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Maintaining Robust Markets in Turbulent Times

Updated: 24 Mar 2020
Charles Li Direct

Global markets are undergoing one of their most volatile periods in history, reflecting the uncertain macro environment and impact of the COVID-19 outbreak. HKEX’s markets have continued to operate with resilience, maintaining a fair and orderly trading environment while at the same time ensuring the safety and wellbeing of our people. Our goal is to continue providing market access while taking the utmost care of our employees, partners and communities in the face of current uncertainties.

The COVID-19 outbreak has caused worldwide economic and social disruption, and at times like these it is critical that global financial markets operators rise to the challenge and provide stable and transparent access to liquidity for issuers, market participants and investors. HKEX’s goal, at this time when our community needs us the most, is to ensure that trading, clearing and risk management systems remain fully functional amid heightened volumes and volatility, providing efficiency, reliability, and transparency.

Sharp market declines can be alarming, but these movements are a reflection of our circumstances. They show that the markets are serving their intended purpose. Watching the turbulence is uncomfortable. I, too, find the sell-off difficult to watch, but closing our markets, or enacting temporary barriers, is not the solution. Draconian measures often only mask or delay the inevitable response of markets to the prevailing conditions and amplify the anxiety, panic, and fear that we feel.

Economies, corporates, sovereigns and individual investors still need to borrow, invest and raise capital. Financial markets direct the flow of savings and investment into the economy in ways that facilitate economic recovery and the resumption of capital growth, which results in the production of goods and services. Our open markets, functioning in a fair and orderly manner, create transparency and give investors the ability to manage their risk, reducing panic and providing economic stability.

Taking Appropriate Action

Our business focus is to keep our markets operational, but as a CEO helping ensure the safety and well-being of HKEX staff, and our broader community is paramount. HKEX has in place a comprehensive business continuity management framework to provide ongoing service continuity and stability. We have taken safety measures across our sites in Asia and the UK, from interim travel arrangements and supplying staff with face masks, to implementing work-from-home and split teams. The HKEX Foundation has also made donations to local partners and NGOs to support those in need at this challenging time.

Market safety mechanisms, such as trading halt arrangements for our after-hours options market, have functioned well. The trading halt mechanisms for Hang Seng Index, Mini-Hang Seng Index, Hang Seng China Enterprises Index, and Mini-Hang Seng China Enterprises Index Equity Index Options have been triggered on more than one occasion during this period. HKEX also continues to actively monitor margining requirements, and has made additional intra-day margin calls. We are pleased that so far all market participants have successfully met the increased thresholds.

Stock Connect has continued to operate without disruption, despite record volumes, proving it is an excellent tool for aiding price discovery and moderating price swings by allowing the two fundamentally different investor bases and markets to interact and complement each other during this period of volatility.

HKEX already has volatility control mechanisms in place for stocks included in our major benchmark indices, and in May 2020 we will further expand the universe of stocks to be covered by our VCMs. We are also in the process of introducing a Pre-Opening Auction Session for the equities market, in addition to the existing Closing Auction Session, to enhance price discovery and better manage volatility and risk.

In London, we have made the difficult decision to temporarily shut the famous metals trading ring at the LME and move to electronic trading, only the second time this has happened in its 143 year history. But this is the right decision, as we must protect our staff and our community.

Collaboration and Communication

HKEX is working closely with the Securities and Futures Commission to provide guidance for listed issuers with a 31 December financial year-end regarding the publication of their preliminary results and annual reports. A total of 1,781 listed companies would need to announce preliminary results by 31 March, under our Listing Rules.

We are allowing some issuers to publish preliminary results without agreement with auditors, or to release management accounts or material financial information, by the 31 March deadline. This will help minimise disruptions to trading, while ensuring that the investing public continued to receive sufficient information. To eligible issuers, we are also allowing an extension to the publication deadline for annual reports. These are unprecedented measures, but are necessary amid the widespread travel disruptions faced by issuers and their auditors, and the need to uphold a fair and orderly market.

We have adapted our hugely popular IPO Listing Ceremony and the ceremonial ’Striking of the HKEX Gong’. We have gone virtual, welcoming newly listed companies to our markets digitally, with bespoke video productions, a simulated countdown and our trademark gong-strike. The IPO market remains open for business, and in the first two months of 2020 there were 24 newly listed companies, equal to the same period last year, and funds raised in the first two months totalled $61.9 billion, an increase of 170 per cent from the year-ago period. We are also beginning to consider measures to help our listed issuers to deal with the new challenges in the coming season of AGMs.

The Future of Our Markets

It is impossible to make any clear predictions of how this crisis will evolve. Yet we all have many anxieties, concerns and questions. How long will the economy need to be paused in order for social distancing to have the necessary effect on the spread of the virus? What is the likelihood of a liquidity crisis in the coming weeks, given the current high volatility and low confidence? What is the chance of an unprecedented financial crisis unfolding given the disruption in the underlying economy, and its heavily leveraged participants? Will the unprecedented level of monetary and fiscal rescue measures be effective in restoring confidence and liquidity? As global market structures have become more sophisticated they have also become increasingly interconnected, complicated and derivative. How can we best use these developments to ensure that the markets serve their most basic functions such as access to capital, price discovery and risk management without becoming a magnifier of risks and volatilities?

The truth is that I don’t know. I don’t know where this will end up.

What I do know is that we will use all the knowledge, intellectual capacity, and tools available to us to ensure that we make the best-informed decisions that we can. The journey ahead will be tougher than anything we have seen before, but with all of us pulling together we will come out of this crisis stronger and more resilient.

As a premier international financial market, HKEX is committed to keeping our markets fully operational. It is our belief, supported by practical experience and the best academic modelling, that fully functioning capital markets, with their price discovery capabilities, risk management role and capital allocation functionality, play a critical and vital role in global economic stability, even if the short term volatility is uncomfortable to observe.

I am proud of the diligence and persistence of our HKEX teams, in particular those overseeing our critical operations during this difficult period. I am even more grateful to the front-line staff in our communities, such as cleaners, nurses, and drivers that keep our societies functioning and care for the sick. Thank you will never be enough.

Now is the time for resolute focus, clarity and calm. I promise that HKEX will be diligent in carrying out its duties and that we will stand by your side as we face this challenge.

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