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Large-Scale Error Trade Handling Procedures

Large-Scale Error Trade (“LET”) Handling Procedures aims to enhance the Exchange’s ability to handle LET in a timely manner. Under the new LET procedures, the Exchange will consider factors, such as the number of trades, counterparties, and contract series involved, to determine whether the claim should be handled as a LET claim. A model for quicker Notation/Reference Price determination by theoretical prices on outright options contracts will be used to facilitate the identification of related error trades and affected counterparties. With the adoption of the LET procedures, it will provide a higher certainty and transparency to the market in the event of a LET. 

The existing Error Trade procedures will continue to be applicable for Error Trades that are not large-scale in nature unless the criteria, as prescribed by the Exchange and notified to Exchange Participants from time to time are met. 

Note: Effective on 7th December 2020, the Exchange will supplement the existing set of Error Trade Handling Procedures with a new set of Large-Scale Error Trade Handling Procedures.


CRITERIA FOR LARGE-SCALE ERROR TRADES

Large-Scale Error Trades claims must satisfy the criteria set forth below:

  1. The number of trades involved ≥ 100
  2. The number of contract series involved ≥ 15
  3. The number of counterparties involved ≥ 5

Note:

  • The Exchange will take into account all relevant factors including but not limited to the above criteria to determine, in its absolute discretion, if a claim should be handled as a Large-Scale Error Trade claim or not.
  • Generally, the Exchange may apply the following approach in determining whether a case will be handled in accordance with the Large-Scale Error Trade Rules:
  1. where all three criteria are met or where the number of involved trades is 500, the Large-Scale Error Trade Rules will typically apply;
  2. where only one or two criteria is/are met, the case will be handled on a case by case basis and the Exchange’s decision will be announced as soon as practicable; and
  3. where none of the criteria is met, the Exchange will not normally apply the Large-Scale Error Trade Rules unless it determines otherwise in its absolute discretion based on the relevant factors in a particular case.

Handling procedures

Such claims shall be processed only in accordance with the following procedures:

  1. The claim must be made within a prescribed time limit after execution of the trade:

    Category
    Prescribed time limit
    Futures and Options (except Stock Options)
    10 minutes
    Stock Options
    30 minutes
    Tailor-Made Combination Trade^ 30 minutes
  2. ^Tailor-Made Combination Trade is a self-defined futures and options strategy through a single order. For further details, please refer to the Tailor-Made Combination page on HKEX website

  3. After receiving a claim, HKEX will immediately broadcast an alert on the derivatives market's trading system about the claim and the possible cancellation of the trade.
  4. The Exchange will consider relevant factors to determine whether such claim should be handled as a Large-Scale Error Trade Claim. For details, please refer to the section Criteria for Large-Scale Error Trades.
  5. All trades which took place on HKATS at a level which deviated from the LET Price Parameters and within such time period as may be determined by the Exchange shall be cancelled (whether the trades have been claimed as Error Trades by an Exchange Participant or not).
  6. Exchange Participants are required to pay a fee of $3,000 per trade.

For details, please refer to HKFE Rules 819BA and 819BB under Rules of the Futures Exchange for Futures & Index Options, Options Trading Rule 540A, 540B, 541 under Options Trading Rules of the Stock Exchange and Operation Trading Procedures 3.5 under Operational Trading Procedures for Options Trading Exchange Participants of the Stock Exchange for Stock Options.

Large-Scale Error Trade Price Parameters

Futures & Index Options

Contract From Notation Price
Stock Index Futures

- Short-dated Futures

- Long-dated Futures

 
6%

12%

Dividend Futures
30%
HSI Volatility Index Futures
40%
Stock Futures
10%
CES China 120 Index Futures 6% 
MSCI Index Futures
6%
USD & CNH London Aluminium Mini Futures
6%
USD & CNH London Zinc Mini Futures
6%
USD & CNH London Copper Mini Futures
6%
USD & CNH London Nickel Mini Futures
6%
USD & CNH London Tin Mini Futures
6%
USD & CNH London Lead Mini Futures
6%
USD & CNH Gold Futures
6%
USD & CNH Silver Futures 6% 
Iron Ore Futures  8%
HIBOR Futures
50 basis points
Stock Index Options
 
Short-dated Options (including Weekly Options)
i)    if notation price ≥ 300 index points
ii)   if notation price < 300 index points

Long-dated Options
i)    if notation price ≥ 300 index points
ii)   if notation price < 300 index points

 
 
 
20%
60 index points

 

40%
120 index points
BRICS Futures  10%
Currency Futures  2%
Currency Options

i)    if Notation Price ≥ 0.4000
ii)   if Notation Price < 0.4000

 
 
20%
0.0800

 

Note:

  1. Large-Scale Error Trade Notation Price for Outright Options Contracts
    1. Outright Stock Index Options and Currency Options

    2. The theoretical price model will use the following parameters:
      1. Implied Volatility (IV) from the latest Risk Parameter Files (RPF); and
      2. Underlying Futures price at or immediately before the time of the option trade

      Notwithstanding the foregoing, the Exchange shall have absolute discretion in determining the parameters.

