TRADING CLEARING AND SETTLEMENT OPTIONS MEMBERS. Stock options market. Fact Book

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1 TRADING The Exchange s traded stock options market offers trading of options on individual stocks. As of the end of 1999, there were 17 stocks on which options are traded. All of the stocks are of high market capitalisation. The number of stocks on which options are traded can be increased by the Exchange according to the market demand. Trading in stock options is off-floor. It takes place via an electronic, screen-based auto-matching system known as (Traded OPtions System TOPS). TOPS is a separate system from the Automatic Order Matching and Execution System (AMS) used for trading in the cash market. TOPS is an integrated trading and clearing system where users can access both trading and clearing functions from the same TOPS computer terminal installed in Exchange members offices. TOPS trading system is a hybrid system, which is order-driven and also responds to quote requests. Orders entered into TOPS are matched automatically based on price and time priority. In order to promote liquidity, the Exchange also operates a market maker mechanism for the stock options market. Upon request, the market makers are obliged to offer two-way quotes for the option series for a minimum quantity within a limited period of time and not to exceed the maximum price spreads. The Exchange charges a trading tariff of HK$1 or HK$5 per option contract, depending on the board lot size of the underlying stocks. Market makers receive discounts on the tariff, depending on their performance in responding to quote requests. No stamp duty is payable on traded options while transaction levy is exempted for the time being, but both charges apply to stock transactions arising from the exercise and assignment of options. Market makers are exempted from ad valorem stamp duty of 0.125% on stock sales and purchases, the purpose of which is to hedge options transactions; instead they pay stamp duty at a flat rate of HK$5 per transaction. CLEARING AND SETTLEMENT All option contracts traded on the Exchange are cleared through a central clearing house The SEHK Options Clearing House Ltd (SEOCH), a wholly owned subsidiary of the Exchange. SEOCH ensures premium settlement and contract performance. By novation, SEOCH acts as a counterparty to its members in relation to each option contract traded on the Exchange and manages counterparty risk by margining members daily and other risk management measures. Stock transactions as a result of exercise and assignment are settled under the Continuous Net Settlement in CCASS. SEOCH maintains a Reserve Fund to support its obligations as counterparty in case of a defaulting member s failure to meet its obligations. The financial resources available to support the Reserve Fund include contributions from members and insurance coverage. OPTIONS MEMBERS Options Members are either Options Trading Members ( OTMs ) or Options Broker Members ( OBMs ). OTMs have direct access to TOPS. OBMs do not have direct access to TOPS, they have to set up omnibus accounts with OTMs who are also SEOCH Members for recording of his or his clients options transactions. The OBM must execute his or his clients options trades via an OTM. Fact Book

2 Options Trading Members Listed below are the major requirements for the registration with the Exchange as an OTM: (1) be a Corporate Member of the Exchange; (2) be a participant of Central Clearing and Settlement System ( CCASS ); (3) have a clearing arrangement for options trades, either as a member of SEOCH or by way of a clearing agreement with a General Clearing Member; (4) have at least one Options Trading Officer and one Options Trading Representative, or two Options Trading Officers, or as the Exchange Council may approve, only one Options Trading Officer, provided that all other requirements are complied with; (5) have installed at least one computer terminal that is linked to TOPS and ensure that such equipment is operated and maintained in accordance with the requirements of the Exchange; (6) have installed, or have access to, a computerized back office administration system which is capable of handling the processing associated with options risk management and settlement. Options Broker Members An OBM may offer options broking services for their clients by setting up an omnibus account with an OTM who is a SEOCH Member. If an OBM defaults on any of its obligations to its clients, the client s only recourse is to the OBM itself; there is no relationship between the OTM who carries account for the OBM and the clients of the OBM. Listed below are the major requirements for the registration as an OBM with the Exchange: (1) be a CCASS participant; (2) have at least one Options Broker Officer and one Options Broker Representative, or two Options Broker Officers; (3) have in place exclusively with one OTM, who is a Direct Clearing Member or a General Clearing Member of SEOCH, an Options Broking Agreement; (4) inform the OTM of the Long-Only Restriction, if any; (5) ensure that he will be able to satisfy any resulting delivery obligation before writing or exercise of an option; (6) have in place, to the satisfaction of the Exchange, staff, computer equipment and internal operating and security procedures necessary to enable him always to have access to updated options price information, for processing instructions from his clients, and providing professional services to his clients; (7) be able to carry out a random assignment process for options exercise to the satisfaction of the Exchange, except where he is subject to the Long-Only Restriction. 2 Fact Book 1999

