Leveraging Technology and Hong Kong’s Unique Position to Manage Risk

Hong Kong markets have continued to operate resiliently, due in large part to the emphasis HKEX places on risk management, says Group Risk Officer John Killian.

In the past 20 years Hong Kong Exchanges and Clearing Limited (HKEX) has built a reputation as one of the world’s most stable and resilient financial market operators.

Strong risk management capabilities have been central to building that reputation, and whilst some of that success can be attributed to the unique structural characteristics of the market itself, HKEX has become innovative and nimble in adapting to the changing face of risk.

Managing risk at a time of change

This month is the 20th anniversary of our own stock market listing, and it comes in a year of remarkable disruption and change around the globe. Geopolitical uncertainties and a world-wide pandemic have created unprecedented challenges.

However, HKEX’s markets throughout have continued to operate with resiliency. Our trading, clearing and risk management systems have remained fully functional amid heightened volumes and volatility, offering efficiency, reliability, and transparency to the market.

Market safety mechanisms, such as our intraday volatility control mechanism or trading halt arrangements for after-hour options trading, have also functioned as expected. This in large part is due to the central role that risk analysis and management plays in the way we operate systemic market infrastructure.

We believe well-functioning capital markets are fundamental to ensuring global economic stability. With their price discovery capabilities, they play a critical role in facilitating the free flow of capital, in facilitating not only growth, but resiliency too, and they will be crucial to getting the global economy back on its feet in 2020. Our markets will provide the framework for the recovery of growth.

HKEX’s focus on sound risk management is due in no small part to Hong Kong’s foundational structures, its geography and the unique role it plays in global capital markets. Our position as a connector between the East and the West, our deep, liquid, and diversified international markets, our robust and transparent regulatory, legal and tax system backed by the rule of law, have underpinned our rigorous approach to risk.

In turn, risk management has played a central role in shaping and supporting the international trust in Hong Kong as an international financial centre. This mutually symbiotic relationship built around risk and trust will continue to shape and drive Hong Kong’s future.

Identifying risks of the future

Like many other business and organisations, two of the greatest sources of risk for HKEX as an exchange operator, regulator and corporation, are geopolitical uncertainties and cyber-crime.

Hong Kong’s very identity and role as an international financial centre has been built upon the vital geopolitical role that it has played as connector between Mainland China and the rest of the world. This was Hong Kong’s strength as a shipping port and centre for trade over the last century, and today, it is HKEX’s drawing card as the global markets leader in the Asian time zone.

The bridge, connections and translation we offer between Mainland China and international financial markets are needed more than ever, but this role also comes with a heightened awareness of both risk and opportunity.

At the same time, as capital markets have become increasingly digitalised and technology-driven, the risk of cyber-crime has become an increasing focus for us, and many of our peers. As an exchange operator, our role is to provide fully functioning capital markets with maximum up-time, creating systemic reliability and assurance for all our stakeholders.

To that end, innovation must never come at the cost of resilience, and we have built robust systems that help us predict, detect and defend against cyber-attacks. We are committed to continuously enhancing our defences in this field.

Innovation and collaboration

At HKEX, we believe that collaboration with regulators, market participants and all of our stakeholders is one of the keys to managing operational risks. We are also increasingly bringing innovation and technology to bear in helping us assess, calculate, control and mitigate financial, operational and market risks.

The HKEX Innovation Lab is the starting point for many of the technology solutions that ensure we maintain market robustness and resiliency through volatility, and that we remain competitive as a global market place.

Many of our innovation projects begin as a search to find better ways to manage risk throughout the trading, settlement and clearing cycle. For example, the Innovation Lab is developing a new blockchain-powered post-trade allocation and processing platform for the Northbound Stock Connect programme to help investors deal with the very short settlement window that is unique to Chinese equity exchanges.

Financial risk management has traditionally looked at past events in order to predict the future. Technology, and greater data processing power, enable better visibility of the present moment. We have implemented a number of AI applications that sift through vast amounts of data to recognise future counter-party risks and unusual market events.

HKEX is also always looking for ways to better leverage and to reinforce our close technological relationship with Mainland China. China is already leading the way in digitalising its capital market activities. As the international connection to Mainland China markets and capital, HKEX is well placed to continue innovating risk management technologies.

Building for the future

Risk management is a necessary, nuts-and-bolts part of our business, but at HKEX we are finding ways to turn it into a competitive advantage. The better we are at managing risk, the more comfortable investors and market participants are trading on our platforms, and the lower their costs of trading become.

The relationship between risk and trust is paramount. It is part of our DNA.

John Killian is Chief Risk Officer at HKEX. He has previously served in senior roles at several major financial institutions, including Goldman Sachs, Deutsche Bank and Banco Santander.

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