HKEX Defers Rollout of Anti-Volatility Mechanism to Later Date

The HKEX’s 'circuit breaker' will prevent price volatility arising from major trading errors and other unusual incidents.

Hong Kong Exchanges and Clearing Limited (HKEX) today announced it will not put into place its Volatility Control Mechanism (VCM) – a measure designed to cool the market when there are abrupt price changes on some derivatives – which was scheduled to launch for Monday’s session.

HKEX deferred the rollout to a date to be determined later after fixing a technical bug related to certain Exchange Participants (EPs) that did not occur in the previous system tests.

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HKEX had originally proposed its VCM in a past consultation paper after the G20 and the International Organization of Securities Commissions collectively issued guidance on the release and presence of more control mechanisms across trading venues.

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The fine-tuned features of HKEX’s ‘circuit breaker’ will prevent price volatility arising from major trading errors and other unusual incidents such as a flash crash or algorithm errors.

The move will bring Hong Kong more closely in line with other major and regional markets that have implemented some form of VCM. But HKEX’s VCM is not expected to be triggered often, nor is it the sort of market-wide circuit breaker, since the mechanism stipulates a maximum of one trigger per instrument in the morning and afternoon trading sessions within a day.

Instead, if the price deviates more than a predefined percentage within a specific time frame, it will trigger a cooling-off period for five minutes to allow market participants to reassess their strategies.

Commenting on the decision, the exchange said in a statement: “After careful consideration, HKEX decided that it will be prudent to conduct more tests to resolve the specific issue and defer the implementation of VCM in the derivatives market. The decision will not have any impact on the market’s operations. HKEX has informed the Securities and Futures Commission of its decision.”

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