Hong Kong Exchanges and Clearing Limited is in an interesting position between East and West, said Charles Li, its CEO during the CEO panel at FIA Boca.
“Our monetary policy is tied up with the Fed, while our economic underlying is tight with China, which has a different monetary policy. We are banking on the idea that China cannot keep its currency closed forever, and then we will be able to provide a platform and products for investors to manage risk and exposure to the two most important currencies -- the renminbi and the dollar.”
He expects that will happen within the next five years.
Describing himself as a peasant learning from the leaders of the world’s financial institutions at the FIA Boca conference, Li said that Hong Kong is not part of the discussion about the futurization of swaps.
“We don’t have any swaps so we don’t have any swaps to really have a future,” he joked before moving into a discussion of the Chinese marketplace which has a strong role for the state.
“From our outside perspective we see a very big transformation and rebalancing of risk between broker dealers and exchanges and CCPs. Broker dealers were very dominant, but it now looks like broker dealers got us into trouble, and now exchanges and CCPs are coming to rescue us. If you look at the market structure and risk managing structures in China, you could argue they are light years ahead.
“The whole reform was premised on the idea that broker dealers are crooks,” added Li, apologizing if this offended anyone, but not disputing the characterization, “and they need to be out of the system.”
China has built a transparent system with 120 million accounts registered directly in the exchange, said Li. The broker dealer just executes the orders. All risk management is centralized, investor money is in the bank and the national center provides margin fund monitoring.
“The power of that market has massively moved to exchanges and CCPs and they are making huge margins; the money sits in reserve.”
Li suggested the government may have made the process too transparent.
“You can argue that when the water is clean there are no fish any more. Fish thrive in muddy water, but when water gets too muddy we get a crisis. How do you get a market with enough mud for people to make a living? If no one is incentivized to make a living, how will broker dealers get innovative enough to create an innovative product?”
Li’s self-description as a peasant didn’t fool CME CEO Phupinder Gill.
“This peasant runs a market with the highest market cap of any exchange on the stage,” he said.