Provisional Legislative Council
Panel on Financial Affairs
Special Meeting, 31 October 1997

Market Situation 22 - 29 October 1997

Market Performance

1. Table 1 (below) shows market performance from 22 to 29 October 1997.

Table 1

Closing as atChange from Previous dayTurnover
29/1010,7651,958811 +1,706

2. There were three days of heavy falls, two of which were followed by a rebound on the following day.

3. On 23 October 1997, the Hang Seng Index dropped 1,211 points (10.4%), closing at 10,426 and the Red Chips and H Shares index dropped by 10%, on a total market turnover of $34 billion. October HSI futures closed at a slight premium (174), in the record turnover of 69,719 contracts. On that day, the Futures Exchange made 3 intra-day margin calls, collecting within one hour of each call, a total of $1.9 billion.

4. The HSI rebounded on the following day by a 6.9% increase, closing at 11,144 points. Red Chips and H shares rebounded by 12.8% and 9.9% respectively, on high total volume of $30 billion. HSI October futures closed at a slight premium (96), on high volume (45,144 contracts).

5. The HSI initial margin was increased to $75,000 per contract on Friday, 24 October 1997.

6. The HSI fell again by 5.8% (to 10,498) on Monday, 27 October 1997 but Red Chips and H Shares fell less (4.5% and 3% respectively), at the moderate volume of $22.5 billion. October futures traded at a discount of 268 points. The Wall Street (Dow Jones Index) drop of 555 points that night, precipitated another drop on 28 October. The Futures Exchange collected another $0.564 billion in intra-day margin.

7. The HSI dropped 13.7% to 9,059 on 28 October 1997, the largest ever one drop. Red Chips fell by 15%, and H Shares by 10.9%. Total volume was $25 billion. October Futures closed at a discount of 350 points. The Futures Exchange collected $1.58 billion in intra-day futures margin. During the night, Wall Street rebounded strongly.

8. The HSI rebounded by 18.8% to 10,870, the largest one-day rise in its history. October futures traded at a premium of 105 points. During the day, the Futures Exchange collected $1.56 billion in intra-day margin.

9. The following three tables show the position of the three most-traded futures contracts for the period 22 to 29 October 1997 :

Table 2

HSI Futures

ClosingTurnoverGross Open Position
Gorss Open Position
22/1011,70011,70051,0366,326 48,10619,39667,502
23/1010,60010,60069,7191,.537 48,38827,12175,509
24/1011,24011,24045,144 9,66238,89729,15968,056
27/1010,23010,23034,6939,792 34,27635,13069,406
28/108,7108,71043,83425,235 27,62944,11771,746
29/1010,87010,96033,546 31,43017,16753,09470,261

Table 3

Red-Chip Index Futures

ClosingTurnoverGross Open Position
Gorss Open Position
22/101,9501,9392,8351,073 8,5132,86711,380
23/101,8001,8002,886698 8,4403,26711,707
24/102,0502,0002,138663 8,1163,55711,673
27/101,9001,8402,327944 7,1634,20211,365
28/101,5821,5302,2191,929 5,4375,83011,267
29/101,9441,9401,6931,912 4,9746,96611,940

Table 4

3-month HIBOR Futures (for all months)
DateTurnoverGross Open PositionClosing price for Dec 97 Contract

Market Operations

10. The trading systems in the exchanges operated perfectly. Neither the Exchanges nor the SFC have received any complaints from the investing public that there was a problem with executing orders.

11. The clearing systems associated with the Stock and Futures Exchanges operated efficiently and effectively. All margins and intra-day marks were duly collected. Tables 5 and 6 show the position on a day-to-day basis.

Table 5

HSI FuturesRed-Chip Index FuturesHIBOR Futures
of Calls
$HK Million
of Calls
HK$ Million
of Calls Amounts
22/101364 --12
23/103 1,9002196243

Table 6
DateAmounts HK$ Million
27/10 41

12. There were no defaults in any of the Clearing Houses.

Co-operation between SFC, Exchanges and Clearing Houses

13. Throughout this period, the SFC closely monitored the trading activities of Exchange Members. Relying partly on Exchange and Clearing House analysis and partly on its own analysis, the SFC undertook continuing risk assessment to determine which members may face stresses in liquidity or difficulty in satisfying the operating capital requirements of the Financial Resource Rules. 14 visits have been made since 20 October.

14. In addition, numerous telephone calls have been made between the SFC and the Exchanges to members asking about their current financial circumstances and, in particular, about liquidity and capacity to satisfy capital requirements.

15. SFC monitoring of trading activity is designed to protect investors, ensure the maintenance of a fair and orderly market and reduce systemic risk (whether through the failure of a market participant or market systems).

16. SFC was frequently in contact with the staff of the local Exchanges and Clearing Corporations. Matters discussed included :

    - Exchange observations on actual trading patterns and expectations of likely trading patterns;

    - Exchange intra-day margin calls (HKFE) or intraday marks (HKSCC) and the monitoring of member capacity to meet those requirements;

    - Exchange tress testing�to determine which members had large financial commitments in the event of significant market movements (this risk assessment helped to target the inquiries discussed below);

    - The satisfaction of direct debit instructions given by members to meet settlement obligations; and

    - The results of inquiries made and inspections carried out by the Exchanges and by the SFC where there was a need to check on the capacity of members to meet anticipated financial commitments.

17. In a practical sense, the SFC also served as a co-ordinator of information flows between Exchanges, Clearing Corporations and the SFC. Throughout this period, the SFC was able to satisfy itself that the trading and risk management systems of Exchanges and Clearing Houses operated effectively and efficiently.

International Co-operation

18. The events on the Hong Kong Exchanges were linked to trading patterns in other financial centres.

19. Many of the members of the Hong Kong Exchanges, including all the largest members, are members of other Exchanges.

20. We therefore remained in touch with our overseas regulatory counterparts, particularly those in the United States and the United Kingdom. We were in frequent contact with our counterparts sharing information at both Chairmen and operating level.


21. The events of the last week has proved that the reforms and systems built since 1987 have weathered the test that they were designed to withstand. The trading, clearing and settlement and risk managements in place have enabled the markets to operate smoothly and efficiently, providing continuous liquidity to both domestic and international investors.

Securities and Futures Commission
30 October 1997

Last Updated on 5 November 1997