Market Turnover


Consultation Paper On The Proposed Market Infrastructure For Trading Of Exchange Fund Notes January 1999 The Stock Exchange Of Hong Kong Ltd

January 1999

January 1999
The Stock Exchange of Hong Kong Ltd

Appendix I - Overview of the Proposed Market Infrastructure:
A Comparison between the Professional and Exchange EFN Markets




In Positioning for a New Era (the Stock Exchange of Hong Kong's strategic plan 1998 - 2001), the Exchange signaled its intention to evolve into a full-service securities market. Key business strategies to accomplish this are expanding the product range available through the Exchange and capturing the full potential of the debt securities market. In line with these strategies the Exchange has been engaged in discussions with The Hong Kong Monetary Authority (HKMA) for the listing of Exchange Fund Notes (EFN) on the Exchange. This paper sets out the proposals for the initial trading and settlement of EFN and invites comments on these proposals from market participants.


In developing these proposals the Exchange has sought to accomplish the following objectives:

  1. Wider Investor Choice. The listing of EFN will make available to investors high quality fixed-income securities. It will expand the range of securities available through the Exchange for existing stock market investors. These securities may also attract investors not presently participating in the stock market who are attracted by the generally lower risk profile of EFN.
  2. Develop Trading in Debt Securities. Existing listed debt securities on the Exchange are generally characterised by low turnover in the secondary market. This may be partially attributable to the use of clearing systems based outside Hong Kong for clearing trades in these debt securities. It may also be attributable to the limited initial distribution of these securities to Hong Kong based investors. To address these matters, the proposals include the use of the existing Central Clearing and Settlement System (CCASS) for clearing and settling EFN trades on the Exchange. In addition, the proposals include a facility for investors to tender for EFN when they are offered for public subscription. These proposals are directed at enhancing the attractiveness of listed EFN.
  3. Develop the Debt Market. The proposals for tendering, trading and settlement will initially only be available for EFN. In future they may be adapted for other debt securities listed on the Exchange, thereby attracting other debt issues to the Exchange leading to the further development of the Hong Kong debt market and expanding choice for investors.


These proposals are based on extending the existing infrastructure for trading securities on the Exchange to the trading of EFN. The advantages of this approach are:

  1. Timeliness. The proposals can be introduced within a short period, as the time required for system development, introduction and training is reduced.
  2. Lower Development Costs. The costs associated with system development, introduction and training are reduced. Existing hardware platforms can be used for the proposed EFN market avoiding hardware and software costs for market participants.
  3. Minimum Disruption. The approach minimises the disruption caused to the existing market. Resources within the Exchange presently directed at the further development of the existing securities trading system will not be required to be directed at developing the infrastructure for the EFN market.
  4. Other. The approach capitalises on the familiarity with and confidence in existing systems. This allows the education effort associated with these proposals to focus on characteristics of fixed-income products. As existing systems are further developed the benefits of those developments will be available to the EFN market.

It is recognised that this approach is at the cost of reduced flexibility in developing systems and procedures specifically focused on debt instruments. It is considered that these costs are outweighed by the benefits set out above.

Overview of Proposed Market

The principal features of the proposed market infrastructure are set out below.

  1. Investors. The market will be open to all investors; in particular retail investors.
  2. Trading Platform. The existing AMS trading platform will be used.
  3. Transaction Size. The existing HK$50,000 minimum denomination size for EFN will form a board lot for trading on the Exchange.
  4. Market Making. The existing AMS is an order matching system that does not support market making. Market making will therefore not be available initially for EFN.
  5. Spread Size. The minimum spread is proposed to be 0.10% representing a price change of HK$50 on each board lot of EFN.
  6. Transaction Costs. EFN are exempt from stamp duty. The existing transaction levy of 0.011% will apply for EFN transactions. The minimum brokerage commission rate will be reduced from the existing 0.25% to 0.10% for EFN transactions with the minimum commission remaining at HK$50.
  7. Short Selling. Short selling will not be permitted.
  8. Price Information. Price information displayed by the AMS system will apply to EFN and will be made available to information vendors as at present. In addition, system enhancements will allow yield-to-maturity, coupon rates and maturity dates to be displayed on AMS trader PCs and to be disseminated to vendors. Previous day closing yields for trades conducted among financial institutions in the over-the-counter (OTC) market and settled through the HKMA's Central Moneymarket Unit (CMU) system will be displayed on teletext.
  9. Settlement. Trades conducted on the Exchange will be settled through the CCASS system operated by the Hong Kong Securities Clearing Company Limited (Hongkong Clearing) on a T+2 basis in line with existing practices on the Exchange. Clearing will initially be on a trade-for-trade basis, but may later migrate to Continuous Net Settlement (CNS). A linkage will be established to allow free-of-payment transfers between participants of CMU and CCASS. Trading will be scripless.
  10. Tendering. Facilities will be introduced to allow investors to tender for EFN when they are initially offered for subscription by the HKMA.


