Futures Business Risk Management Recommendations
Release Date: 2022-12-12
24/F, Central Government Offices,
2 Tim Mei Avenue, Tamar,
Hong Kong
Government of the Hong Kong Special Administrative Region of the People's Republic of China
Financial Services and the Treasury Bureau
December 12, 2022
To: Government of the Hong Kong Special Administrative Region of the People's Republic of China
Secretary of the Financial Services and the Treasury Bureau, Mr. Christopher Hui
Under Secretary, Mr. Joseph Chan
Futures Business Risk Management Recommendations
Dear Secretary Christopher Hui and Under Secretary Joseph Chan,
The national policy “14th Five-Year Plan” supports and strengthens Hong Kong's role as an international asset management center and risk management center, better integrating into the national development agenda. By the end of November this year, the number of mainland enterprises listed in Hong Kong has exceeded 50% of the total number of listed companies in Hong Kong, proving Hong Kong's role as a crucial bridge for mainland enterprises to go global. Meeting market expectations while effectively conducting appropriate risk management is the only path for Hong Kong's positioning and development. Based on this principle, our association presents the following recommendations on the current situation and development of the futures market.
1. Lower the Financial Requirements for Trading Rights Applications at HKEX
In the past, applying for a futures license only required compliance with the Securities and Futures Commission's Financial Resources Rules (FRR). However, since last year, in addition to complying with the SFC's FRR, applicants for trading rights at the Hong Kong Stock Exchange (HKEX) must also meet a financial requirement of at least HKD 30 million in liquid capital. HKEX's capital requirement is stricter than the SFC's, creating a dual approval process.
This policy impacts two areas:
1. Severely hinders the development of the futures industry, directly causing small and medium-sized brokerages to abandon futures businesses;
2. Brokerages apply only for a futures license without HKEX trading rights, indicating that most applicants engage in global futures trading through the Hong Kong market. According to SFC survey data, over 70% of clients primarily invest in foreign markets. Is this outflow of capital favorable in terms of government policy?
2. Expand Product Differentiation and Implement a 24-hour Trading System
National policy supports Hong Kong in becoming a global risk management center, fully leveraging its market's ability to act as a risk management intermediary and better providing risk management services to mainland enterprises. Hong Kong should ideally integrate its futures and spot markets to offer a variety of combined products and services to enterprises. However, the local futures market lags behind foreign markets in product development and popularity. Currently, index futures dominate the Hong Kong market, and although precious metals and forex futures have been added in recent years, Hong Kong remains at a disadvantage compared to foreign markets, as reflected in HKEX trading data.
Our association proposes the following suggestions for futures market development:
1. Further diversify futures products. Develop agricultural and energy futures, such as rapeseed oil, early indica rice, glass, coking coal, plywood, fiberboard, and eggs, aligning with domestic resources and market demand, in line with the national “internal circulation” policy.
2. Extend trading hours for futures. Currently, most futures products in Hong Kong trade until 3 a.m. local time. We suggest implementing a 24-hour trading system at HKEX to strengthen Hong Kong's position as a world asset management center and enhance competitiveness against the CME in risk management.
3. Provide Flexibility for Futures Firms in Policies
Our association strongly opposes the SFC's consultation document issued on November 25, 2022, regarding proposed “Consultation Paper on Proposed Risk Management Guidelines for Licensed Persons Dealing in Futures Contracts” particularly the tightening of margin systems and stress testing. Implementing these guidelines would significantly increase operational costs for futures firms. We urge the government and the SFC to thoroughly discuss and explore providing flexibility and survival space for futures businesses, as excessive regulation could be the last straw for SMEs already hard-hit by the pandemic and global economic impacts.
Since futures products currently cannot be used for margin lending, many brokerages reduce the initial margin to 80%, 50%, or 20% to lower investors' trading costs and barriers, promoting client trading volume and survival space.
Additionally, we hope the policy can explore using other financial products as collateral, such as using stocks for financing, to increase industry income. Referencing international practices and similar operations, providing credit facilities to clients is a significant factor in strengthening derivatives markets in Europe and the U.S., and should not be prohibited.
4. Provide Financial Support to Futures Firms
For futures operators, the current cost of doing business is heavy, and income sources are limited, mainly deriving minimal commissions from client transactions. Meanwhile, various data and IT network connection fees charged by HKEX constitute a substantial portion of brokerage income. In commercial terms, after calculating revenue and expenditure, futures business is often seen as non-essential.
We hope the government can provide financial support and measures, such as futures network subsidies and tax reductions, to further reduce the operational burden of brokerages.
5. Explore Futures Connect Program with Mainland
As the most open city in China, Hong Kong has institutional advantages in the futures market over the mainland and can continue to serve as an unparalleled intermediary linking China's domestic demand with global markets. The Hong Kong government should actively discuss a Futures Connect Program with the mainland, similar to “Stock Connect” and “Bond Connect,” allowing Hong Kong and international investors direct access to the mainland market and qualified mainland investors to participate in the Hong Kong futures market. This would expand the local client base and help Hong Kong stand out as a leading international financial center, maintaining its role as Asia's derivatives hub.
To maintain its financial advantages, Hong Kong needs to rely on the mainland's strong support. Thus, our association hopes the government can discuss other favorable policies for financial futures development with the mainland, such as mutual recognition or alignment of futures qualifications in the Greater Bay Area, promoting talent exchange, and allowing futures firms to establish offices and conduct client acquisition activities in the mainland.
Should you have any inquiries about this letter, please feel free to contact me at ( ) or Mr. LIU Tsan Pui Martin, Deputy Director of Industrial Relations Department.
