Published On: Thu, May 20th, 2010

HKEx Extends Price Range for Block Trades in its Derivatives Market

Hong Kong Exchanges and Clearing Limited (HKEx) has amended its rules to extend the acceptable prices at which block trades can be executed in its derivatives market.

From 24 May 2010, blocks trade must be executed at a fair and reasonable, based on certain new criteria (please see attachment for details). The revisions are designed to give market participants more flexibility in executing block trades.

The Block Trade Facility for futures and options is an important tool in extending HKEx’s services. Block trades comprise large buy and sell orders privately negotiated apart from the open market. Benefits to the marketplace include price and execution certainty for large deals, HKEx clearing house guarantees for transactions that may otherwise have been executed in the over-the-counter, or OTC, market and added liquidity.

In the first four months of this year, block trades accounted for 10 per cent of HKEx’s derivatives market turnover, nearly one-third of the stock index options turnover and more than 11 per cent of stock options turnover.

“These changes are in line with part of the core strategy in our current three-year strategic plan: to generate growth by increasing derivatives market volumes through enhanced trading dynamics and wider product and service offerings,” said Calvin Tai, HKEx’s Head of Derivatives. “Our revised acceptable prices for block trades will help ensure the Block Trade Facility continues to contribute to the development of our derivatives market.”

Attachment
Revised Permissible Price Range for Block Trades of Stock Options

The price at which a block trade is executed must be fair and reasonable, as determined in one of the following manners:

(a) When the executed price is at or within the range of highest traded price, lowest traded price, bid and ask price of the contract.

(b) When the executed price is within the following price range to both sides of a reference price obtained through prevailing market prices, or if necessary, determined as the theoretical values based on the prevailing underlying values:

Stock Options
Whichever is narrower :
1) The difference between the trade price and reference price is at or within 3 per cent of the nominal price of the underlying security at the time the trade occurred; or

2) The difference between the trade price and the reference price is such that it is at or within 2 times the maximum spread permitted under Market Maker Obligations and the difference represents not more than 30 per cent of the reference price

Revised Permissible Price Range for Block Trades of Futures and Stock Index Options

The price at which a block trade is executed must be fair and reasonable, as determined in one of the following manners:

(a) When the executed price is at or within the range of highest traded price, lowest traded price, bid and ask price of the contract.

(b) When the executed price is within the following price range to both sides of a reference price obtained through prevailing market prices, or if necessary, determined as the theoretical values based on the prevailing underlying values:
Futures Contracts (Price Range)
Stock Index Futures (1%)
Stock Futures (3%)
HIBOR Futures (25bps)
3-year Exchange Fund Note Futures (50bps)
Gold futures (3%)

Options Contracts (Price Range)
Stock Index Options >300 points (10%)
Stock Index Options <300 points (30 index points) At all times, HKEx has the absolute discretion to make a final decision in determining whether an executed price is fair and reasonable taking into consideration factors such as the traded prices on previous days, traded prices and prevailing bid and ask prices of option series of the block trade contract, the volatility and liquidity of the relevant market, the size of the block trade order and general market conditions.

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