Comments on these proposals or on the future development of the debt market should be submitted to the Exchange on or before February 12, 1999.


In this consultation paper, the following terms, save where the context otherwise requires, have the following meanings:

AMS The Automatic Order Matching and Execution System established and operated by The Stock Exchange of Hong Kong Limited
CCASS The Central Clearing and Settlement System established and operated by Hong Kong Securities Clearing Company Limited
CNS Continuous Net Settlement
CMU The Central Moneymarkets Unit established and operated by the Hong Kong Monetary Authority
Equity Market The present equity market operated by the Exchange
Exchange The Stock Exchange of Hong Kong Limited
Exchange Debt Market The present debt securities market operated by the Exchange
EFN Exchange Fund Notes
IP Investor participant who holds an Investor Participation Account at Hongkong Clearing
Hongkong Clearing Hong Kong Securities Clearing Company Limited
HKMA Hong Kong Monetary Authority
Market Maker Market Maker is a Recognised Dealer who is obliged to quote two way prices in the Professional EFN Market
Professional EFN Market The EFN market currently existing among financial institutions
Exchange EFN Market The proposed market to be operated by the Exchange for trading EFN listed on the Exchange
Recognised Dealer Recognised Dealer, who is entitled to trade and hold the Exchange Fund papers and specified instruments, is appointed by the HKMA


3.1 Background

In its strategic plan (1998-2001), 'Positioning for a New Era', published in June 1998, the Exchange set out its strategic directives for continuous expansion of itself and its marketplace. One of the objectives is to capture the full potential of the debt market in Hong Kong. In furtherance of this, the HKMA and the Exchange are planning to establish an exchange listed and traded marketplace for the EFN.

To develop the market, the existing market infrastructure for trading equities will be adopted to allow trading of EFN on the Exchange as soon as possible. When this adoption is completed, the HKMA will seek to list all existing and future issues of EFN on the Exchange.

Adopting this approach will allow trading to take place in a more timely manner than if a new trading system were developed and will reduce development costs. It will capitalize on investors' existing familiarity with the present trading system - the AMS. As a consequence, education programmes for investors will be able to focus on the features specific to the new product rather than the characteristics of the market. As planned enhancements to the AMS are developed and introduced, these will be available for the debt market as it develops.

 3.2 Purpose of this Consultation

This paper outlines the key features of the initial proposed trading and settlement arrangements, highlights areas which may be subject to future development and invites comments from all interested parties.

 3.3 The Hong Kong Debt Market


The listing of debt securities on the Exchange started with an issue by the Mass Transit Railway Corporation in 1988. Since then, the number of listed debt securities has grown to 258 with a total nominal value of HK$858,065 million by the end of November 1998. Listed issuers include 17 states, 52 corporations, 17 state corporations, 22 banks and 9 supra-nationals. Trading of debt securities on the Exchange Debt Market is negligible (with turnover of HK$18.15 million in November 1998). It is understood that many investors hold their securities to maturity. The liquidity of the secondary market is thus relatively low.

The introduction of the Exchange Fund Bills programme in 1990 and the EFN programme in May 1993 by the HKMA saw further steps in the development of the debt market. The size of this market, as measured by the outstanding amount of Hong Kong dollar debt securities, was HK$391 billion as at the end of September 1998. Of this, the EFN amounted to HK$33.6 billion. Daily average turnover of this instrument from January to September 1998 was HK$747 million.

