No futures for foreigners - SFC
11 July 2009
Goodness, we go out for a nice evening of trad jazz courtesy of Joop Litmaath and his Hong Kong City Jazz Band (free plug, if only they had a web site) and come home to the Friday-night-nobody-will-read-it announcement from the SFC, that they have given up (sorry, they will "further study") the introduction of remote participants (read: foreigners) to Hong Kong's futures market.
This is yet another example of the protectionism and lobbying power of vested interests which holds this city back. In brief, what the SFC had proposed was to allow an overseas participant, which is either regulated in an acceptable overseas jurisdiction, or is a participant of a regulated market in such a jurisdiction, and which does not deal with customers in HK, to place orders directly with futures exchanges in Hong Kong. Currently there is only one, The Hong Kong Futures Exchange Ltd (HKFE), which is owned by Hong Kong Exchanges and Clearing Ltd (HKEx, 0388).
HKEx supported the proposal. HKEx first floated the idea of remote participants in its Exchange newsletter of October 2007 and again in January 2008, in the context of both the stock and futures markets. It noted that all the overseas exchanges which allowed remote participants required those participants to establish onshore third-party clearing arrangements for settlement of their transactions. Presumably that is what HKEx would require too.
But HK-regulated brokers, through whom all orders must currently be placed, naturally disliked the notion that some of their business would be placed directly with the exchange, by futures brokers in London, New York or elsewhere, or even more directly by large high-frequency traders which are party to a significant portion of the global futures turnover. Local brokers probably think they are entitled to a cut of the action in return for paying the high rent and operating costs of doing business in Hong Kong.
In the end, the SFC decided to proceed cautiously, knowing how powerful the stockbroker lobby is, and issued a consultation paper on 27-Feb-09 for remote participants in just the Futures Market, leaving the securities market untouched.
The conclusions paper offers nothing to justify the U-turn. It says that it needs to further study the risk management arrangements - but this is specious - if the overseas participant is required to have a third-party clearer in Hong Kong, then it is no different in risk management terms to an overseas client of a Hong Kong futures broker, provided that the third-party clearer can enforce any trading limits against the overseas participant. The consultation was not about the clearing arrangements, it was about amending the definition of "dealing in futures contracts" in the Securities and Futures Ordinance. HKEx would surely have followed up with detailed clearing requirements, and the necessary rules would still have required the SFC's approval. The SFC has now put a halt on the whole process.
Only 14 of the 16 submissions were published. Five of the 16 respondents withheld their names, including the two who did not allow publication of their submission. Shame on all five of them. One that did publish was from Kingsway Financial Services Group Ltd, whose submission consisted of just one sentence: "We have concern that the remote participation may lead to increased competition from the overseas counterparts". Ooooh - increased competition - we mustn't allow that, must we? Competition is a bad, terrible thing, the enemy of markets everywhere. What profound insight they have.
This leaves HK looking protectionist and backward. Many international exchanges allow remote participants, including (as the consultation paper noted) ICE, the London Metal Exchange, the New York Mercantile Exchange, the Australian Stock Exchange and Singapore Exchange Derivatives Trading. They benefit from additional liquidity, and the onshore clearers of those trades also generate domestic economic activity, including employment.
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