3 OPTIONS MARKET MAKERS An OTM who satisfies the specific requirements of financial standing, trading record, personnel, computer equipment and internal control procedures may apply to the Exchange to become a Market Maker for specific options classes. Market Makers are obliged to provide two-way quotes for particular series for most of the time when requested. There is more than one Market Maker in each option class for the purpose of improving price competitiveness. Market Makers have no trading priority. Their orders are matched in the same manner as the orders of other OTMs. Their quotes are firm and behave as limit orders in the market, and will match with other orders in the same price and time priority manner. List of options market makers as at 31 December 1999 Market maker Responsible option classes BNP Securities (Hong Kong) Ltd. All 17 Goldman Sachs (Asia) Securities Ltd. All 17 Macquarie Equities (Asia) Ltd. All 17 MPI Securities (Asia) Ltd. All 17 SG Securities (HK) Ltd. Cheung Kong Holdings, HSBC Holdings, Hutchison Whompoa, Cable & Wireless HKT Timber Hill Securities Hong Kong Ltd. All 17 SEOCH MEMBERS Only OTMs are eligible to become members of SEOCH. There are three categories of SEOCH Membership: (1) A Self Clearing Member (SCM) is entitled to clear options contracts of his own house account only; (2) A Direct Clearing Member (DCM) is entitled to clear options contracts of his clients, and his own house account; (3) A General Clearing Member (GCM) is entitled to clear options contracts of his clients, his own house account and on behalf of other OTMs who are Non-Clearing Members. A Non-Clearing Member (NCM) is an Options Trading Member who is not a SEOCH Member but has entered into a clearing agreement with a GCM of SEOCH with whom his options trades are cleared. Each SEOCH Member must have a suitably experienced staff member responsible for settlement and risk management matters, nominated as Options Clearing Officer who has passed the Exchange s Options Officer and Representative Examination and the Options Clearing Officer Examination. Each SEOCH Member must have in place procedures and a back office computer system appropriate to the type of SEOCH Membership applied for. The member has to maintain minimum liquid capital level and make a contribution to the Reserve Fund as required by the type of membership. Fact Book

4 OPTIONS OFFICERS AND REPRESENTATIVES All personnel involved in the handling of clients in the stock options business are required to possess specific qualifications. Options Officers Options Officers are either Options Trading Officers or Options Broking Officers. An Options Trading Officer or an Options Broker Officer is a Dealing Director, who has passed the Options Officer and Representative Examination and is nominated by an Options Member and registered with the Exchange as such. He is responsible for all the activities of the Member s stock options business. Options Representatives Options Representatives are either Options Trading Representatives or Options Broking Representatives. An Options Trading Representative or an Options Broker Representative is an Authorized Clerk, a Sales Representative, or a Dealing Director, who has passed the Options Officer and Representative Examination and is nominated as such. He is authorized to provide customer services in relation to stock options business by an Options Member and registered as such with the Exchange. Options Clearing Officers An Options Clearing Officer is a staff of an SEOCH Member, who has passed the Options Officer and Representative Examination and Options Clearing Officer Examination, and has at least two years experience in the financial services industry and is nominated as such. He is responsible for clearing matters in relation to stock options business of an Options Member. 4 Fact Book 1999

5 CONTRACT SPECIFICATIONS FOR STOCK OPTIONS Option type Contract size Expiry months Tick size Expiry Exercise style Settlement style Puts and calls One board lot of the underlying shares The nearest three months and the following two quarterly expiry months HK$0.01 Business day immediately preceding the last business day of the contract month American. Permitted to buy and exercise on the same day Physical delivery of underlying shares Strike price (HK$) Intervals (HK$) up to $2 $0.10 $2 to $5 $0.20 $5 to $10 $0.50 $10 to $20 $1.00 $20 to $50 $2.00 $50 to $200 $5.00 $200 to $300 $10.00 $300 to $500 $20.00 Settlement period T+0 (option premium, payable in full) T+2 (stock transfer following exercise) Fact Book

