Ben explains the nuances that exist when monitoring holdings listed on the HKEX.
The Hong Kong Stock Exchange (HKEX) is one of the many exchanges covered by our Position Limits service and is certainly one of the more complex in how the limits are calculated and monitored.
In Hong Kong, the Securities and Financial Commission (SFC) under Section 35(1) of the Securities and Futures Ordinance (Cap. 571) are empowered to make rules to:
- Prescribe limits on the number of futures or options contracts to be held or controlled by a person
- Require a person holding or controlling a reportable position to notify the recognised exchange
Alongside setting the limits, the SFC have outlined how futures contracts should be monitored against them. This blog will touch on the nuances that exist when monitoring holdings listed on the HKEX.
Calculation of Contract Exposure
Spot, Single and All month position limits apply on the Hong Kong Stock Exchange. The spot limit is effective from the open of trading on the 5th last trading day of the delivery month. Therefore, to monitor spot limits accurately, calendar information is required from the exchange.
Option contracts must be delta adjusted before applying the exposure against the limit. The clearing houses HKFE Clearing Corporation (HKCC) and SEHK Options Clearing House Limited (SEOCH) both provide the full greek ladders for traded contracts.
Different limits and calculation methods exist depending upon whether the holder is an exchange participant or not. Exchange participants may also apply “disaggregation” principles to holdings they have (explained in more detail below).
Netting of Contracts
There are two types of netting procedure to consider when monitoring limited at the Hong Kong Stock Exchange:
Net Long or Net short:
The contract exposure is calculated by netting long and short holdings then applying the absolute value against the limit, whether that value is net long or short.
Gross long and Gross Short:
The contract exposure is calculated by first aggregating the absolute value of all long positions and short positions separately, then independently applying each amount against the limit. Essentially two different values could be evaluated against the limit, compared to the single, net amount.
Aggregation of Contracts
If a person has discretion over positions held with him for other persons, all these positions should be aggregated with their own positions in the application of the prescribed limits and reportable positions. The SFC does accept that limits do not apply to persons who control positions purely because of the corporate relationship (e.g parent company in relation to positions held by its subsidiaries
The “disaggregation” principle allows a person who holds contracts for other persons, to apply the limits separately to his/her own position and to each of the position he/she may hold for the other person, where discretionary management of the contracts is not held.
If a person has holdings in the same contract across multiple entities, the obligation is to aggregate all positions before applying the limits. Reporting is only required from a single entity but the total positions held at all other other entities is required to be reported.
Here at FundApps, we hold calendar information of contracts listed on the HKEX, as well as aggregating on both an entity and contract level, enabling us to compare exact positions with the relevant limit.