HKEX Implements Severe Weather Trading Operational Arrangements

Background

Historically, whenever Typhoon Signal No. 8 or above was hoisted, or a Black Rainstorm Warning was put in place by the Hong Kong Observatory, or an announcement of "Extreme Conditions" was made by the Hong Kong Government, market participants could expect delayed market opening or suspension of trading, clearing and settlement services. In the summer months, there would often be multiple occasions on which the securities and derivatives markets would be affected by such severe weather (SW) conditions.

On 18 June 2024, Hong Kong Exchanges and Clearing Limited (HKEX) published its conclusions (Consultation Conclusions) to its consultation on the operational model and arrangements to allow Hong Kong's securities and derivatives markets to remain open during SW conditions.

Market feedback

Following a consultation period of 8 weeks, HKEX has decided to adopt all of the proposals with minor modifications to the SW Trading (SWT) implementation model, in response to market feedback.

HKEX received 133 non-duplicate responses from the public, of which approximately 59% were submitted by institutional respondents, and the rest were made by individual respondents. All of the proposals received broad support from a majority of the respondents. Many responses highlighted the importance of introducing arrangements for SWT, which would support Hong Kong in remaining a competitive financial hub and status as an international financial center. Some corporate respondents indicated that the suspension of trading and clearing services during SW conditions under the existing arrangements introduces unnecessary market risks and inconveniences to investors, especially when a SW market closure aligns with an index rebalancing day, a crucial time for fund transactions.

Some respondents raised concerns about personnel safety as maintaining operations during SW conditions may make it necessary for employees to commute in such conditions. Other concerns were raised regarding possible difficulties operating in SW conditions, such as due to disruptions such as power outages or network interruptions. In response, HKEX has clarified some aspects of the operational arrangements and made further recommendations to address concerns over safety and operational difficulties.

Key changes to be adopted

The current SW arrangements in respect of trading, clearing and settlement services and operations will be removed. Operations in both the securities and derivatives markets will continue during SW events - such days will be "SWT Days".

In response to market feedback on personnel safety and operational difficulties, HKEX recommends that fully remote digital operations be adopted during SWT Days to the fullest extent possible. HKEX's recommendations to market participants are summarised in the section "Next steps for market participants" below.

Trading, post-trade and listing arrangements in the securities and derivatives markets

Under the existing arrangements, depending on the time at which the relevant SW signal or announcement is issued by the Hong Kong Observatory or the Hong Kong Government, trading, clearing and settlement in the securities and derivatives markets would either be delayed, terminated following the issue of the signal or announcement, or altogether cancelled for the day. Following the implementation of the SWT operational arrangements, trading, post-trade and listing arrangements in Hong Kong's securities and derivatives markets will be operational during SW events.

The following services will remain open or proceed as usual on SWT Days:

Arrangements for corporate actions on SWT Days

The date for determining eligibility entitlement in the Central Clearing and Settlement System (CCASS) of corporate actions by the Hong Kong Securities Clearing Company Limited (HKSCC) will be the original last registration date, irrespective of whether that day is a SWT Day. While the last registration date announced by listed issuers will be deferred pursuant to Practice Note 8 to the Main Board Listing Rules to provide sufficient time to complete registration, HKSCC will refer to the original last registration date as the date for determining eligibility of corporate actions in CCASS.

The HKEX has provided the following illustrations of arrangements that would be made in respect of corporate actions if the date of the relevant corporate action falls on a SWT Day:

• Cash dividend payment: if via electronic means, to be paid upon receipt of the good funds on the same day; if via paper cheques or other non-electronic means, HKSCC will arrange payment when SW conditions are cancelled.

• Stock dividend / bonus issue distribution: HKSCC will arrange distribution when SW conditions are cancelled.

• Election (dividend with scrip/currency option): deadline for election form return will be postponed and HKSCC will extend the CCASS deadline in accordance with issuers' arrangement.

