Hong Kong Exchanges and Clearing Limited (HKEX) will implement the first phase enhancements of the Volatility Control Mechanism (VCM) on 11 May this year, the Exchange announced today.

HKEX’s VCM was first introduced to the securities market in August 2016 and is designed to prevent extreme price volatility among individual stocks.

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HKEX proposed the VCM enhancements in a consultation paper in 2019. This followed guidance issued by the International Organisation of Securities Commissions asking regulated markets to review and adjust their volatility controls to ensure that they stay relevant with respect to the latest market developments.

“The enhancement will further strengthen our stock-level safeguards during extreme price volatility, and reflect changes in international practice and regulatory guidance,” HKEX’s Head of Markets Wilfred Yiu says.

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HKEX proceeded with implementation of the first phase of VCM enhancements after concluding that there was substantial market support for its proposal based on the consultation feedback.

Expansion of VCM stock coverage

The first phase of VCM enhancements includes the expansion of VCM stock coverage from constituent stocks of the Hang Seng Index and Hang Seng China Enterprises Index (total number of stocks at 781) to constituent stocks of Hang Seng Composite LargeCap, MidCap and SmallCap Indexes (total of nearly 5002 stocks).

Additionally, it includes the application of a tiered structure of triggering thresholds at ±10 per cent, ±15 per cent, and ±20 per cent to the last traded price five minutes ago respectively for the constituent stocks of the three Hang Seng Composite Indexes.

Six months after the implementation of the first phase enhancements, HKEX will conduct a review on market operations before implementing the second phase enhancement, which will allow multiple triggers per stock per trading session.

HKEX has also rolled out a set of market education materials, which include educational videos and infographics on VCM enhancements. Further details of the VCM can be found on the HKEX website.