      The Underlying Futures Prices for respective option contract months are defined as follow:

      On Normal Trading Days

      Option Contract Months
      Underlying Futures Prices
      Spot month
      Underlying spot month Futures last traded price at or immediately before the time of the option trade
      Other months
      Underlying spot month Futures last traded price at or immediately before the time of the option trade plus previous day’s rollover spread between the daily settlement price of the contract month under evaluation and the daily settlement price of the spot month

       

      On Last Trading Days

      Option Contract Months
      Underlying Futures Prices
      Spot month
      Underlying spot month Futures last traded price at or immediately before the time of the option trade
      Spot next months
      Underlying spot next month Futures last traded price at or immediately before the time of the option trade
       Other months Underlying spot next Futures last traded price at or immediately before the time of the option trade plus previous day’s rollover spread between the daily settlement price of the contract month under evaluation and the daily settlement price of the spot next month 

      When the Underlying Futures price is not available. The Exchange shall under such circumstance obtain the Underlying Futures price from the latest RPF.

      The Notation Price determined by the theoretical price model shall be binding on the parties to these trades and the parties to these trades shall not be entitled to object to the theoretical price model or appeal against the Exchange’s decision for any reason.

    3. Outright Weekly Index Options

      The theoretical price model will use the following parameters:
      1. Implied Volatility (IV) from the latest Risk Parameter Files (RPF); and
      2. Underlying Futures price at or immediately before the time of the option trade

      Notwithstanding the foregoing, the Exchange shall have absolute discretion in determining the parameters.

      The Underlying Futures price for a weekly option contract is the last traded price of the spot month monthly Futures contract of the same underlying at or immediately before the time of the option trade.  Except that on the last trading day of a Monthly Futures, the underlying Futures price for a weekly option contract is the last traded price of the spot next month Monthly Futures of the same underlying at or immediately before the time of the option trade.

      When the Underlying Futures price is not available. The Exchange shall obtain the Underlying Futures price from the latest RPF.

      The Notation Price determined by the theoretical price model shall be binding on the parties to these trades and the parties to these trades shall not be entitled to object to the theoretical price model or appeal against the Exchange’s decision for any reason.


  2. Large-Scale Error Trade Notation Price for Futures and Other Contracts

    1. Futures Contracts

    2. The Notation Price of Futures Contracts shall be determined by the following sequence:
      1. last traded price immediately prior to the Large-Scale Error Trade; or
      2. the Underlying Futures price from the latest RPF
    3. Standard Combination For Combination vs Combination Trades Only

    4. The traded price of the Standard Combination trade is such that it exceeds whichever is the greater of:
      1. 60 ticks from the Notation Price of the Standard Combination trade concerned; or
      2. 20 percent from the Notation Price of the Standard Combination trade concerned.
      For the purpose of determining a Notation Price:
      1. The Exchange shall base on the last traded price of the Combination vs. Combination trades prior to the Large-Scale Error Trade occurring that trading day in that Standard Combination trades; or
      2. The Exchange shall obtain the Notation Price of each individual leg consisted of the Standard Combination trades from the latest RPF for the respective HKFE product, then the Exchange shall calculate the fair price of the Standard Combination trades concerned.
      Notwithstanding the above, the Exchange shall have absolute discretion in determining the Notation Price.

       

Stock Options

  1. The difference between the trade price and Reference Price is such that it exceeds 6% of the nominal price of the underlying security at the time the trade occurred; or
  2. The difference between the trade price and the Reference Price is such that it exceeds 4 times the maximum spread permitted under Market Maker Obligations and the difference represents at least 60% of the Reference Price.

  3. Note:

    Large-Scale Error Trade Notation Price for Outright Options Contracts

    The theoretical price model will use the following parameters:
    1. Implied Volatility (IV) from the latest Risk Parameter Files (RPF); and
    2. Underlying Stock Traded Price at or immediately before the time of the option trade; and
    3. Interest Rate from the latest RPF; and
    4. Dividend Date and Dividend available in HKATS

    Notwithstanding the foregoing, the Exchange shall have absolute discretion in determining the parameters.

    The Reference Price determined by the theoretical price model shall be binding on the parties to these trades and the parties to these trades shall not be entitled to object to the theoretical price model or appeal against the Exchange’s decision for any reason.



Tailor-Made Combination

The trade price of the Tailor-Made Combination trade is such that it exceeds whichever is the greater of:
  1. 60 ticks from the Notation/Reference Price of the Tailor-Made Combination trade concerned; or
  2. 20 percent from the Notation/Reference Price of the Tailor-Made Combination trade concerned.
For the purpose of determining a Notation/Reference Price:
  1. The Exchange shall base on the last traded price prior to the Large-Scale Error Trade occurring that trading day in that Tailor-Made Combination; or
  2. The Exchange shall obtain the Notation/Reference Price of each individual leg consisted of the Tailor-Made Combination trades from the latest RPF for the respective HKFE product or Stock Options, then the Exchange shall calculate the fair price of the Tailor-Made Combination trades concerned.

**Notation Price refers to Futures & Index Options while Reference Price refers to Stock Options.

Notwithstanding the foregoing, the Exchange shall have absolute discretion in determining the Notation/Reference Price.

 

Broadcast Channel for LET Cancelled Trade Details


Daily Risk Parameter Files (RPF)

To download RPF specifications and RPFs, please visit HKEX website at the URL

https://www.hkex.com.hk/eng/market/rm/rm_dcrm/riskdata/rpf/riskdata.asp

 

Frequently Asked Questions (FAQ)

Frequently Asked Questions

 

Large-Scale Error Trade Briefing Session (December 2020)

Large-Scale Error Trade Briefing Session Materials (December 2020)

Updated 12 Dec 2020