OREANDA-NEWS. Hong Kong Exchanges and Clearing Limited (HKEX) published a consultation paper today (Friday) on a proposed revision of the stock option position limit (SOPL) model for its derivatives market.

The proposal is aimed at addressing the technical deficiency in the existing SOPL regime and improving the efficiency of the market.  HKEX believes implementation of the proposal would align Hong Kong's SOPL regime with international practices and ensure the relevance of individual position limits in the long run, thus ensuring the city’s competitiveness as an international financial centre.

Key proposed changes for SOPL model are:

  • Three-tier framework to address the de facto single position limit issue.  A contract equivalent number will be calculated for each stock option class based on the underlying stock's market capitalisation and liquidity and other factors.  Each stock option class will be assigned to one of three tiers comprising limits of 50,000, 100,000 and 150,000 contracts based on the contract equivalent number.
  • Regularly scheduled reviews.  The position limits for all stock option classes will be reviewed annually and adjusted when necessary to ensure they remain in line with the market’s development.

The last review of the existing SOPL model was 10 years ago.  Since then there has been significant growth in Hong Kong's securities and stock options markets (average daily stock options volume increased from 73,390 contracts in 2006, the year of the most recent review, to 374,346 contracts in 2015).

"The existing SOPL regime is not in line with investors' trading and hedging needs because of its technical deficiencies including a de facto single position limit system. There are also no regularly scheduled reviews to help ensure the regime reflect the market's development," Roger Lee, HKEX's Head of Markets, said.  Currently, 95 per cent of stock option classes are assigned the same position limit.

HKEX consulted the Securities and Futures Commission and conducted extensive research of international practice on SOPLs before developing its proposal.  The proposal also reflects feedback from extensive discussions with market participants, and HKEX noted Financial Services Development Council's recommendations in a recent report titled "Hong Kong's Derivatives Position Limits Regime – The Need for Revision".

"HKEX strives to provide an efficient marketplace to meet investors' evolving trading and hedging needs." Mr Lee added.  "Our goal is always to lift unnecessary market constraints while maintaining market integrity."

Application of the proposed model today would result in 27 stock option classes with position limits of 50,000 contracts, 16 stock option classes with position limits of 100,000 contracts and 41 stock option classes with position limits of 150,000 contracts.