HKEX Consultation Paper on After-Hours Futures Trading

Hong Kong Securities and Futures Professionals Association

Position Paper on the Proposal for After-Hours Futures Trading

Date: May 31, 2011

Introduction:

In light of the recent consultation document proposing the introduction of after-hours futures trading sessions, we express our unequivocal opposition. Our primary emphasis should be on refining existing trading mechanisms, instituting position limits, mandating disclosures for major holders, and implementing robust suspension protocols.

Detailed Analysis and Perspectives:

1. Historical Lessons and Current Concerns:
   The global financial crisis of 2008 starkly illustrated the perils associated with the excessive proliferation of derivative products, insufficient transparency, and lax regulatory oversight. This led to the downfall of Lehman Brothers and widespread political and economic turmoil. As jurisdictions worldwide aim to fortify the safety of derivatives and hedge funds through more stringent regulations, enhanced transparency, and restricted leverage, this proposal's direction is perplexing. It appears to compromise financial transparency and security, skewing the system in favor of large market makers while disadvantaging smaller investors and jeopardizing financial stability. We resolutely oppose this trajectory and will continue to advocate against it with cogent and reasoned arguments.

2. Comprehensive Hedging and Market Integrity:
   Although futures trading possesses the potential to offer effective hedging capabilities, it necessitates a supporting framework of comprehensive hedging instruments, including both spot and options trading. Developing futures trading in isolation risks transforming it into a destabilizing force. The 1987 stock market crash in Hong Kong stands as a historical example of the dangers of excessive one-sided futures development without adequate support from short-selling stocks and options trading. The current proposal for after-hours futures trading resembles the preconditions of that crash, with no viable hedging trades available post-market closure.

3. Volatility and Systemic Risks:
   Despite years of development and the advent of various hedging tools, derivatives and hedge funds continue to suffer from opacity, exacerbated by technological advancements and the rise of algorithmic trading. Even during standard trading sessions, unchecked volatility can occur, as seen in events like the 2008 financial crisis and the "flash crash" on May 6, 2010. Introducing after-hours futures trading is likely to induce further uncontrolled market fluctuations, posing significant risks to the stability of the stock market and the broader economy.

4. Policy Recommendations for Market Expansion:
   While there is often resistance to new trading policies due to concerns about expanding Hong Kong's market presence internationally, we maintain that any enlargement of trading scales or timeframes must be contingent upon resolving existing systemic issues. The improvement of current trading mechanisms should be the priority, aimed at minimizing potential crises through increased safety and transparency. Only after these enhancements are deemed sufficient should the extension of trading hours be contemplated.

5. Essential Stabilization Measures:
   Regardless of the outcome regarding after-hours futures trading, we insist on the necessity of implementing enhanced suspension arrangements, comprehensive disclosure requirements, and position limits for large stakeholders. These measures are fundamental to ensuring market stability and safeguarding financial and economic security.

6. Transparency and Accountability in Futures Trading:
   Existing requirements for the disclosure of transactions and holdings by significant shareholders in individual stocks should be extended to futures traders. Specifically, if an independent investment entity's futures position surpasses 5% of the total holdings, public disclosure of its short positions and subsequent trades should be mandated until the position falls below the 5% threshold. This aligns with modern principles of transparency and informed market practices.

7. Managing Speculation and Financial Stability:
   While prudent futures trading can offer opportunities for bidirectional market movements and act as a buffer against extreme trends, excessive speculation by individual investors with substantial short positions poses risks to financial stability. To mitigate these risks, we propose instituting a 10% short position limit for individual investors, thereby reducing the motivation for market manipulation and excessive leverage.

8. Ensuring a Balanced Market Environment:
   As previously noted, futures trading can contribute positively to market stability, but this requires an equitable and well-regulated market environment. Permitting short-selling activities under extraordinary conditions could lead to disastrous outcomes, severely eroding investor confidence and impacting the entire economic system. In recent years, hedge funds have become increasingly sophisticated in market-making, often collaborating with large securities firms to disseminate supportive research reports and financial ratings, occasionally resorting to rumors for profit. Under uncontrollable market conditions, extraordinary measures are necessary. We strongly recommend temporarily suspending futures trading when the market becomes unmanageable, defining a single-day 5% drop in the Hang Seng Index as a trigger for such a suspension.

Conclusion:

The Association emphasizes the importance of carefully considering and strategically enhancing existing trading mechanisms to prevent future crises and foster a fair, transparent, and resilient financial market.

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End of Position Paper