation of the warehousing system under constant review and will continue to tune the system when such tuning is both necessary and effective.
Impact of New European Market Infrastructure Regulation
The introduction of the new European Market Infrastructure Regulation (EMIR) regulatory environment has had a major impact on LME and its members, though the full force of the changes will not be felt until 2014/2015. Certain assumptions that were made when LME Clear was first mooted have had to be dramatically revised, and the operation of LME's core systems is impacted by the need to make trading, and particularly clearing, EMIR compliant. From LME's perspective, there will be opportunity in the EMIR-driven changes, including the potential for the construction of a trade repository. EMIR mandates that all trades, both on-exchange and OTC, must be recorded the consequent positions be aggregated so that regulators can see clearly what is happening across markets. The regulatory push to clearing, to on-exchange execution, and to the registration of OTC business should strengthen the position of the LME in its markets.
Establishment of User Committee
LME members and the broader metals industry have always played a significant role in the running of LME through their participation in the operational committees. All the operational committees will continue to meet and their advice will continue to be important to the decision-making process. A User Committee has been newly created under the LME board to ensure that there remains a direct line of communication from LME's users to the board.
Introduction of New Products
In January 2012, LME introduced LMEswaps for all LME non-ferrous contracts. An LMEswap is an on-exchange contract between two parties where the cash difference between the agreed fixed price and the floating Monthly Average Settlement Price (MASP) is financially settled at the end of the averaging period. LMEswaps are the first of their type in the world traded on-exchange and bring transparency to pre- and post-trade prices. They are designed specifically for members of the metal community who need to hedge against the monthly average price with the added security of clearing.
In response to a member consultation on LME's Closing Prices, LME on 6 February 2012 began publishing live forward prices for all metals traded in the last Ring session of the day (the afternoon Kerb) which adds further transparency to the procedures used to establish the Closing Prices. The forward curve is available for the key prompt dates and displayed on a daily basis from 16:15 by LME licensed data vendors and on the electronic wallboards in the Ring dealing area. As the prices for the forward curve change during the Kerb session, they will be amended and displayed accordingly.
Broadening Education and Outreach in Asia
LME has been broadening its education and outreach efforts in Asia amid growing interest in futures trading in the region.
In 2012, seminars were designed and run out of Asia for the purpose of providing traders, investors and industry players in the region with a greater understanding of how LME contracts can be used to manage the impact of price volatility and the regulation, pricing, hedging and delivery procedures for trading on LME.
In December 2012, visits were made to Mumbai and New Delhi as part of an educational tour of India. The sell-out tour, which consisted of day-long seminars for Indian delegates to familiarise them with metals price risk management tools, had received enormous support from the Indian industry.
with metals price risk management tools, had received enormous support from the Indian industry.
HKEx has continued to broaden and deepen its relationships with the Mainland authorities (at the Central Government level as well as the provincial and local levels) and market participants. It has signed MOUs with all 6 Mainland exchanges (ie, the China Financial Futures Exchange, the Dalian Commodity Exchange, the Shanghai Futures Exchange, the Shanghai Stock Exchange, the Shenzhen Stock Exchange, and the Zhengzhou Commodity Exchange). In 2012, over 130 meetings were conducted with the governments of 22 Mainland cities, including Beijing, Chongqing, Hunan, Liaoning, Nanjing, Shanghai, Sichuan, and Tianjin, as well as Central Government regulators and authorities.
HKEx organises exchange programmes for the Mainland authorities to strengthen their understanding of its businesses and to forge closer working relationships. In 2012, it arranged exchange programmes for over 50 senior officials from various departments of China Securities Regulatory Commission, including Listed Company Supervision, Fund Supervision, and Futures Supervision, as well as the Enforcement Bureau. In addition, HKEx co-organised training workshops on corporate governance standards of listed issuers for about 100 senior Mainland executives. The training was in Hong Kong and the other co-organisers were The Hong Kong Polytechnic University and the Research Institute of Hong Kong and Macao Affairs Office of the State Council.