Exchange Fund Bills and EFN are Hong Kong dollar debt securities issued by the HKMA to provide a cost-effective instrument for conducting money market operations by institutional investors. They constitute direct, unsecured, unconditional and general obligations of the Hong Kong government for the account of the Exchange Fund and have maturities ranging from 2 to 10 years. Exchange Fund Bills are of shorter maturity and there are no plans for Bills to be listed. Accordingly, this Consultation Paper deals with the EFN only.

The EFN programme was originally designed to facilitate interbank liquidity management with the ultimate objective of maintaining exchange rate stability. At present EFN are traded mainly by banks and institutional investors and the transaction sizes are generally in millions of dollars. Participation by retail investors in the Professional EFN Market is relatively limited.

3.4 Developing a Listed EFN Market

Eyeing the potential for retail interest in high-quality debt instruments and to support the development of the debt market with a robust secondary market, the Exchange is planning to establish a listed EFN marketplace (Exchange EFN Market). The main objective of the Exchange EFN Market is to provide a market where all investors, particularly retail investors can participate in the trading of the EFN, and to increase liquidity of the debt market. This will entail significant benefits in terms of:

  1. Meeting Investor Demand - The Exchange EFN Market will make the EFN, and potentially other high quality debt instruments, available to ordinary investors. The high saving rate of Hong Kong people suggests that there are funds available which might seek an outlet for alternative long-term listed investments. Moreover, many retail investors will, for the first time, be able to invest in a listed product which is theoretically riskless and similar to other sovereign type fixed income papers. It is expected that the imminent launch of the Mandatory Provident Fund will further fuel the development of the Hong Kong debt market by increasing the demand for high quality Hong Kong dollar fixed-income listed products.
  2. Promoting the Development of the Debt Market - The establishment of the Exchange EFN Market will increase the coherence and coordination of the two established markets, the Exchange Debt Market and the Professional EFN Market, in developing and trading fixed income products. It will promote the growth in demand for and supply of debt securities, thus enhancing the liquidity of the debt market. In the longer term, it will provide an alternative channel for corporations to raise funds.
  3. Assuming a Strategic Role - The development of the Exchange EFN Market will enhance the competitiveness of the Exchange and improve Hong Kong's position as an international market. It will also position the Exchange to play a more significant role in the listing and trading of Mainland debt securities.


4.1 Overview

The success of the Exchange EFN Market will depend very much on the market infrastructure. In particular an efficient trading and clearing system, with minimum systemic and settlement risks. This is critical for establishing participants' confidence, which is in turn a prerequisite for liquidity.

In this respect, the Exchange has considered the feasibility of merging the Exchange EFN Market with the Professional EFN Market currently participated by banking institutions. However, due to the differences in trading and settlement practices between the Professional EFN Market and the Exchange Debt Market, merging the two markets is considered to be disruptive to the existing market infrastructure. In view of this, the HKMA and the Exchange do not intend to merge the two markets, but to treat the Professional EFN Market as an OTC market separately from the Exchange EFN Market. An overview of the proposed relationship between the existing market and the proposed market is set out below. A comparison of the proposed market infrastructure of the Exchange EFN Market and the existing market infrastructure of the Professional EFN Market can be found in Appendix I.

4.2 Market Participants

4.2.1 Target Investors

At present, the EFN are traded in the Professional EFN Market by a small group of participants, consisting mainly of financial institutions. Banks are important participants since EFN not only satisfy their liquid asset requirements, but also qualify as collateral for borrowing from the HKMA's Discount Window. Institutional investors trade the EFN through Recognised Dealers because the EFN are cost-effective for conducting money market operations.

The Exchange EFN Market will be open to all investors. The Exchange is of the view that the Exchange EFN Market will be able to attract investors for the following reasons:

  1. The EFN are high quality papers issued by the Hong Kong government for the account of the Exchange Fund.
  2. The less speculative nature of the EFN Market will encourage the participation of investors who are looking for predictable and secure future income . These are expected to be predominantly retail investors.
  3. The EFN will provide an additional choice of investment for retail investors between the low risk, low return bank savings deposit and relatively high risk, high return equity market.

4.2.2 Market Intermediaries

As in the Equity Market, the Exchange EFN Market will consist of Members of the Exchange as intermediaries. This will be different from the Professional EFN Market, which consists of Recognised Dealers, some of whom are also authorised as Market Makers.

