HONG KONG EXCHANGE TO INSTITUTE VOLATILITY CONTROL MECHANISM FOR DERIVATIVES MARKET

Hong Kong Exchanges and Clearing Limited (HKEX), which operates stock and futures markets in Hong Kong, announced a plan to institute a Volatility Control Mechanism (VCM) designed to prevent extreme price volatility for its derivatives market in November of 2016. The institution of this mechanism follows the HKEX’s adoption of a VCM for the securities market in August of this year.

How Does the VCM Work?

The VCM consists of several measures, including the triggering of a cooling-off period of 5 minutes when there is an attempt to trade a contract covered by the VCM at a price more than 5 per cent away the reference price (the price of the last, or most recent trade, 5 minutes ago), subject to certain exceptions. Trading of the contract can continue within the cooling off period but within a band.

Roger Lee, HKEX’s Head of Markets, said in the announcement that “[t]he cooling-off period in the VCM mechanism alerts the market, provides a short time window allowing market participants to reassess their strategies and positions, and helps re-establish an orderly market at times when there is abrupt and drastic price movement for the contract concerned.”

Safeguard Against Volatility

Lee stated that the VCM is not intended to limit price fluctuations in normal market conditions but instead to safeguard the market from extreme price volatility arising from major trading incidents, and it is expected to be employed sparingly.

The HKEX announcement can be found at the following link:

http://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/161024news.htm

Jeff Petersen is an attorney licensed in California and Illinois representing clients in a wide variety of securities matters. He can be reached in California at 858.792.3666 and in Illinois at 312.583.7488.