Issuer and Client Services
In line with its core strategy to generate organic growth, HKEx has continued to promote Hong Kong as a pre-eminent listing venue for Mainland and international companies seeking capital, brand awareness, Asia exposure, and a liquid secondary market. Throughout 2012, HKEx maintained a high level of marketing activity, including roadshows in the mainland of China and in many other markets around the world, to identify and meet with potential issuers. In addition, HKEx collaborated closely with the Mainland and Hong Kong governments to organise promotional activities in strategically important Mainland cities and regions to attract companies to list in Hong Kong.
In 2012, HKEx hosted over 20 events for potential issuers, ranging from large conferences to small roundtable discussions and workshops, in 10 Mainland cities and Hong Kong. HKEx also made 55 trips to different Mainland cities and 18 trips internationally to speak at listing promotion events and meet with government officials and potential issuers, including companies that are looking for a secondary listing and leading companies in a number of sectors and industries.
As at the end of 2012, there were 158 and 87 real-time and delayed IV licences respectively (2011: 149 and 80). The licensed IVs altogether offered a total of 954 types (2011: 914) of real-time market data services.
End-user Licence for Market Data
In view of the positive market response to the introduction of an end-user licence for the Derivatives Market data in 2011, HKEx extended the end-user licence to cover the Cash Market data in December 2012 for licensees' internal usage of Cash Market datafeed ˇV MDF 3.8. As at the end of 2012, there were 23 End-user Licensees (mainly EPs and market makers) for the Derivatives Market data.
Non-display Usage of Market Data
Traditionally, market data has been used mainly by people in a ˇ§displayˇ¨ mode on screens. With the advance of technology and the increasing popularity in automated trading in recent years, market data is increasingly being used by machines, or the so-called ˇ§non-displayˇ¨ mode. In response to changes in market behaviour, HKEx announced in July 2012 the introduction of a new policy for non-display usage of HKEx real-time's market data which took effect from January 2013.
Extension of Discount Programme of Real-time Market Data for Mainland Users and Mainland Television Subscribers
The discount programme for Mainland users of HKEx's real-time market data has been extended until the end of 2013. More than 10,300 individual investors and 3,500 institutional investors in the mainland of China registered under the programme will continue to enjoy the discounted rates of $80 and $120 respectively for HKEx securities market data along with a free derivatives data package without price depth.
The discount programme which enables Mainland television subscribers to provide HKEx's real-time securities market data to its viewers in the mainland of China has also been extended to the end of 2013. The subscriber fee remains at a flat rate of $10,000 per month.
Mainland Market Data Hub
In view of the substantial growth of demand for Hong Kong market data in the mainland of China and the growing number of Mainland IVs offering the data, HKEx established the Ganghui Financial Information Services (Shanghai) Limited, a wholly-owned subsidiary of HKEx, in Shanghai in 2012 to coordinate its market data distribution in the mainland of China. As part of the HKEx Orion programme, a market data hub will be launched in Shanghai in the third quarter of 2013. Initially, it will offer securities market and index datafeed products. This initiative will strengthen HKEx's Mainland connectivity, enable Mainland investors to access HKEx's market data through a reliable, scalable, and cost-effective infrastructure, and mark HKEx's first significant technical infrastructure footprint in the mainland of China. A Founding Members Programme was launched in February 2013 to allow IVs and other interested parties to participate in the early set-up of the market data hub and joint marketing efforts with HKEx.
In October 2012, the CESC officially commenced operations in Hong Kong, just 4 months after HKEx, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange announced the signing of a joint venture agreement. It brings together the experience and expertise of the 3 exchanges and aims to contribute to the further internationalisation of China's capital markets by providing global investors with exposure to the world's second largest economy through Hong Kong. On 10 December 2012, the CESC launched CES120, the first index in the new CESC Cross Border Index Series. CES120 is disseminated to the HKEx real-time MDF IVs for their redistribution free of charge. The CESC will develop sub-indices, including a pure A-shares index and a Hong Kong Mainland index based on CES120 constituents, and plans to introduce other cross-border indices as well as index-related products in early 2013.