4.3 Trading Platform and Pricing Mechanism

4.3.1 Trading System

To ensure the range, depth and liquidity of the Exchange EFN Market, a robust and efficient trading system is essential. Trading of EFN on the Professional EFN Market is conducted mainly over proprietary systems, which are generally not suitable for retail trading. The Exchange considers that the existing trading system, AMS, can be conveniently and quickly adapted to provide a trading platform for the Exchange EFN Market.

On the same basis as trading transactions on the Equity Market, the AMS trading platform will allow brokers to conduct automatch trades and direct business transactions, dealing either as a principal or on behalf of customers, on the Exchange EFN Market. Once a trade is concluded, the transaction details will be recorded in AMS and passed to CCASS for settlement.

4.3.2 Transaction Size

The present minimum denomination size of HK$50,000 for EFN will form the minimum transaction size on the Exchange EFN Market. This is considerably smaller than typical transaction sizes on the Professional EFN market. It is also smaller than the minimum transaction size for a number of debt securities listed on the Exchange. In addition, a recent Retail Investors Survey conducted by the Exchange shows that a typical Hong Kong retail stock investor has an average portfolio size of HK$150,000 and the average transaction size is HK$50,000.

The minimum transaction size will represent one board lot of EFN, which will comprise 500 trading units of HK$100 each. The structuring of board lots in this way is adopted by the Exchange for other debt securities.

4.3.3 Market Making

At present, the EFN are traded through the market making system in the Professional EFN Market. The 29 Market Makers are the nucleus of the Professional EFN Market, essential for maintaining a current benchmark. There are, however, several implications of the market making system for the Exchange EFN Market:

  1. Adopting market making would be a fundamental change in the current order driven market structure.
  2. The adoption of a fully supported market making system for the Exchange EFN Market would necessitate substantial changes to the AMS, delaying the introduction of EFN on to the Exchange.

Market making will not initially be available for the Exchange EFN Market. It may however be considered when a market making function is available in the Exchange's enhanced trading system (AMS/3) if there is insufficient liquidity.

4.3.4 Spread Size

The current spread size of debt securities on the Exchange is 0.125%. This is probably too large for the EFN. The Exchange therefore recommends reducing the spread size to 0.10% for the Exchange EFN Market for the following reasons:

  1. 0.10% is equivalent to HK$50 for a minimum transaction size of HK$50,000. Although the proposed spread size is larger than that of the Professional EFN Market, the expected average transaction size is smaller.
  2. It allows orders to aggregate around the spreads so that the market depth for each price queue is larger.
  3. Though it is 20% smaller than the current spread of 0.125%, the difference is not significant. Further, it is closer to the spread size of 0.01% to 0.05% of the Professional EFN Market.
  4. It is also a common trend to set the spread size using a decimal system instead of the current 1/8 system.
  5. It should also be noted that the spread size for debt securities has always been different from the spread size for equities and warrants because of their stable nature.

Spread sizes for the trading of EFN on the Professional EFN Market are a matter of negotiation between Market Makers and Recognised Dealers. The spread size can be as low as 0.01%, but the one frequently used by the market is 0.05%. It should be noted that these are based on high value transactions, where comparatively small spreads may represent significant dollar amounts.

The Exchange also proposes to review the spread size of existing debt securities after the launch of the EFN on the Exchange.

4.3.5 Transaction Costs

Transaction costs on the Exchange EFN Market will include:

  1. Transaction Levy

    The current transaction levy is 0.011%, which is split between the SFC and the Exchange at a ratio of 4 to 7. The Exchange proposes to maintain the transaction levy of 0.011% on all EFN transactions.

  2. Minimum Brokerage Commission

    The brokerage commission rate in the Professional EFN Market is negotiable but is generally around 0.01% per annum, whereas the minimum rate in the Equity Market and the current Exchange Debt Market is 0.25%. While maintaining the minimum commission of $50, the Exchange proposes to reduce the minimum commission rate of 0.25% to 0.1% exclusively for the Exchange EFN Market to:
    • increase the attractiveness of this new product to investors;
    • narrow the difference between the Professional and the Exchange EFN Markets; and
    • allow investors to cover their costs by a smaller movement in price.

