This guide provides an overview of the key requirements, costs, and operational details for firms seeking to become participants on the Hong Kong Exchanges and Clearing Limited (HKEX) derivatives market. It covers the necessary regulatory framework, financial requirements, product offerings, and ongoing obligations for exchange participants.
Regulatory Framework and Licensing
To operate as an exchange participant in Hong Kong, firms must obtain the appropriate licenses under the Securities and Futures Ordinance (SFO). The SFO categorizes regulated activities into several types, with the most relevant for derivatives trading being:
- Type 2: Dealing in futures contracts
- Type 7: Providing automated trading services
Acquiring these licenses is a prerequisite for applying to become an Exchange Participant of HKEX's derivatives market, Hong Kong Futures Exchange (HKFE).
Financial Requirements
Becoming an exchange participant requires meeting specific capital and liquidity requirements.
Capital and Liquid Capital Requirements
- HKFE Participant: A minimum paid-up capital of HKD 5,000,000 (~USD 641,000) is required.
Liquid Capital: Must be not less than the higher of:
- HKD 3,000,000 (~USD 384,600); or
- HKD 20,000,000 (~USD 2,564,100) for General Clearing Participants, or HKD 5,000,000 (~USD 641,000) for Direct Clearing Participants.
Guarantee Fund Contributions
Participants must make initial contributions to the relevant Clearing House's reserve fund:
HKFE Clearing Corporation (Futures):
- General Clearing Participant: HKD 7,500,000 (~USD 961,500)
- Clearing Participant: HKD 1,500,000 (~USD 192,300)
SEOCH (Stock Options):
- General Clearing Participant: HKD 5,000,000 (~USD 641,000), plus an additional HKD 1,500,000 for each new clearing arrangement beyond the third non-clearing participant.
- Direct Clearing Participant: HKD 1,500,000 (~USD 192,300)
Startup and Operational Costs
Setting up as a derivatives exchange participant involves significant initial and ongoing costs.
One-Time Costs
- Exchange Trading Right: HKD 500,000 (~USD 64,100)
- System Hardware & Software: Approximately HKD 98,200 (~USD 12,590) for initial setup (OG server, workstation, hub/cabling, and software).
- Installation Fees: Approximately HKD 3,000–14,500 (~USD 380–1,860) per additional connection.
Recurring Costs
- Annual Participation Fee: HKD 6,000 (~USD 770)
- Data Line Monthly Fee: Approximately HKD 7,000 (~USD 900)
- Monthly License Fees: Range from HKD 1,750 to 5,200 (~USD 220 to 670) per user/connection, depending on the system and order throughput.
- Monthly Maintenance Fee: HKD 3,000 (~USD 380) for additional servers (first server is free).
- Annual Maintenance Fee: Approximately HKD 6,900 (~USD 880)
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Product Offerings on HKEX Derivatives Market
The HKEX offers a diverse range of derivative products for trading.
Equity Index Products
A core offering includes futures and options on major indices:
- Hang Seng Index (HSI) Futures & Options
- H-Shares Index (HHI) Futures & Options
- Mini-HSI and Mini-HHI Futures
- Hang Seng Dividend Point Index Futures
- International index futures like IBOVESPA, MICEX, and S&P BSE SENSEX
Equity Products
- Single Stock Futures on major Hong Kong-listed companies.
- Single Stock Options on a wide selection of equities.
Interest Rate and Currency Products
- HKD Interest Rate Futures (1-month and 3-month)
- USD/CNH (Hong Kong) Futures – allowing exposure to RMB exchange rates.
Metal Products
- LME Mini Futures contracts on Aluminium, Zinc, and Copper, settled in RMB.
Trading Hours and Sessions
Trading hours vary by product. The general derivatives market schedule is:
- Morning Session: 9:15 am – 12:00 noon
- Afternoon Session: 1:00 pm – 4:15 pm
- After-Hours Futures Trading Session (T+1): 5:00 pm – 11:45 pm (for specific products like HSI and HHI futures)
A pre-opening session runs from 8:45 am to 9:15 am and from 12:30 pm to 1:00 pm for certain index futures. On half-days (e.g., Christmas Eve), the market closes at 12:00 noon.
Fees and Charges
Participants incur various fees for trading, clearing, and settlement.
Trading Fees
Fees are product-dependent. Examples include:
- HSI Futures: HKD 10.00 per side
- HHI Futures: HKD 3.50 per side
- USD/CNH Futures: CNY 8.00 per side
- Single Stock Futures: HKD 3.50 per side
A Securities and Futures Commission (SFC) levy of 0.0027% also applies to most transactions.
Clearing and Settlement Fees
Clearing fees are charged per contract. Examples:
- HKFE Clearing (Futures): Typically HKD 1.50 to 10.00 per contract.
- SEOCH (Options): HKD 2.00 per contract for stock options.
Block Trade Facility
The exchange provides a mechanism for executing large, privately negotiated trades off the central order book.
- Eligibility: Trades can be between client, house, or registered trader accounts.
- Minimum Volume: Varies by product (e.g., 100 contracts for index products, 500 for stock options).
- Price Restrictions: The execution price must be fair and reasonable, typically within a percentage band of the current market price or a theoretical value.
- Combination Orders: Different orders can be combined into strategies (e.g., spreads) for block trade execution, provided at least one leg meets the minimum volume requirement.
Market Maker Responsibilities and Incentives
Market makers play a vital role in providing liquidity and have specific obligations in return for fee concessions.
Key Responsibilities:
- Response to Quote Requests: Must respond to a high percentage (e.g., 70%) of electronic quote requests within a short timeframe (e.g., 20 seconds).
- Continuous Quoting: For designated products/series, must provide continuous two-way prices for a high percentage of the trading session (e.g., 70%).
- Maximum Spreads: Quotes must be within a defined maximum spread, which varies by product and volatility.
Key Incentives:
Market makers receive significantly reduced exchange fees. For example:
- HSI Futures Standard Fee: HKD 10.00; Market Maker Fee: HKD 3.50
- HHI Futures Standard Fee: HKD 3.50; Market Maker Fee: HKD 0.50
These incentives are designed to compensate market makers for the liquidity they provide.
Frequently Asked Questions
What is the first step to becoming an exchange participant?
The first step is to obtain the necessary Type 2 (Dealing in futures contracts) license from the Securities and Futures Commission (SFC) under the Securities and Futures Ordinance. This regulatory approval is mandatory before applying to HKEX.
What are the main ongoing costs for a participant?
The main recurring costs include annual participation fees, monthly data line and system licensing fees, clearing and settlement fees per transaction, and the costs associated with maintaining adequate liquid capital.
Can a firm be a participant for just one product type?
While technically possible, the structure of trading rights and system connectivity often makes it more practical for firms to participate across multiple product types. The application is made to become an HKFE Participant, which grants access to the suite of derivatives products.
What are the advantages of being a Market Maker?
The primary advantage is a substantial reduction in exchange trading fees, which can significantly lower the cost of doing business for firms that are actively providing liquidity to the market.
How does the Block Trade facility work?
The Block Trade facility allows participants to execute large orders off the central order book at a mutually agreed price. The trade must meet minimum volume requirements and the price must fall within a "fair value" range based on the current market. The trade is then reported to the exchange.
Is there a significant difference in cost between being a Clearing Participant vs. a Non-Clearing Participant?
Yes, the financial requirements are substantially higher for Clearing Participants (both General and Direct) as they are responsible for their own clearing and settlement, which requires contributing more capital to the guarantee funds. Non-Clearing Participants clear their trades through a Clearing Participant.