• Subscription - instruction submission (e.g. rights issue, open offer, preferential offer, takeover offer): deadline for lodging instructions will be postponed and HKSCC will extend the CCASS deadline in accordance with issuers' arrangement.

• Stock consolidation and splitting: to be carried out as scheduled. HKSCC will arrange the conversion in CCASS as scheduled.

• Change of board lot: to be carried out as scheduled. HKSCC will arrange the change in board lot in CCASS as scheduled.

• Voting: proxy forms will be submitted to issuers by HKSCC before the issuer's proxy deadline.

For full details of how the SWT arrangements will impact operational arrangements in the market, please refer to Appendix II of the Consultation Conclusions.

Next steps for market participants

Ensuring personnel safety: In light of the relevant statutory duties of employers to ensure employee safety, market participants and relevant parties are advised to adopt appropriate approaches with reference to the Hong Kong Government's Code of Practice in Times of Adverse Weather and Extreme Conditions.

Discussions with banks and custodians: Participants are advised to start planning and engaging in discussions with their banks and custodians regarding services offered on SWT Days. For instance, market participants may pre-fund their payment obligations to the extent possible. This ensures their capability to meet payment obligations and adhere to prescribed timelines.

Discussions with service providers and information vendors: Market participants are advised to initiate discussions with their service providers and information vendors to ensure uninterrupted service and support during SWT Days.

Ensuring remote access to necessary systems: Participants are advised to leverage remote working capabilities developed during the pandemic to facilitate full front-to-back operations on SWT Days. Regulatory guidelines on operational resilience and remote working should be referenced, with HKEX considering arranging testing sessions to aid in preparation before SWT implementation.

Conducting review of procedures: Market participants and providers of relevant market services should review existing operational and monitoring procedures and implement enhancements where necessary. Examples include using non-physical methods for money transfer, ensuring continuous banking services through communication with banks, and informing clients about potential limitations under SWT for banking services supporting securities trading. HKEX has provided suggestions on preparations to be made for SWT operations, including assessments of what essential services are required, what infrastructure is needed for employees to work remotely to provide such services, and the allocation of staff that would be required.

Steps for Exchange Traded Funds (ETF) managers: ETF managers are encouraged to initiate discussions with relevant stakeholders to optimise arrangements for order execution, basket composition, and trade settlement, ensuring smooth operation of ETF primary markets on SWT Days.

Investing public: The public is advised to adopt electronic trading and money transfers, and assess the appropriateness of any existing transfer limits. In addition, the public is advised to understand the services provided by their service providers on SWT Days, the electronic trading systems provided by brokers and electronic fund transfer services.

Effective date, implementation support and further guidance

SWT will be launched on 23 September 2024.

HKEX will provide assistance to qualified participants for approximately 3 months after implementation. Qualified participants who apply for assistance and meet relevant criteria will be exempt from the additional financial cost and disciplinary action should they fail to fulfil delivery or payment obligations on an SWT Day.

HKEX will also organise an optional testing session for market participants who seek to assess their readiness for SWT.

For market participants regulated by the Securities and Futures Commission (SFC), HKEX notes that the definition of a "business day" in the Securities and Futures Ordinance (SFO) will not be amended for the implementation of SWT. As such, a gale warning day or Black Rainstorm warning day will continue to not be regarded as a business day for the purposes of the SFO. The SFC has issued a circular to intermediaries and a circular to management companies of SFC-authorised investment products listed on the Exchange to provide guidance to regulate on the implementation of SWT.

Conclusion

With the intensification of the effects of climate change and the increasing frequency of extreme weather events, businesses and organisations must develop appropriate measures for operational resilience. In developing the SWT operational arrangements, HKEX has committed itself to carrying out enhancements to market infrastructure, bringing Hong Kong in step with other major markets. The implementation of the hotly anticipated SWT arrangements will allow Hong Kong's securities and derivatives markets to remain fully accessible during SW conditions, bolstering the reliability of Hong Kong's markets and the city's status as a world-class financial center.