While other exchanges are racing to be the fastest, achieving lightning speed is only one part of the Hong Kong Exchanges and Clearing's strategic vision, which remains focused on building a bridge between the Chinese and international markets, said Charles Li, the exchange's chief executive officer in a speech earlier this week.
HKEx expects to spend over HK$2 billion (US$256.6 million) on capital expenditure over the next three years, excluding the cost of a next generation trading platform whose development would begin after the upgrades of the exchange's AMS/3.8 matching engine and MDS/3.8 market data platform are completed by the end of 2011. By comparison, the Singapore Exchange recently spent US$195 million (S$250 million) on its Project Reach upgrade.
“We want to be the international exchange of choice for Chinese clients and we want to be the Chinese exchange of choice for international clients. Our vision is to deliver that bridge, a bridge that is changing because the two sides of our key client base are changing dramatically,” Li said in a speech at the second annual Trading Architecture Asia conference in Hong Kong.
“For many of our exchange peers, speed is almost becoming the primary driver and almost everything is about latency. We don't need to be the fastest because we have many other dimensions that are important, because we have a unique future growth opportunity structurally. But we still need to be significantly more competitive than we are today,” he added.
HKEx is currently at ”chapter two' of its development roadmap which aims to make Hong Kong the offshore renminbi (RMB) centre for China and places heavy emphasis on the opportunities arising from the ongoing internationalisation of the RMB, including offering issuing and trading capabilities in the Chinese currency. ”Chapter one', in motion for the past 15-17 years, is focused on attracting Chinese issuers to list in Hong Kong as well as international investors that want exposure to Chinese firms through these listings. China-related companies now account for about 60% of HKEx's market capitalisation and around 70% of daily trading volume. Now, Li is counting is on an increase in the pace of liberalisation in the mainland.
“I believe, with a great degree of conviction, that a significant acceleration of the capital account opening is going to happen within the next 3-5 years,” said Li who joined HKEx in October 2009 from J.P. Morgan where he was chairman of the US investment bank's China businesses. “We are not doing RMB just to simply redenominate our Hong Kong businesses. The reason we are doing RMB on such a massive scale is to get ready because when the door opens, with the Chinese investors coming down here, they would want to invest in Chinese underlyings and they would want to stay in the RMB. Our strategy is to make sure that this market can welcome the arrival of that investor base. The joint venture we announced is a very important step for that transition.”
On 18 August, HKEx issued an announcement saying that it has entered into talks with China's Shanghai and Shenzhen stock exchanges about a potential joint venture to develop index and equity derivative products.
At the same time, the HKEx is moving into ”chapter three' of its strategy, the aim of which is to make Hong Kong a “comprehensive international financial centre” and which emphasises the expansion of its capabilities to other key asset classes, particularly financial derivatives and commodities. This would include the establishment of a central counterparty clearing house for over-the-counter (OTC) derivatives by end-2012 as part of the G20 commitment on reducing systemic risk in derivatives trading. OTC clearing on HKEx is expected to start with interest rate swaps and non-deliverable forwards.
“We have the world's second largest economy across the border whose currency is still a closed currency, but is going to be opening up in a very accelerated manner. There are massive financial derivatives, interest rate and credit opportunities associated with the massive growth of that economy and the globalisation of the economy including its currency,” Li noted.
In particular, the HKEx boss has set his sights in commodities trading, in response to China's key role in such markets. “We are not interested in building an all-purpose commodity exchange. That game is over. We are not even going to compete regionally with other people. But there are important opportunities in commodities, particularly in risk management, clearing and a number of key commodities where China has disproportional influence, whether as producer or consumer. We are looking for areas where we can uniquely bring the global players together with China,” he added.
Li said that HKEx's trading architecture had to be flexible enough to be able to provide participants with greater options, such as being able to offer FIX connectivity as a choice on top of its proprietary protocol. In addition, the HKEx is building a data centre, scheduled for completion in 2012, with 31,400 square meters of floor space that would enable it to offer colocation services.
“After ”3.8', we probably are done with what we can with the existing platform. There's only that much you can do on a platform that has the legacy that we have. But it will buy us a very important window of time for us to begin to move on to our next generation. Our next generation initially will be in parallel with our ”3.8', and we're going to start with our access component first, the central gateway and next generation market data. When we finish that then we move on to the matching engine,” Li said.