Product and Index Development
The member exchanges of the BRICS alliance (comprising Brazil's BM&FBOVESPA, Russia's Moscow Exchange MICEX-RTS, India's BSE Limited, HKEx, and South Africa's JSE Limited) listed local currency versions of benchmark equity index futures and/or options of other alliance members in the first half of 2012 and provided joint product education for respective market participants in the second half of 2012. The BRICS exchanges engaged major index vendors in developing a set of new composite indices comprising of local markets from each jurisdiction. The composite indices would reflect various asset classes as the basis for new products to serve investors globally in cash and derivatives markets and a vehicle to access existing BRICS liquidity pools internationally. The BRICS exchanges alliance initiated the efforts in developing and testing product concepts and work together with the selected vender to determine the scope of the next engagement in the first quarter of 2013.
Cash and Derivatives Clearing
Scripless Securities Market
HKEx continues to support the SFC in preparing the draft subsidiary legislation based on the operational arrangements recommended by the Scripless Securities Market Working Group. A market consultation for the enabling legislation is tentatively planned for 2013.
CCASS Service Enhancement
In May 2012, new features were introduced in CCASS to improve the SIs' operational efficiency. Participants can now opt to settle SIs in any eligible currency (HKD, RMB, and USD) instead of in the trading currency of the securities only. In addition, a new reference field was added for SI input which allows Participants to handle IPOs with better control and higher efficiency.
HKCC's Settlement Bank Arrangement
Money settlement arrangements with all Settlement Banks of HKCC were standardised in August 2012 to streamline the payment flows and to facilitate a higher level of the banks' participation in RMB settlement.
To prepare for the introduction of AHFT, DCASS was enhanced in November 2012 to allow CPs to support the clearing of HSI Futures, H-shares Index Futures, and Gold Futures during the after-hours trading session.
Self-assessment of Principles for Financial Market Infrastructures
In April 2012, the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions issued the report ˇ§Principles for financial market infrastructuresˇ¨ (PFMI Report) which contains new international standards for payment as well as clearing and settlement systems. These standards are designed to maintain and promote global financial stability, and are applicable to financial market infrastructures including central securities depositories, securities settlement systems, and central counterparties.
In order to stay on a par with international standards, HKEx is conducting self-assessment of HKSCC, HKCC, and SEOCH observance levels against the PFMI Report's principles in their capacities as either central counterparty, central securities depository, or securities settlement system. The assessment, through a gap analysis, is targeted to be completed in the first half of 2013, after which HKEx will develop plans for financial resources and enhancements to its systems, policies, and operations for ensuring compliance with these principles, as appropriate.
In 2012, there were 24,344 CCASS Participants, including 599 IPs admitted in 2012. HKEx organised 24 training courses related to CCASS or DCASS for CPs and market participants in 2012.
In preparation for the development of a new regulatory regime for the OTC derivatives market in Hong Kong, the HKMA and the SFC are planning to introduce the legislative proposal to the Legislative Council in the first half of 2013.
With this backdrop, HKEx established OTC Clear, the clearing house for its OTC derivatives clearing business, in 2012. Feedback from discussions with potential clearing members has been positive. After incorporating market views and suggestions into the rules and procedures of OTC Clear, HKEx submitted them to the SFC for its review. Subject to the SFC's approval of OTC Clear as a recognised clearing house, HKEx is targeting to introduce its OTC derivatives clearing services in the second quarter of 2013. Initially, the product coverage will be interest rate swaps on RMB, HKD, USD and Euro, and non-deliverable forwards for RMB, Taiwan dollar, Korean Won and Indian Rupee.
As regards the OTC clearing and settlement system (OCASS), the system development work was largely completed in December 2012. OTC Clear is arranging for testing with clearing members in the first quarter of 2013. Before the official launch of the OTC derivatives clearing services, market rehearsals to simulate the operations in production will be conducted with clearing members.
In the last quarter of 2012, OTC Clear started promoting its OTC clearing services to individual banks and licensed corporations and working closely with them on the clearing membership applications. Discussion with a group of strategic partners on the proposal to offer them minority stakes in OTC Clear is in progress. HKEx also worked with middleware vendors to co-organise seminars and briefing sessions for market participants to raise their awareness and understanding of trade registration platforms' services and features.