Wishing you well,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association
Government Response (In Chinese only)
2 Tim Mei Avenue, Tamar,
Hong Kong
Government of the Hong Kong Special Administrative Region of the People's Republic of China
Financial Services and the Treasury Bureau
December 12, 2022
To: Government of the Hong Kong Special Administrative Region of the People's Republic of China
Secretary of the Financial Services and the Treasury Bureau, Mr. Christopher Hui
Under Secretary, Mr. Joseph Chan
Futures Business Risk Management Recommendations
Dear Secretary Christopher Hui and Under Secretary Joseph Chan,
The national policy “14th Five-Year Plan” supports and strengthens Hong Kong's role as an international asset management center and risk management center, better integrating into the national development agenda. By the end of November this year, the number of mainland enterprises listed in Hong Kong has exceeded 50% of the total number of listed companies in Hong Kong, proving Hong Kong's role as a crucial bridge for mainland enterprises to go global. Meeting market expectations while effectively conducting appropriate risk management is the only path for Hong Kong's positioning and development. Based on this principle, our association presents the following recommendations on the current situation and development of the futures market.
1. Lower the Financial Requirements for Trading Rights Applications at HKEX
In the past, applying for a futures license only required compliance with the Securities and Futures Commission's Financial Resources Rules (FRR). However, since last year, in addition to complying with the SFC's FRR, applicants for trading rights at the Hong Kong Stock Exchange (HKEX) must also meet a financial requirement of at least HKD 30 million in liquid capital. HKEX's capital requirement is stricter than the SFC's, creating a dual approval process.
This policy impacts two areas:
1. Severely hinders the development of the futures industry, directly causing small and medium-sized brokerages to abandon futures businesses;
2. Brokerages apply only for a futures license without HKEX trading rights, indicating that most applicants engage in global futures trading through the Hong Kong market. According to SFC survey data, over 70% of clients primarily invest in foreign markets. Is this outflow of capital favorable in terms of government policy?
2. Expand Product Differentiation and Implement a 24-hour Trading System
National policy supports Hong Kong in becoming a global risk management center, fully leveraging its market's ability to act as a risk management intermediary and better providing risk management services to mainland enterprises. Hong Kong should ideally integrate its futures and spot markets to offer a variety of combined products and services to enterprises. However, the local futures market lags behind foreign markets in product development and popularity. Currently, index futures dominate the Hong Kong market, and although precious metals and forex futures have been added in recent years, Hong Kong remains at a disadvantage compared to foreign markets, as reflected in HKEX trading data.
Our association proposes the following suggestions for futures market development:
1. Further diversify futures products. Develop agricultural and energy futures, such as rapeseed oil, early indica rice, glass, coking coal, plywood, fiberboard, and eggs, aligning with domestic resources and market demand, in line with the national “internal circulation” policy.
2. Extend trading hours for futures. Currently, most futures products in Hong Kong trade until 3 a.m. local time. We suggest implementing a 24-hour trading system at HKEX to strengthen Hong Kong's position as a world asset management center and enhance competitiveness against the CME in risk management.
3. Provide Flexibility for Futures Firms in Policies
Our association strongly opposes the SFC's consultation document issued on November 25, 2022, regarding proposed “Consultation Paper on Proposed Risk Management Guidelines for Licensed Persons Dealing in Futures Contracts” particularly the tightening of margin systems and stress testing. Implementing these guidelines would significantly increase operational costs for futures firms. We urge the government and the SFC to thoroughly discuss and explore providing flexibility and survival space for futures businesses, as excessive regulation could be the last straw for SMEs already hard-hit by the pandemic and global economic impacts.
Since futures products currently cannot be used for margin lending, many brokerages reduce the initial margin to 80%, 50%, or 20% to lower investors' trading costs and barriers, promoting client trading volume and survival space.
Additionally, we hope the policy can explore using other financial products as collateral, such as using stocks for financing, to increase industry income. Referencing international practices and similar operations, providing credit facilities to clients is a significant factor in strengthening derivatives markets in Europe and the U.S., and should not be prohibited.
4. Provide Financial Support to Futures Firms
For futures operators, the current cost of doing business is heavy, and income sources are limited, mainly deriving minimal commissions from client transactions. Meanwhile, various data and IT network connection fees charged by HKEX constitute a substantial portion of brokerage income. In commercial terms, after calculating revenue and expenditure, futures business is often seen as non-essential.
We hope the government can provide financial support and measures, such as futures network subsidies and tax reductions, to further reduce the operational burden of brokerages.
5. Explore Futures Connect Program with Mainland
As the most open city in China, Hong Kong has institutional advantages in the futures market over the mainland and can continue to serve as an unparalleled intermediary linking China's domestic demand with global markets. The Hong Kong government should actively discuss a Futures Connect Program with the mainland, similar to “Stock Connect” and “Bond Connect,” allowing Hong Kong and international investors direct access to the mainland market and qualified mainland investors to participate in the Hong Kong futures market. This would expand the local client base and help Hong Kong stand out as a leading international financial center, maintaining its role as Asia's derivatives hub.
To maintain its financial advantages, Hong Kong needs to rely on the mainland's strong support. Thus, our association hopes the government can discuss other favorable policies for financial futures development with the mainland, such as mutual recognition or alignment of futures qualifications in the Greater Bay Area, promoting talent exchange, and allowing futures firms to establish offices and conduct client acquisition activities in the mainland.
Should you have any inquiries about this letter, please feel free to contact me at ( ) or Mr. LIU Tsan Pui Martin, Deputy Director of Industrial Relations Department.
Wishing you well,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association
Government Response (In Chinese only)