Despite a lower minimum commission rate, the new EFN products will create a new source of income for Members and Members' own minimum charge still applies. This arrangement will be reviewed by the Exchange when the Exchange EFN Market is more developed and mature.

  1. Stamp Duty
    No stamp duty is payable on EFN transactions.
4.3.6 Transparency and Price Discovery

Similar to the Equity Market and the current Exchange Debt Market, the Exchange EFN Market will have complete transparency in market depth as bid and ask prices, last and previous trade prices, turnover, etc. will be disseminated on a real-time basis to the market by the AMS.

Leveraging on the capability of the AMS, the Exchange will enhance the system for the Exchange EFN Market with the following information:

  1. A new range of financial information pages will be developed to display every 5 minutes the yields (yield-to-maturity) of all EFN together with their coupon rates and maturity dates in descending order. This will allow investors to choose different EFN paper, with the highest to the lowest yields, from the screen before placing their orders with Members.
  2. There will be a stock page for each EFN paper to display the short name, HKMA issue number, Exchange stock code, prices and other details. Accrued interest will be displayed as usual for reference.
  3. Index pages will also be available for finding HKMA issue number and Exchange stock code for each EFN paper.
  4. The previous closing yields published by the HKMA on the Professional EFN Market will also be disseminated as a news item.

By providing this information, trading on the Exchange EFN Market should be able to take place on a fully informed basis. As market information is available on the Professional EFN Market from information vendors and on the Exchange EFN Market from AMS, it is expected that prices in both markets will be comparable due to market forces. This situation will be similar to that between the listed Equity Market and its local or overseas OTC market.

4.3.7 Trading Practices - Short Selling

Market Makers in the Professional EFN market are expected to quote two-way prices for EFN. To facilitate this, subject to maintaining a net long position in EFN at the CMU, these Market Makers are permitted by the HKMA to incur a short position in individual EFN issues. Market making will not be a feature of the Exchange EFN market and short selling will therefore not be permitted.


5.1 Settlement System

Currently, the EFN are settled through the Central Moneymarkets Unit (CMU), a computerized clearing and settlement system set up by the HKMA. The CMU provides both real time and end of day delivery versus payment service. In general, trades concluded before 11:00 a.m. are settled on the same day at 3:00 p.m. and trades concluded after 11:00 a.m. are settled at 3:00 p.m. on the following day. However, it should be noted that settlement period in the Professional EFN Market is negotiable.

The Exchange does not intend to adopt the clearing and settlement system currently used in the Professional EFN Market as Exchange listed securities are settled through CCASS. It is proposed to build on investors' and market participants' existing familiarity with this system by extending it to the Exchange EFN Market. It is therefore proposed that the clearing and settlement facility for the Exchange EFN Market will be provided by CCASS in accordance with the current practice of the Equity Market.

All trading of EFN papers will initially be settled on a trade-for-trade basis. Settlement will be effected via CCASS in accordance with the existing rules and procedures. The settlement period will remain at T+2 to allow sufficient time for clients and brokers to complete delivery and payment. CCASS will handle accrued interest for settlement calculation and interest payment. CNS will be provided by CCASS when there is sufficient turnover.

5.2 Transfer between CMU & CCASS

In order to facilitate delivery of EFN between the Professional and the Exchange EFN Markets, there will be a linkage between CMU and CCASS to provide free-of-payment transfers between participants of CMU and CCASS. The linkage is aimed solely at the delivery of the EFN between CMU and CCASS accounts and is not intended for settlement of inter-market trades for which the Exchange does not provide a market.

To fit into the existing processing cycle and to enable completion of transfer at the end of both CCASS and CMU settlement runs, transfers between CCASS and CMU are expected to be required to be submitted before 2:30 p.m. Detailed procedures are being developed and will be available from Hongkong Clearing in due course.

5.3 Scripless System

The Professional EFN Market is completely scripless. It is also not the intention of the HKMA to issue scrip for the Exchange EFN Market. Ownership of the EFN will be recorded in the CMU, of which Hongkong Clearing will be a member. Records in Hongkong Clearing's CCASS stock accounts for its participants (e.g. Exchange Members, custodians, IP, etc.) will account for the EFN in the Exchange EFN Market. Investors must hold their EFN under CMU members or under CCASS participants.


