Trading in overseas futures

As financial markets around the world become more connected, trading in foreign investment markets such as futures is becoming much easier for Hong Kong investors. Given that futures trading of each jurisdiction is regulated differently, trading guidelines and investor protection may vary from market to market.

Some Hong Kong brokers provide services to clients for conducting transactions in other jurisdictions. If your futures broker is not an exchange participant of an overseas market, it has to establish relations with an overseas counterparty i.e. local execution broker and place your money with this counterparty in order to execute your trades in the market.

The amount of your money placed with the overseas broker by your Hong Kong broker can be higher than the margin required by the overseas exchange. The reasons behind may be the need for a sufficient buffer in case market fluctuations cause the overseas exchange to suddenly increase the margin requirement.

However, some brokers have placed client money with overseas brokers in amounts which are substantially in excess of the required margin level. This may be due to the fact that a broker may not have properly assessed the appropriate amount of your money that should be placed with overseas brokers and the risks involved.

Regardless of why your futures broker places "too much" money with its overseas counterparty, you should be aware of any risks involved. For instance, the assets that you receive or hold outside of Hong Kong may not be subject to the same level of protection as the assets that you receive or hold in Hong Kong.

In Hong Kong, if you suffer pecuniary losses as a result of defaults of licensed securities or futures intermediaries, you can file a claim to the Investor Compensation Company Limited. An overseas market may be regulated differently, or with less investor protection. Therefore, it would be very difficult, if not impossible, for a local regulator to compel enforcement of the rules of the regulator or the markets in other jurisdictions.

Before letting your futures broker transact for you across the border, you should determine from your broker:

• whether the trades will be executed via its counterparty outside Hong Kong;
• if yes, the name, creditworthiness and reputation etc of the firm; and
• how the amount of your money to be placed with the counterparty will be determined.

If you are still in doubt, think again whether you are still prepared to trade in overseas futures, via the local broker. In any event, watch out for the risks when you trade in overseas market which you are not familiar with.