Callable bull bear contracts (CBBC's) and structured warrants, the dominant retail investment products in Hong Kong, have been excluded from the potential cross-listing of derivative products between Hong Kong Exchanges and Clearing Limited (HKEx) and Korea Exchange (KRX). In a non-binding letter of intent signed by the two companies on Tuesday (June 21), both stated the cross-listing applies only to stock index futures and options, as well as single stock futures and options, according to a HKEx spokesperson.
HKEx products would trade in Korean won at KRX and KRX products would trade in Hong Kong dollars at HKEx. "Investors will be able to trade the cross-listed products in the same way that they transact local products. The cross-listing between KRX and HKEX will open up significant opportunities, as the trading hours largely overlap," Kyungsoo Choi, chief executive of KRX, said in a statement.
According to Charles Li, chief executive at HKEx, equity derivatives are "an important strength of HKEX" and the cross-listing of products would create new trading and risk management opportunities for both Hong Kong and Korea investors.
Retail investors in Hong Kong, however, might not be first in line for Korean futures and options, as restrictive rules and higher risks associated with derivatives has resulted in the Hong Kong's options market dominated by institutional investors.
"I doubt there will be that much demand for Korean futures and options from retail clients in Hong Kong," said a Hong Kong-based investment banker. "On the other hand, Korean investors are quite sophisticated, and the local derivatives market is very large, active and liquid, which could provide fertile ground for Hong Kong options."
According to data from HKEx, Hong Kong futures and options trade volume in the first five months of 2016 has dropped by 3.1%, with futures climbing 35.9%, with open interest of 679,645, and options dropping 22.9% to 41m, with open interest of 9,305,576. On the KRX, monthly derivatives trade volume in May had an aggregate value of KRW707tr ($620bn).
The exclusion of warrants and CBBCs from the deal could add to the woes of market segment that has been in decline in recent months. However, market players and investors believe this could offset by the long-anticipated admission of derivatives trading on the Hong Kong and Shanghai Stock Connect scheme which could prompt a sizable surge as mainland investors gain access to Hong Kong products.
"Subject to an increase in investor familiarity with stocks in both markets, the restrictions on derivatives trading could be loosened," Johnny Yu, head of warrants and CBBCs at UBS Asia, said in a recent interview with SRP.
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