As financial markets continue to evolve, investors have begun seeking more effective investment tools to enhance their investment returns. To meet investor demand, The Hong Kong Exchanges and Clearing Limited (HKEX) has launched a range of stock futures contracts, all of which represent stocks listed on its wholly-owned subsidiary, the Hong Kong Stock Exchange (HKEX), which boasts high trading volumes and active liquidity. Through investing in stock futures, investors can participate in the performance of individual companies while also benefiting from the short selling and leverage effects offered by the derivatives market.

Given that the underlying stocks represented by stock futures are typically leading companies within their respective industries, investors can strategically select to invest in those industry-specific futures if they believe a particular sector’s performance will outperform or underperform the overall stock market.

Basic Definition

A stock futures contract is an agreement to buy or sell a specified quantity of financial value (contract size) equivalent to a specified number of shares (the underlying stock) at a predetermined price (the agreed-upon price) on a future, specified date.

All stock futures contracts are settled in cash and do not involve the physical delivery of shares upon expiration.

Contract Expiry

Upon contract expiry, the profit or loss amount is calculated as the difference between the agreed-upon price and the final settlement price multiplied by the contract multiplier, which will be deducted from the clearing member’s margin account.

The final settlement price refers to the official closing price of the stock reported by the Shanghai Stock Exchange on the last trading day.

If a futures investor wishes to close out their position before expiry, a short seller only needs to buy back one futures contract, while a long position holder must sell one futures contract.

Margin Deposit

In futures trading, both buyers and sellers must initially deposit a basic margin as collateral to fulfill the contract. After each daily settlement, the clearing organization calculates profits or losses for all open contracts based on the closing market price and uses this to deduct from investors’ margin accounts. If unfavorable market conditions result in an investor incurring losses that cause their margin to fall below the specified level, the exchange will require the investor to top up their margin within a designated timeframe to maintain it at the original basic margin level (i.e., to cover).

Advantages

• Low Transaction Costs: The fees are low relative to the value of the underlying shares. Each futures contract is equivalent to thousands of shares, and commissions depend on the number of contracts traded, resulting in a very low cost per unit of value.
• Easier Short Selling: Because investors can easily short stocks through futures contracts, they can profit during market declines by shorting stock futures.
• Market Maker System: To ensure market liquidity, The Hong Kong Exchange & Clearing Limited (HKEX) mandates that market makers provide buy and sell prices within a specified range, maintaining circulation in the stock futures market.
• Leverage Effect: Investors only need to pay a margin representing a small portion of the contract value when buying and selling stock futures contracts, making hedging and trading more cost-effective.
• Reduced Foreign Investor Currency Risk: Stock futures contracts provide foreign investors with access to invest in high-quality local stocks because they only pay a margin instead of the full contract value, significantly reducing the currency risk borne by foreign investors.
• Electronic Trading System: Stock futures contracts are traded through The Hong Kong Exchange & Clearing Limited’s (HKEX) electronic trading system. All trades are executed according to price and time priority, with immediate display of buy prices, sell prices, and transaction prices, achieving the highest level of market transparency.
• Clearing Company Performance Guarantees: Stock futures contracts will be registered, settled, and performance guarantees provided by HKEX’s wholly owned subsidiary, Hong Kong Futures Clearing Limited (the Clearing Company). Because the Clearing Company is the counterparty to all unsettled contracts, participants in the clearing house will not have to bear counterparty risk. However, this guarantee does not include the financial responsibility of the clearing participant for its clients; investors choosing a broker to trade must exercise caution.

Market Making

Market participants or individual stock futures contracts may register as market makers on the exchange and simultaneously provide both buy and sell prices within the specified maximum spread. Exchange participants and their clients should be aware that individual stock futures contracts may not have a market maker registered to provide bid-ask spreads, and their trades will be based on market unit pricing. Investors should note that stock futures without registered market makers may involve liquidity risk, and caution should be exercised before entering the market.

Risks of Trading Stock Futures

Stock futures involve high risks. Losses arising from trading stock futures may exceed the initial margin paid, potentially requiring you to pay additional margins within a short period. If unable to meet these payments, your position may be liquidated, and you will bear all resulting losses. Therefore, it is crucial to fully understand the risks associated with trading stock futures and assess whether it’s suitable for you. Before engaging in transactions, consult with a broker or financial advisor to determine if futures and options contracts are appropriate based on your financial situation and investment objectives.

Adjusting Comments

When a listed company alters its capital structure through measures such as a cash offer or the issuance of bonus shares, this will lead to changes in share prices at the time of net asset valuation or the effective date, and may also affect uncovered positions.

If other circumstances remain unchanged, the value of holdings held by shareholders will not be adjusted on the settlement day; however, this is different for buyers or holders of stock futures. Unless the futures contract is appropriately adjusted, changes to the share price will unfairly and unjustly impact the value of a stock futures position. The adjustment ratio determined by the Settlement Corporation is based on maintaining the fair value of the futures contract and only made when there are significant changes. The Hong Kong Exchange will announce the details of the adjustments, and participants in the exchange must inform customers about the changes.

Futures Contracts Overview

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References

Hong Kong Exchange - Derivatives / Stocks / Stock Futures HKEX_Stock_Futures_SC.pdf