6.1 Tender Applications

In general, existing debt securities listed on the Exchange are not actively traded. The exceptions to this are debt securities which have been widely distributed to investors at launch. It is therefore proposed to provide a mechanism to allow retail investors to participate in the initial issue of the EFN.

In the Professional EFN Market, all Recognised Dealers can participate in the tendering for new EFN issues. Since Hongkong Clearing will become a Recognised Dealer and will have an account with CMU, it is proposed that investors in the Exchange EFN Market will be able to participate through their brokers via CCASS or, for those who are IPs, directly through CCASS. CCASS will collect tender applications from its participants and submit them to the HKMA's CMU for tender processing.

Due to banking practices and to enable CCASS to collect funds from IPs and other CCASS participants, the cut-off date for EFN applications will be two days ahead of the HKMA's tendering date. Investors will however be allowed to cancel their applications one day prior to the tendering date. CCASS will distribute the EFN to its participants after they have been alloted by the HKMA in accordance with the tendering rules and practices adopted by the HKMA. Detailed procedures are being developed and will be available from Hongkong Clearing in due course.

6.2 Tendering and Settlement Fees and Charges

For tender applications, the brokerage rate chargeable for successful applications will be 0.1%, which is equivalent to the minimum brokerage commission rate. This arrangement is the same as the application of shares for new issues. In addition, Hongkong Clearing may charge a nominal fee for the tendering service.


As the EFN are relatively new to retail investors and Members of the Exchange, a series of educational and promotional programmes will be launched jointly by the HKMA and the Exchange prior to the listing and trading of the EFN in the Exchange. The programme will aim at introducing the EFN to investors and brokers as an instrument for long term investment as well as a tool for portfolio management.


The proposed market infrastructure is, in general, in line with the existing debt securities market in the Exchange. A few minor changes in the spread table and minimum brokerage commission rate are proposed to cater for the introduction of the EFN to the Exchange EFN Market. To facilitate investors in obtaining the EFN directly from the HKMA at issuance, tendering facilities will be provided and investors can submit applications to Exchange Members or, in the case of IPs, to CCASS.

In addition, transfer facilities will be provided by Hongkong Clearing for delivery of the EFN between the Professional and Exchange EFN Markets. It is expected that the proposed infrastructure will facilitate the growth of the Hong Kong debt market.


Members of the Exchange and market participants are invited to send their comments to:

Market & Product Development Division

The Stock Exchange of Hong Kong Limited

(Consultation on Exchange Fund Notes)

1/F, One and Two Exchange Square


Hong Kong

Fax No: 2521 7899

Either by fax, mail or simply by dropping it into the special mailbox for the consultation paper at the entrance to the Trading Hall on or before February 12, 1999.

Should you have any queries, please contact Member Services at 2840 3626.


Overview of the Proposed Market Infrastructure:

A Comparison between the Professional and Exchange EFN Markets

Exchange EFN Market

Professional EFN Market

Market Participants
Target InvestorsRetail InvestorsFinancial Institutions
Market IntermediariesMembers of the ExchangeRecognised Dealers and Market Makers of the HKMA
Trading Platform
Trading SystemAMSProprietary Systems
Trading Hours10:00 a.m. - 12:30 p.m. 2:30 p.m. - 4:00 p.m. In general 9:00 a.m. - 5:00 p.m.
Minimum DenominationHK$50,000HK$50,000
Market MakingInitially nilAvailable
Spread Size0.1%Negotiable;
  • Minimum 0.01%
  • Common 0.05%
Transaction Costs
Stamp DutyNilNil
Transaction Levy0.011%Nil
Brokerage CommissionMinimum rate 0.1%; with a minimum charge of HK$500.01% per annum (negotiable)
Trading Practices
ellingNot allowedSolely for Market Makers appointed by HKMA

Exchange EFN Market

Professional EFN Market

Settlement SystemCCASSCMU
Settlement PeriodT+2Negotiable; T+0 in general
Evidence of OwnershipScriplessScripless
Tendering of EFN
Tendering MechanismAvailable through CCASSAvailable through CMU
Related Fees & Charges
  • Commission: 0.1%
  • CCASS fee may apply

Updated 05 Feb 2010