3
WEDNESDAY, NOVEMBER 30, 1994
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THE THIRD TYPE OF RISK WHICH ARISES WITH ANY INVESTMENT PRODUCT IS SYSTEMIC RISK, THAT IS THE RISK TO THE MARKET SYSTEMS INHERENT IN
THAT THIS IS THE TYPE OF RISK
15 TRADING, CLEARING AND SETTLEMENT. THE FOCUS AND PURPOSE OF THE RISK MANAGEMENT SYSTEMS OPERATED BY THE EXCHANGES UNDER THE SUPERVISION OF THE SFC. THESE SYSTEMS HAVE BEEN THOROUGHLY OVERHAULED AND REFORMED SINCE THE EVENTS OF 1987, A REFORM PROCESS THAT INCLUDED THE ESTABLISHMENT OF THE SFC ITSELF. TODAY HONG KONG'S RISK MANAGEMENT IS WIDELY RECOGNISED AS BEING SOUND, WELL-RUN
FULLY UP TO INTERNATIONAL STANDARDS. AND
OF INDEED THIS IS ONE
THE
AS
MORE IMPORTANT FACTORS THAT HAS ENCOURAGED 50 MANY INTERNATIONAL PLAYERS TO RE-ENTER OUR MARKET IN RECENT YEARS. THE RISK MANAGEMENT ARRANGEMENTS PROPOSED FOR STOCK FUTURES ARE BASED ON THE TRIED AND TESTED SYSTEMS ALREADY APPLIED SUCCESSFULLY TO INDEX FUTURES. THE
THE THE MARKET REGULATOR, IS FULLY SATISFIED THAT SFC,
FUTURES EXCHANGE HAS THE ABILITY, THE EXPERIENCE AND THE RIGHT PROCEDURES ΤΟ HANDLE THE SYSTEMIC RISKS ASSOCIATED WITH THE TRADING OF STOCK FUTURES. IN THIS PARTICULAR CASE, THE SFC HAS, HOWEVER, EXPRESSED A PREFERENCE FOR AN ADDITIONAL ASPECT OF REGULATION AND RISK MANAGEMENT, NAMELY THE APPLICATION OF POSITION LIMITS, TO HAVE THE STATUTORY BACKING OF THE COMMODITIES TRADING ORDINANCE IN ORDER THAT CRIMINAL SANCTIONS WILL APPLY TO THOSE WHO BREACH THE LIMITS AND THUS TO PROVIDE BETTER PROTECTION TO INVESTORS. THE CONSEQUENT DECISION OF THE GOVERNOR-IN-COUNCIL TO ADD THE NAME OF THIS
THE PRODUCT TO SCHEDULE OF THE ORDINANCE REPRESENTS GOVERNMENT'S ONLY, AND NECESSARILY VERY LIMITED, INVOLVEMENT IN WHAT IS ESSENTIALLY A MARKET
MATTER.
A THIS MINOR LEGISLATIVE AMENDMENT IS NOT DEVELOPMENT
PRE- REQUISITE TO THE TRADING OF THE PRODUCT, WHICH NEEDS ONLY THE APPROVAL OF THE SFC, BUT IT DOES REPRESENT THE REGULATOR'S CONCERN THAT THE LEVEL OF REGULATION AND RISK MANAGEMENT SHOULD BE AS HIGH AS POSSIBLE.
I HAVE GONE TO SOME LENGTH TO CLARIFY THE RESPONSIBILITY OF DIFFERENT PARTIES FOR THE CRITICAL ASSESSMENT OF THE MERITS AND DEMERITS OF AN INVESTMENT PRODUCT IN ORDER TO ILLUSTRATE THE CONFUSION AND OVER-SIMPLIFICATION THAT UNDERLIES THE WORDING OF THIS MOTION.
LET ME NOW TURN TO SOME OF THE OTHER POINTS WHICH HAVE COME UP
ON THIS SUBJECT, INCLUDING IN TODAY'S DEBATE.
DERIVATIVES
RAISE WITH
WITH
SATISFY
IS
FIRST ARE THE SUGGESTIONS THAT STOCK FUTURES WOULD INCREASE THE VOLATILITY OF SHARE PRICES, AFFECT THE CASH MARKET'S ABILITY TO RAISE CAPITAL AND COMPETE WITH STOCK OPTIONS. ON VOLATILITY, THE EXPERIENCE
PRODUCTS
THE ELSEWHERE AND
WEIGHT OF OF TRADING SIMILAR
EXPERT LOCALLY BOTH OPINION,
AND INTERNATIONALLY,
SUPPORT THE DO NOT
IN PROPOSITION THAT DERIVATIVE TRADING SERVES TO INCREASE VOLATILITY THE CASH MARKET. ON THE CONTRARY, IT HAS BEEN SHOWN THAT TEND TO INCREASE THE OVERALL LIQUIDITY, WHICH IN TURN SERVES TO THE LEVEL OF MARKET ACTIVITY GENERALLY. AS REGARDS COMPETITION SECURITIES AND STOCK OPTIONS, THE PRODUCTS OUGHT NOT TO COMPETE EACH OTHER SINCE THEY HAVE A DIFFERENT RISK PROFILE AND WILL
THIS THE
THE EVIDENCE OF NEEDS OF DIFFERENT TYPES OF INVESTORS.
: VISIBLE IN THE FUTURES EXCHANGE ITSELF
THE PRE- ALREADY CLEARLY
NOT DETRACTED FROM THE EXISTENCE OF HANG SENG INDEX FUTURES HAS SUCCESSFUL DEVELOPMENT OF THE MARKET FOR HANG SENG INDEX OPTIONS SINCE THE INTRODUCTION OF THE LATTER IN MARCH 1993. NOR, CONVERSELY, INDEX OPTIONS DETRACTED FROM THE MARKET FOR THE INDEX FUTURES. IS ROOM FOR THE TWO PRODUCTS TO CO-EXIST AS THERE WILL BE FOR FUTURES AND STOCK OPTIONS. NOR WOULD THE STOCK EXCHANGE PROCEED
IT AS IT HAS NOW COMMITTED TO DO, IF
THOUGHT STOCK OPTIONS,
OF CONSEQUENTIAL
CASH EFFECTS ON THE CONCERNS FOUNDED.
MARKET
HAVE
THERE
STOCK
WITH
THAT
WERE
WELL-
/SOME HAVE