To prepare for the launch of OTC clearing services, HKEx organised various events in 2012 for potential OTC Clear clearing members. Highlights are set out below.
The design and construction of LME Clear, LME's vertically integrated clearing house, continued during 2012. Implementation work for the clearing and risk management platform commenced in the third quarter, and 3 member working groups, covering legal, operations, and IT aspects, were formed in the fourth quarter. Since November 2012, regular member working group meetings on operations and IT have been held.
A high level service description and the technical specifications have been distributed to members for their readiness work. The risk management framework, detailed rulebook, and procedures are scheduled for members' consultation in the first quarter of 2013. It is expected to launch LME Clear in 2014.
Clearing Risk Management
In March 2012, HKEx published consultation conclusions on the HKEx Clearing House Risk Management Reform Measures with a view of strengthening its clearing house risk management regime. The consultation drew over 600 responses from CPs, professional and industry associations, market practitioners, and individuals. The responses were broadly supportive and the measures were successfully implemented in 2012.
The key measures were: (i) the introduction of a standard margin system and a Dynamic Guarantee Fund at HKSCC; (ii) the revisions to certain price movement assumptions in the clearing houses' stress testing; (iii) the revisions to the counterparty default assumption in the stress testing; (iv) the revisions to the collateral assumptions at HKCC and SEOCH; and (v) the introduction of various means of financial support to reduce the impact of risk management reform on CPs.
For OTC clearing, to ensure the robustness of OTC Clear's risk management model and framework in line with the international standards, risk management reviews covering margin calculation, pricing, default management and guarantee fund stress testing were completed by independent third party consultants in 2012.
Production Systems' Stability and Reliability
During 2012, all major trading, clearing and settlement, and market data dissemination systems for the Cash and Derivatives Markets continued to perform reliably.
IT Security Enhancements
HKEx has commenced a 2-year programme to implement various IT security enhancement initiatives following the completion of an IT security risk and infrastructure review in the first quarter of 2012. The programme involves enhancements in security technologies, people, and processes with an objective to raise IT security to a higher level of maturity. A number of key improvements were successfully completed in 2012. The target is to roll out the remaining initiatives in phases in 2013 and the first half of 2014.
New Data Centre and IT Office Consolidation
Construction of the TKO Data Centre was completed with occupancy permit obtained in August 2012. The relocation of the IT office to the new building and the first phase of data centre migration, involving the Cash Market, were conducted smoothly in October 2012. The relocation of all other primary data centres will be conducted in phases in 2013.
HKEx Orion Programme
The HKEx Orion technology initiatives programme was launched in March 2012. The programme comprises a set of projects which will progressively transform HKEx's market platforms to improve market access, connectivity, speed, and functionality.
The SDNet/2 provides higher bandwidth scalability for future business growth and offers the choice of multiple network carriers for diversity and competitive pricing. The backbone infrastructure was duly implemented as part of AMS/3.8 project. The first phase migration of network circuits for EPs and IVs of the Cash Market to the SDNet/2 was completed in July 2012. The migration of EP and IV network circuits for the Derivatives Market and the Cash Clearing is planned for the first quarter and second half of 2013 respectively.
The OMD is an integrated low-latency data feed adopting a common message format across all asset classes traded on the HKEx markets. The OMD will enable HKEx to: (i) offer a suite of market data product feeds with content, market depth, and bandwidth requirements tailored to suit the needs of different types of customers; and (ii) establish points of presence for market data distribution outside of Hong Kong such as in the mainland of China. Implementation work for the OMD commenced in the first quarter of 2012, and customers were given access to the planned system for the Cash Market in December 2012. Rollout for the Cash Market is scheduled for the second quarter of 2013 and that for the Derivatives Market by the first quarter of 2014.
HKEx also commenced development of the OCG for the Cash Market in the third quarter of 2012. The OCG will significantly reduce EPs' costs by offering market access without the need for any gateway equipment to be deployed in their premises as well as offering additional features such as FIX (Financial Information eXchange) support and ˇ§drop-copyˇ¨. BSS vendor exhibitions were organised to facilitate EPs' selection of BSS solutions for the OCG. The OCG is tentatively targeted for launch in the fourth quarter of 2013.
