Innovation

Hong Kong Exchange Expected to Announce New Framework

The Hong Kong Exchange is expected to unveil a new framework in the coming weeks. Sources familiar with the matter told Bloomberg that the plan, although still being finalized, could be subject to last-minute changes. This new framework will mark the end of the long-standing practice of halting stock market trading during typhoons and heavy rainstorms.

End of Decades-Old Practice

For decades, Hong Kong has shut down its stock market whenever severe weather, such as typhoons and heavy rainstorms, was expected. This move will bring an end to this decades-old practice, allowing the market to remain open even in the face of severe weather conditions. According to Bloomberg, people familiar with the matter confirmed that the market will no longer shut down during these extreme weather events.

Impact on Hong Kong's $4.2 Trillion Market

The new framework, which could be implemented as soon as September, will ensure that Hong Kong’s $4.2 trillion market (32.8 trillion Hong Kong dollars) continues trading even during typhoons and heavy rainstorms. This change is expected to have a significant impact on market operations, as the exchange typically halts trading when a typhoon signal or a “black rainstorm warning” is issued.

Previous CEO's Statement on Reviewing Protocol

In 2022, Nicolas Aguzin, the previous CEO of Hong Kong Exchanges and Clearing, mentioned to CNBC that the bourse was reviewing its protocol regarding market closures during severe weather. This review appears to have culminated in the proposed changes expected to be announced soon.

Tropical Cyclone Statistics

According to the Hong Kong Observatory, there were 11 tropical cyclones that reached typhoon intensity or above in 2023. This number is lower than the 60-year average of about 15 from 1961 to 2020. These statistics highlight the frequency and intensity of severe weather that the new framework will have to accommodate.

Government's Perspective on the Proposal

A government spokesperson told Bloomberg that the proposal will facilitate continued trading and strengthen Hong Kong’s position as a two-way gateway between international and Mainland markets. It will also consolidate Hong Kong's competitiveness as an international financial center. The spokesperson added that it remains their target to announce relevant implementation details and the timetable by the middle of this year.

Push for Early Implementation

Top government officials are reportedly pushing hard to have the plan in place as early as possible. Sources indicate that a three-month preparation period is considered feasible, suggesting that the exchange could implement the plan in the middle of the typhoon season. This period is critical as it will test the resilience and readiness of the new framework.

Current Protocol for Extreme Weather

Currently, the Hong Kong Exchange cancels the morning session if extreme weather conditions persist beyond 9 a.m. Hong Kong time and before 11 a.m. If these conditions extend beyond 12 p.m., a full day’s trading will be canceled. This protocol has been in place to ensure the safety and stability of market operations during severe weather.

Typhoon Season in the Pacific

The typhoon season in the Pacific usually begins with less severe storms in April and continues until November. The most severe typhoons typically occur in August and September, according to the climatological database World Info. This period is crucial for the implementation of the new framework, as it will coincide with some of the most intense weather conditions.

Strengthening Market Resilience

The new framework aims to strengthen the resilience of the Hong Kong stock market against severe weather disruptions. By maintaining trading operations during typhoons and heavy rainstorms, the market will be better positioned to handle extreme conditions without significant interruptions. This resilience is vital for maintaining investor confidence and ensuring the continuous operation of the financial market.

Enhancing Hong Kong's Financial Competitiveness

The decision to keep the stock market open during severe weather is part of a broader strategy to enhance Hong Kong's financial competitiveness. By aligning its market operations with global standards, Hong Kong aims to attract more international investors and reinforce its status as a leading financial hub. This move is expected to boost market liquidity and provide more opportunities for traders and investors.

Anticipated Benefits for Market Participants

Market participants, including investors, brokers, and financial institutions, are expected to benefit from the continuous trading operations. The elimination of weather-related disruptions will provide a more stable and predictable trading environment. This stability is crucial for making informed investment decisions and managing market risks effectively.

Addressing Potential Challenges

While the new framework offers several benefits, it also presents potential challenges that need to be addressed. Ensuring the safety of market participants during severe weather is a primary concern. The exchange will need to implement robust contingency plans and safety measures to protect traders and staff. Additionally, maintaining effective communication with market participants during extreme weather events will be essential to ensure smooth operations.

Preparations for Implementation

In preparation for the implementation of the new framework, the Hong Kong Exchange is expected to conduct thorough testing and simulations. These preparations will help identify potential issues and ensure that the market infrastructure is ready to handle continuous trading during severe weather. Training programs and informational sessions for market participants may also be conducted to familiarize them with the new protocols.

Monitoring and Evaluation

After the implementation of the new framework, the Hong Kong Exchange will likely monitor and evaluate its effectiveness. Continuous assessment will help identify any areas that need improvement and ensure that the framework remains robust and adaptable to changing weather patterns. Feedback from market participants will be crucial in refining the protocols and enhancing the overall resilience of the market.

Conclusion

The upcoming changes to the Hong Kong Exchange's protocol for severe weather conditions represent a significant shift in market operations. By ending the practice of halting trading during typhoons and heavy rainstorms, Hong Kong aims to strengthen its position as a leading financial center and enhance market resilience. While the new framework offers numerous benefits, careful preparation and ongoing evaluation will be essential to ensure its success. The anticipated announcement in the coming weeks will provide further details on the implementation and timeline of these changes, marking a new chapter in the history of the Hong Kong stock market.