Hong Kong Exchanges and Clearing (HKEx) is planning to significantly expand its derivatives offering, in particular breaking into fixed income derivatives, an area it has left relatively untouched up until now, while also expanding its equity range.
As part of the exchange's Group Strategic Plan, which will run from 2013 to 2015, the exchange stated its "current suite of derivatives products can be considerably enlarged over time, in particular through the introduction of RMB-based products."
A spokesman for the HKEx explained that more derivatives are a good fit for HKEx, where 75% of current revenues are from cash equity and 25% from equity derivatives. "Entering into derivatives linked to fixed income and commodities will enable HKEx to diversify its revenue base. In addition… HKEx's strategy of extending beyond equities will entrench Hong Kong as an international financial centre in the years to come," said the spokesman.
The exchange's chief executive Charles Li commented that a multi-asset class strategy - alongside helping HKEx be internationally competitive as an exchange, and for diversification of revenue and growth - would help the bourse in "leveraging our offshore status to build sustainable competitive advantages as the exchange of choice for our international investors seeking Mainland China exposure".
"The best place to be in today's exchange industry is derivatives, in particular fixed income and commodities, because they are sticky," said Li, explaining that this means liquidity tends to stay where it is established. "A very strong position in those assets can be created if an exchange owns the benchmarks as well as clearing services." He added "[the recently acquired] London Metal Exchange (LME) gives HKEx the world's leading benchmarks for base metals. In fixed income and commodities HKEx plans to build a first mover advantage in developing new benchmarks around the renminbi and Mainland China's fixed income market."
An HKEx spokesman noted that its intended fixed-income product suite would include a broader range of currency futures, bond index products and RQFII ETFs (Renminbi Qualified Foreign Institutional Investor Exchange Traded Funds) on bonds. Current fixed income products on HKEx are limited, for example including 1- and 3-month HIBOR (Hong Kong Interbank Offered Rate), which saw zero volume during November and December 2012. However, HKEx believes there is substantial demand for the expanded product set, with investors in particular driven by the story of the internationalisation of the renminbi.
Derivatives on the exchange are also benefiting from other boosts, such as improvements to market structure. This will include a single license for securities and derivatives market data products, upgrading the capacity and technology of HKEx's derivatives trading system, and improvements to its risk management function.
A spokesman explained HKEx wanted to align the contract, policies and fees structure of its securities and derivatives market data so information vendors would not need to sign a separate agreement for each market data product. In addition to consolidating four different agreements, it provides a convenient arrangement for multiple datafeed products. The spokesman noted multiple licences were a legacy from when the stock exchange and futures exchange were completely separate, prior to becoming part of HKEx in 2000.
Improvements to the exchange's derivatives platform is one of the three central components of HKEx Orion, HKEx's $380 million investment programme, and improves trading, clearing and market data.