For the Cash Market trading system, HKEx is preparing for the eventual replacement of AMS/3 with the OTP. The OTP is a new Cash Market trading system aimed at providing low latency, high capacity, and new business functionality. A proof-of-concept exercise was completed in 2012. The development and implementation of the project are expected to take place in 2013 and 2014 respectively.
On the Derivatives Market front, HKEx is working on the migration of HKATS/DCASS onto a new technology platform (Genium INET) to facilitate technology alignment with vendor's product roadmap, and achieve significant improvement in capacity and reduction in order latency for further development of the Derivatives Market. The Genium INET platform is targeted to be rolled out in the fourth quarter of 2013.
The Hosting Services offered by HKEx provide a local area network infrastructure in the TKO Data Centre which supports users' low latency connections to HKEx's systems. Total capacity of the hosting floors can support up to 1,200 racks of server space. The initial phase, comprising 320 racks, was implemented in the fourth quarter of 2012. About one-third of the capacity has been subscribed by about 60 companies including EPs, IVs, technology vendors, and telecommunication service providers. Support for Cash Market trading through the network was launched in December 2012, with approximately 20 hosting service users trading on the infrastructure.
With an open ecosystem approach to support Hong Kong's financial markets community, HKEx's Hosting Services enable users to interact with each other efficiently and conveniently subscribe for software services, market data feeds, and managed services provided by various technology vendors and IVs. Besides, 14 financial extranets and telecommunication service providers have set up networks at the carrier-neutral data centre. Global connectivity can be supported by the Hosting Services by simple cable patching. To promote the Hosting Services to the trading community and technology vendors, HKEx organised the HKEx Hosting Services Ecosystem Founding Members Conference and the Exchange Technology Forum and participated in the Asia Pacific Trading Summit and the Trading Architecture Asia event in 2012.
The Hosting Services will be extended to support the Derivatives Market trading and low-latency direct connection to the OMD by the third quarter of 2013.
HKEx Mobile and HKEx Group Website
HKEx Mobile (m.hkex.com.hk), a new mobile website which is compatible with most popular smartphone operating systems, was launched in April 2012 to promote greater access to up-to-date HKEx news and market information.
In December 2012, the HKEx Group website (www.hkexgroup.com) was launched to give an overview of the Group, including LME and the CESC.
The Group's funds available for investment comprise Corporate Funds, Margin Funds and cash collateral and Clearing House Funds, totalling $46.0 billion on average in 2012 (2011: $48.2 billion).
Business Outlook - For the year ended December 31, 2012
Looking ahead, the ever-changing macroeconomic environment and the evolution of the world's financial markets will continue to present both interesting opportunities and new challenges for HKEx.
A dominating theme of the strategic plan we just published for 2013 to 2015 is mutual market access. As China accelerates the opening of its capital, financial and commodity markets, we will experience a seismic shift of capital flow, making China to transform from an importer of capital to an exporter of capital. As it has successfully done in the past 20 years, Hong Kong can once again play the key role of bringing Chinese and international markets together, by inviting Chinese domestic investors to come to Hong Kong as well as by facilitating easier access for international investors into the domestic Mainland markets where they are still largely restricted. Not only Hong Kong has the capability to play this part, it will also benefit tremendously from facilitating this mutual market access.
While the opportunities for Hong Kong and HKEx are phenomenal, the challenges are also great. At the macro level, the global economy is still affected by easing monetary policy in Europe and the US, which has led to relatively abundant liquidity in the financial markets. Containing risk while maintaining growth is a fine balance and not easy to strike. Therefore, we will continue to exercise caution in investment and other expenditure in 2013, and give priority to projects that are the most important to our current strategic plan. At the micro level, we need to bridge the differences across markets and explore feasible models for building connectivity, including trading and clearing infrastructure, market structure, and risk management.
We set out a goal to transform HKEx into a truly global exchange and to lead Hong Kong's markets to new horizons. Our new three-year strategic plan is a continuation of this vision and I am confident that with determination and patience, we will succeed in achieving our goal.
Source: HK Exchanges (00388) Annual Results Announcement
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