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Over the past four years, we have launched a lot of initiatives, made investments, completed a major acquisition, and launched reforms. It’s been a very busy time, and people have asked me why we’re doing so much, so fast. Others openly wonder whether and when these initiatives will bear fruit. These are good questions. Because we’ve done so much of late, I feel it’s time to take stock of where we are, what these initiatives mean, why we’re doing them, and how these dots can be connected to show the larger picture.
Imagine you are undertaking large-scale upgrades to your home. The first task is to strengthen the foundation. We’ve done this with our AMS 3.8 order matching system and the major investment in our Orion Technology Initiatives, which include the new Data Centre we opened last year, Hosting Services, and the new Market Data Feed. This infrastructure required substantial investment, but it is crucial; we want to build our house on solid ground.
The second thing we’ve done is to build new floors and rooms in our home. When adding on to a home, you not only need to provide space for today, but also extra rooms for guests or children you might have in the future. That’s what we’re doing with our house, too: we are preparing for new business. The LME is obviously the largest new floor, but our joint-venture with the Shanghai and Shenzhen exchanges is another, and OTC Clear – the newest – will be launched soon. In various ways, these initiatives propel us into new asset classes, make us more international, and prepare us better to grasp the emerging opportunities in the accelerated opening of the Mainland capital markets.
Now that we’ve completed our structural renovations, we need to protect the house. This is where risk management reform comes in. Risk management, like a security system, is not an exciting part of the building process. But it’s extremely important, and we’ve undertaken a number of measures to strengthen risk capital in the market and ensure that the house remains safe.
The next step is to begin furnishing the home. These are the microstructure changes that make our market more efficient and more competitive, such as the recent revamp of our stock options market. Other microstructure changes may require more discussion with the market: one is closing auctions while another is trading anonymity. When we consider these and other reforms, we will of course listen carefully to different voices and various points of view from the market. Over time, we’ll improve the decorations to make our house more aligned with international standards and more attractive to visitors wherever they come from.
Last but not least, we can begin inviting guests from both Mainland China and international markets to visit our new home. To do this, we have to make ourselves compatible with the Mainland and international markets. New trading hours and After Hours Futures Trading are intended to align our market with those in the Mainland and the rest of world and to support mutual market access. In addition, the RMB Equity Trading Support Facility, launch of RMB futures, and the Dual Tranche, Dual Counter IPO model are all designed to ensure we are the most prepared among international markets once the internationalisation of the RMB intensifies and more funds start flowing out of the Mainland.
What are the financial implications of these initiatives? Consider our Data Centre for example. It required heavy investment and before revenue reaches its full potential, the depreciation costs of the completed centre will put pressure on our profit margin. By contrast, the BRICS Exchanges Alliance and our CESC joint venture involved little investment but the brand and strategic effect is substantial. Last but not the least, the LME is the largest of our strategic investments. In the medium to long term, it will be one of our key growth engines. However, the LME fee structure has yet to become fully commercialised and the LME is in its most critical stage of infrastructure investment. Its lower profit margin and cost of the acquisition means the LME’s financial contribution in the next two years will be limited. Its most tangible contribution will be to help HKEx substantially speed up connectivity with the Mainland market.
But each of these initiatives fits into a larger plan and they need to be viewed as being a part of this whole. When the market opportunities come, they will be powerful drivers of growth for HKEx and Hong Kong.
Take the example of trading hours. When we changed our market opening time to align with the Mainland, the market did not immediately see the value. However, the emergence of the RMB A-share ETF is to a large extent a result of the alignment of trading hours. Once the A-share related stock options and futures come and when we enable mutual market access on an even larger scale, the idea of aligned market opening times with the Mainland will seem natural.
There’s no question that what we’ve been doing is ambitious. Conducting large-scale renovations to a house is not easy. But I believe that the efforts our market has made over the past few years will bear fruit sooner than most people expect.
I sincerely thank the market for the patience it has shown during this transitional period. A house is not built overnight; it must be built in stages over time until it finally takes shape and is ready to move in. As I said, our plan is comprised of many individual initiatives that all contribute to a better, bigger, solid and more efficient house. Once we’ve executed the plan, we’ll have a highly efficient and even more globally competitive market.
