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

^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

2. 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.
3. 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.
4. 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).
5. 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

Note:

1. Large-Scale Error Trade Notation Price for Outright Options Contracts
   • Outright Stock Index Options and Currency 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 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 month	Underlying spot next month Futures last traded price at or immediately before the time of the option trade
     Other months	Underlying spot next 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 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.

   • 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.

       

   • Outright Options on Futures

     Theoretical price calculated with the following parameters:

     1. Implied Volatility from the latest RPF; and
     2. Underlying Futures price^{note 1}

   Note 1: The underlying Futures prices for respective Options contract months are defined as follows:

   From the trading day after the Last Trading Day of the underlying Futures to the Last Trading Day of Options on Futures

   Option Contract Months	Underlying Futures Prices
   Spot month of Options on Futures	Underlying spot month Futures last traded price at or immediately before the time of the option trade
   Other months of Options on Futures	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

   From the Trading Day after the Last Trading Day of Options on Futures to Trading Day before Last Trading Day of the underlying Futures

   Option Contract Months	Underlying Futures Prices
   Spot month of Options on Futures	Underlying spot Futures price at or immediate before the time of the options trade plus previous day’s rollover spread between the daily settlement price of the Options contract month under evaluation relative to the daily settlement price of the spot month Futures
   Other months of Options on Futures

    

   On Last Trading Day of the underlying Futures

   Option Contract Months	Underlying Futures Prices
   Spot month of Options on Futures	Underlying spot next month Futures last traded price at or immediately before the time of the option trade
   Other months of Options on Futures	Underlying spot next 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

    

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

    

   • Futures Contracts

     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
   • Standard Combination For Combination vs Combination Trades Only

     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.



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

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.

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)