6 Stock options classes as at the end of 1999 Class Code Launch date Lot size (shares) Cable & Wireless HKT Ltd HKT 23/10/ Cheung Kong (Holdings) Ltd CKH 25/09/ China Resources Enterprise, Ltd CRL 14/07/ China Telecom (Hong Kong) Ltd CHT 15/05/ CITIC Pacific Ltd CIP 23/10/ CLP Holdings Ltd CLP 18/12/ Hang Seng Bank Ltd HAB 09/12/ Henderson Land Development Co Ltd HLD 18/12/ Hongkong Electric Holdings Ltd HKE 16/02/ Hopewell Holdings Ltd HHL 26/02/ HSBC Holdings plc HKB 08/09/ Hutchison Whampoa Ltd HWL 18/12/ New World Development Co Ltd NWD 05/08/ Shanghai Industrial Holdings Ltd SIH 14/07/ Sun Hung Kai Properties Ltd SHK 18/12/ Swire Pacific Ltd A SPA 09/10/ Wharf (Holdings) Ltd WHL 05/08/ Monthly stock options contract volume, 1999 Contracts 350, , , , , , , , , , , , , , , ,000 92, ,122 50,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Call Put Month-end stock options open interest, 1999 Contracts 250, , , , , , , , , , , , ,000 91, ,789 96,254 50,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Call Put 6 Fact Book 1999

7 Options contract value, volume and open interest, Contract value (HK$mil) Contract volume (contracts) Open interest (contracts) No. of Year/ trading Average Average Month days Call Put Total daily Call Put Total daily Call Put Total 1995 * , , ,946 4,769 30,504 14,074 44, , , , ,740 1,269,912 5,100 23,945 27,036 50, , , , , ,641 1,648,748 6, , , , , , , , ,645 1,637,447 6,629 26,771 35,309 62, , , , ,163,716 1,034,256 2,197,972 8, ,040 90, , Jan ,409 47,302 92,711 4,636 39,865 51,695 91,560 Feb ,322 66, ,122 6,125 45,156 61, ,789 Mar ,308 78, ,872 6,516 45,288 50,966 96,254 Apr ,056 73, ,205 8,906 73,020 73, ,195 May ,191 72, ,152 7,864 67,732 81, ,957 Jun ,053 80, ,365 9,160 78,008 83, ,455 Jul ,857 99, ,227 8,963 78, , ,376 Aug , , ,550 8,934 94,914 89, ,365 Sep , , ,116 10,148 76,670 88, ,094 Oct ,338 97, ,592 10, ,130 87, ,155 Nov , , ,144 13, , , ,467 Dec ,194 96, ,916 10, ,040 90, ,210 Note : Figures may not add up to total due to rounding. (*) Trading of stock options was launched on 8 September Options contract value, volume and open interest by class, 1999 Contract value (HK$mil) Contract volume (contracts) Year-end open interest (contracts) % of % of % of Class Call Put Total total Call Put Total total Call Put Total total Cheung Kong ,924 47, , ,385 4,650 8, China Resources ,234 38,045 77, ,703 4,770 13, China Telecom ,718 25,092 59, ,018 2,654 5, CITIC Pacific ,102 33,592 68, ,484 5,319 13, CLP Holdings ,130 50, , ,954 5,355 11, CWHKT , , , ,787 13,886 29, Hang Seng Bank , , , ,965 8,990 23, Henderson Land ,895 28,792 62, ,562 1,197 3, HK Electric ,401 47,162 83, ,433 3,559 7, Hopewell Holdings ,431 6,061 10, ,120 1, HSBC Holdings 1, , , , , ,832 8,112 19, Hutchison Whampoa ,868 71, , ,536 5,539 10, New World Development ,464 44, , ,218 4,257 15, Shanghai Industrial ,280 50, , ,774 6,205 10, SHK Properties ,127 36,037 81, ,640 4,325 7, Swire Pacific A ,736 39,408 79, ,111 3,619 5, Wharf (Holdings) ,843 53, , ,249 6,613 19, Total 3, , , ,163,716 1,034,256 2,197, ,040 90, , Note: Figures may not add up to total due to rounding. Fact Book