Transcript Slide 1

Futures Market:
Hong Kong Experience
Prof. Stephen Yan-Leung Cheung
City University of Hong Kong
Content
Asian Financial Crisis (1997-1998)

What happened

Consequences

Aftermath

Lessons
What Happened?

Inflated asset price
– Fell by 60%

Potential recession
– 1998 Q3 GDP ↓6.9%



Other Asian currencies have sharply depreciated
Market perceived that HK dollar was undervalued
Hong Kong dollar is linked with US dollar with
US$1 vs HK$7.8
What Happened?


Pressures began in October 1997 on the forward
rates for the HK dollar and regulated in a sharp full
in equity market
Pressures continued periodically through the first
half of 1998
Weakness in domestic economy
– Yen had fallen to an 8-year low of 147 per US$
– Renewed concerns an possible depreciation of RMB
–

In 1998. equity prices had fallen over 55% from their
peak a year earlier, 12-month forward rate on the
HK dollar was depreciated by 8% compared to 7.8
which is the official rate of HKD
Double Play

Taking short position in the equity market
–
–
–

Short-selling stock
Short HSI futures contract
Put option on HSI
Putting upward pressure on the forward
rates for the Hong Kong dollar
→ sharp fall in equity market
Chart 1 HSIF Open Interest and 3-month Hong Kong Dollar Forward
175
8.2
155
.
8.1
115
7.9
95
7.8
75
7.7
55
HSIF Open Interest
3-month HK$ forward
9812
9811
9810
9809
9808
9807
9806
9805
9804
9803
9802
9801
9712
9711
9710
9709
9708
9707
9706
9705
9704
9703
7.6
9702
35
HK$/US$
8.0
9701
Open Interest ('000)
135
9701
9702
9703
9704
9705
9706
9707
9708
9709
9710
9711
9712
9801
9802
9803
9804
9805
9806
9807
9808
9809
9810
9811
9812
Volatility
16%
55
14%
45
12%
10%
25
8%
6%
15
4%
5
2%
-5
0%
-15
HSIF Volatility
1m HIBOR
HIBOR (%)
.
Chart 2 HSIF Volatility and 1-month HIBOR
35
Currency market

Short position in the HK dollar may have
established to over US$ 10 billion (6% of
GDP) by institutions
– SWAP-driven issuance of HK dollar dominated
securities by international financial institutions in
the first eight months of 1998
– Concentrated selling intended to move the
exchange rate beyond the official exchange rate
– Market rumors on devaluations of the HK dollar
Derivatives market



Activity on HSI futures contract rose from
April to August 1998
4 hedge funds whose futures and options
positions accounted for 40% in early August
1998
Their positions accounted for 49% of the total;
one fund accounted for one-third
Source: Report of the Work Group on Highly Leveraged Institutions (Financial Stability Forum 2001, BIS)
Consequences


HKSAR government’s intervention in the
market during 14-28 August, US$ 15 billion in
equities, led to the creation of HK tracker
fund
Subsequent improvement in the global
outlook, the large hedge fund HSI futures
positions were mostly unwound in October
Risks

Futures market
– Concentration risk, a big concern?
– Definitely yes for the economy, because of
systematic risk
Aftermath

Open position limit

Margin requirement

Super-margin requirement
Lessons (1)

Communication channels between HKFE and
SFC

Coordination between regulators
– Cross-market surveillance Committee

Market Intelligent System
Lessons (2)
Education on products

Investors

Regulators

Intermediaries
‘Big elephant jumped
into a small pond.’
~ END~