Hong Kong's International Financial Centre: Retrospect and Prospect

mismanaged. In the wake of the crisis, Hong Kong is collaborating with other jurisdictions
around the world to improve the basic infrastructure through which various kinds of financial
derivatives and synthetic securities, like synthetic exchange-traded funds, are handled.
For derivatives, the HKEx is establishing a clearing house for over-the-counter derivatives.
This complements recently announced plans of the HKMA to maintain a central registry and
database of OTC activity. With the latter improving market transparency and the former
reducing clearing risks, since the clearing house serves as counterparty for both sides a trade, the
aim is to make Hong Kong a relatively more attractive centre than its regional competitors.
Interest-rate derivatives will open the market, and equity derivatives are expected to
follow. Eventually, dealers expect to be able to offer variations on such products denominated in
RMB. The main securities market regulator, the Securities and Futures Commission (SFC), is
consulting market participants on appropriate supervisory structures. 45
Overall exchange market competitiveness
Similar issues regarding
appropriate disclosure of risks and data on pricing confront instruments like synthetic exchangetraded
funds. Parallel work programs are therefore underway within the HKEx and the SFC.
More on this below, but it is obvious that regulators want to keep Hong Kong markets abreast
with regional and global competitors without also repeating transparency-related problems like
those encountered with Lehman mini-bonds in 2008.
The implications of the current strength of the Hong Kong Exchange are the subject of
much debate. Given recent history, Exchange leaders extol the stability that comes from its nearmonopoly
position. Others, aware of competitive currents coursing through analogous markets
in London and elsewhere, wonder about the costs and the opportunity costs. One current issue
clarifies both positions: so-called ‘dark pools’ of liquidity
There is nothing essentially new about off-exchange liquidity deployed in non-displayed
trades arranged by dealers and brokers. In major international financial centres, an informal
matching service has long been offered to big clients, although some observers now say that this
has morphed into a system of vested interests matching, clearing, settling trades, and frontrunning
new information. Best estimates are that some thirty active dark pools now deal in
stocks on major U.S. markets, up from about 10 in 2002. They are said to account for nearly
10% of trading volumes. 46 Whatever their merits or risks, such alternative liquidity systems
have been rising globally in volume and in the electronic speed of their deployment across
rapidly globalizing exchanges. 47
45 Financial Times (London), 10 December 2010.
46 Venkatachalam Shunmugam, “Dark Pools,” vox.eu.org, n.d.
47 Michelle Price, “The emergence of Asia's dark pools,” The Banker (On-line), 2 November 2010.
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