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Hong Kong’s new China stock derivatives projected to set trading record – Nikkei Asia

HONG KONG — Trading in Hong Kong Exchanges and Clearing’s new mainland China equity derivatives has almost quadrupled in the four days since their launch, pointing to investors’ thirst to hedge their exposure to shares listed on the world’s second-largest stock market.

The China A50 Connect futures contract, which ends Singapore Exchange’s monopoly on offshore China stock derivatives, debuted on Oct. 18 with the highest first-day trading by value of any futures contract from the HKEX, the world’s most valuable exchange.

The contract is projected to ramp up faster than Hang Seng Tech Index futures, launched in July, which were themselves one of the most successful derivatives launches of recent years for the bourse, according to Kevin Rideout, HKEX’s co-head of sales and marketing.

The mainland futures contract based on MSCI China A50 Index is also expected to add to the allure of mainland stocks traded through the connect mechanism that links the Hong Kong, Shanghai and Shenzhen stock exchanges. HKEX has modelled itself as the gateway to China and gained from a surge in new listings and trading volumes, with derivatives its next target.

There are nearly 14,000 registered funds for northbound Stock Connect, holding an estimated 2.5 trillion yuan ($391 billion) to 3 trillion yuan, Rideout said in a recent interview with Nikkei.

“These investors really do deserve an appropriate hedging instrument,” he said. “Clearly, that is a segment of the community that would really, really want to be utilizing the solution.”

On Oct. 18, the first day of trading, a total $90 million notional value worth of A50 Connect futures were traded, compared to Hang Seng Tech Index futures’ $38 million on its first day. The number raced up to $344 million on Oct. 21. While FTSE China A50 futures traded in Singapore averaged $5.2 billion a day in September, analysts said that over time Hong Kong will overtake its rival.

In the past, HKEX’s derivatives business was largely restricted to contracts on stocks listed in the city, in addition to products from the London Metal Exchange, which it acquired in 2012. Derivatives contributed 16% of HKEX’s revenue, compared with around 46% for its Singapore rival, which so far had a free run with its pan Asian derivatives portfolio.

Last year, HKEX snatched the MSCI derivatives licensing agreement, ending Singapore Exchange’s 23-year relationship with the index provider. It now offers futures and options based on 37 of the index provider’s Asia and emerging markets-focused benchmarks.

Still, the rollout of the A shares futures is seen as the most important and expected to eclipse the success of the HSCI Tech Index Futures volume. The tech index future’s daily volumes have increased sixfold since launch, while derivatives that use the city’s Hang Seng Index have remained stagnant, according to HKEX data.

UBS analysts led by Kelvin Chu said in a note in August the new contract may bring in an extra 5 to 10% revenue for HKEX by 2023, with a market share of 60% among offshore A-share futures in their base case scenario.

Citigroup analyst Yafei Tian estimates the new futures contract will add 600 million Hong Kong dollars ($78 million) to HKEX’s revenue in 2024, accounting for 2% of the bourse’s core revenue and 22% of derivatives revenue.

The exchange reported a 24% rise in revenue to a record HK$10.9 billion in the first six months of the year.

HKEX’s gains from the A-share futures contract comes at the expense of Singapore Exchange, which garnered 40% of its derivatives volume from FTSE China A50 futures from July 2020 to June 2021.

Alvin Ma, managing director of Hong Kong-based Axiom Investment Management Limited, said Chinese or foreign institutions in the city will now opt for HKEX’s MSCI China A50 Connect Index Futures, instead of SGX’s offering.

“Hong Kong will surely win because of its proximity to China. Why should we go to Singapore [from now on]? It is more convenient to hedge China’s stocks in Hong Kong,” he said, adding that the city has the deepest market for A-share trading and is closer to market news and information.

HKEX’s contract is based on the MSCI China A 50 Connect Index, which selects 50 names from among the largest stocks listed in Shanghai and Shenzhen available via Stock Connect. It includes China’s top liquor maker Kweichow Moutai, electric car battery maker Contemporary Amperex Technology and solar panel materials maker LONGi Green Energy Technology.

The index targets at least two stocks from each sector, with the aim of providing a more balanced portfolio, preventing overweighting in specific sectors such as financials and underweighting in new economy sectors, according to HKEX. For example, MSCI China A50 only has 18% in financials, while FTSE China A50 has 38%.

“China’s clearly evolved from what you’d call an old economy into a new, more balanced economy,” Rideout said. “Not just the banks and property stocks that dominated the market for so long. There is a pressing demand for an offshore hedging tool that truly represents the new modern China.”