Hong Kong Exchanges and Clearing : HKEX 2016 Third Quarter Results

Pursuant to Chapter 38 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, the Securities and Futures Commission regulates Hong Kong Exchanges and Clearing Limited in relation to the listing of its shares on The Stock Exchange of Hong Kong Limited. The Securities and Futures Commission takes no responsibility for the contents of this announcement, makes no representation as to its accuracy or completeness, and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

(Incorporated in Hong Kong with limited liability)

(Stock Code: 388)

(Financial figures in this announcement are expressed in Hong Kong dollar unless otherwise stated)

The Board1 is pleased to present the unaudited consolidated results of the Group2 for the nine months ended 30 September 2016.

• Revenue and overall financial performance remained steady in Q3 2016, compared to the prior quarter, with some pick- up in volumes during September.

• Revenue and other income for YTD Q3 2016 was 20 per cent lower than the prior period. However, after excluding exceptional gains of $514 million in YTD Q3 2015, revenue and other income decreased by 16 per cent. The significant drivers of Group revenue during the period were:

  • Subdued activity on the Cash Market in Hong Kong and Commodities trading on the LME.

  • Increased trading of derivatives contracts on the Futures Exchange.

• Operating expenses increased by 2 per cent against YTD Q3 2015. After eliminating a one-off recovery of $77 million from the liquidators of Lehman Brothers Securities Asia Limited in YTD Q3 2015, underlying operating expenses have reduced by 1 per cent compared to the prior period.

• Profit attributable to shareholders decreased by 30 per cent against YTD Q3 2015, where exceptionally high trading income delivered record high profits for the Group, or by 23 per cent after adjusting for the one off items referred to above. Notwithstanding difficult trading conditions, the YTD Q3 2016 profit attributable to shareholders compares well with pre 2015 results and was 24 per cent higher than the equivalent period in 2014.

1. The board of directors of Hong Kong Exchanges and Clearing Limited (HKEX or the Company)

2. HKEX and its subsidiaries

3. For the purposes of this announcement, EBITDA is defined as earnings before interest expenses and other finance costs, taxation, depreciation and amortisation. It excludes the Group's share of results of the joint venture.

   BUSINE SS RE VIEW

   Overview

   Fig. 1 - Market activity and Group Revenue

   Market sentiment improved in Q3 20164 with the Hang Seng Index reaching a 52-week high during September and headline ADT improving to $68.3 billion, 9 per cent above Q2 2016. This was accompanied by an increased level of funds flow through the Shanghai-Hong Kong Stock Connect (SH-HK Connect) where both Northbound and Southbound Trading showed increases over Q2. In particular, the net inflow of Mainland funds via Southbound trading reached a record high in September. Nevertheless, Revenue5 was 3 per cent lower than Q2 2016, due to seasonal fluctuation in depository, custody and nominee services, which were down by $146 million, and reduced derivatives trading relative to Q2 2016.

   Overall revenue and other income for YTD Q3 2016 dropped by $2,122 million (20 per cent) compared to the prior period. After adjusting for one-off items, which increased the 2015 revenue and other income by $514 million6, the decline against the prior period was 16 per cent. Nevertheless, this compares favorably with the difficult markets experienced during the first nine months of 2016 where there was a decline in headline Cash Market ADT of 42 per cent (against the record high of $117.2 billion in YTD Q3 2015) as well as reduced volumes in the commodities and stock options markets. The more modest fall in overall revenue and other income is attributable to a continuation of a significant increase in trading on the HKFE7 that has been seen throughout 2016. Overall HKFE volumes are up 21 per cent over YTD Q3 2015 but the concentration of this volume growth in higher fee products, in particular Hang Seng Index products, has resulted in HKFE trading fees increasing by 41 per cent8. This upsurge in derivatives activity has seen trading income from the Derivatives Market increase from 18 per

4. Q1 = first quarter, Q2 = second quarter, Q3 = third quarter, Q4 = fourth quarter, YTD Q3 2015 = nine months ended 30 September 2015, YTD Q3 2016 = nine months ended 30 September 2016

5. Excludes net investment income and sundry income

6. One-off items in YTD Q3 2015: gain on sale of Worldwide House property $445 million, gain on sale of shares in LCH.Clearnet Group Limited (LCH) $31 million, and post liquidation interest received from liquidators of Lehman Brothers Securities Asia Limited (Lehman) $38 million

7. Subsidiaries of the Group include The Stock Exchange of Hong Kong Limited (SEHK or the Stock Exchange), Hong Kong Futures Exchange Limited (HKFE or the Futures Exchange), Hong Kong Securities Clearing Company Limited (HKSCC), HKFE Clearing Corporation Limited (HKCC), The SEHK Options Clearing House Limited (SEOCH), OTC Clearing Hong Kong Limited (OTC Clear), LME Holdings Limited (LMEH), The London Metal Exchange (LME), LME Clear Limited (LME Clear) and other subsidiaries.

8. Before any allocation of fees to Clearing segment

cent in YTD Q3 2015 to 29 per cent of the Group's overall trading income in YTD Q3 2016.

The effect of the expenditure control measures introduced earlier in the year can be seen in the Group's operating expenses, which have risen by 2 per cent overall. However, after eliminating a one-off recovery of $77 million from Lehman's liquidators in YTD Q3 2015, the Group's underlying operating expenses have reduced by 1 per cent compared to the prior period. The Group's capital expenditure for the year to date is also lower than previously anticipated as less critical projects have been deferred.

Cas h S e gme nt

Trading fees and trading tariff dropped by 43 per cent compared to YTD Q3 2015 in

YTD Q3 2016 vs YTD Q3 2015 ($m)

1

line with the 44 per cent fall in ADT. The overall drop in revenue was partly offset by an 11 per cent increase in Stock Exchange

Revenue

-27%

2,728

37

Operating expenses

-4%

EBITDA

-32%

listing fees.

Operating expenses declined by 4 per cent due to lower staff costs including reduced variable pay accruals and cost control measures.

318

506

1,867

1,980

52

307

563

1,058

85%

2,315

80%

1,582

413 398

YTD Q3 2015 YTD Q3 2016 YTD Q3 2015 YTD Q3 2016 YTD Q3 2015 YTD Q3 2016

Trading fees and trading tariff Stock Exchange listing fees

Market data fees Other revenue

Operating expenses EBITDA

1 Excludes derivative warrants (DWs), callable bull/bear contracts (CBBCs) and warrants under the Equity and Financial Derivatives segment

Market sentiment improved during Q3

2016, with the benchmark Hang Seng Index reaching a 52-week high during September 2016 and headline ADT increasing to $68.3 billion in Q3 2016 compared with the previous quarter ($62.6 billion), partly

driven by significant increase in participation of Southbound investors. In September a $59 billion net inflow of Mainland funds via Southbound trading represented a record high. However, ADT for YTD Q3 2016 was still down as compared to the record-highs achieved during the same period in 2015.

On 16 August 2016, a Joint Announcement by the China Securities Regulatory Commission and the Securities and Futures Commission (SFC) granted in principle approval for the establishment of

Shenzhen-Hong Kong Stock Connect (SZ- HK Connect), set for launch in Q4 2016. It also abolished the aggregate quota under the SH-HK Connect, allowing its continued and uninterrupted operation. Subsequent to this announcement, HKEX has participated in over 30 Mainland seminars and training workshops on the mechanism and

developments of the Stock Connects, reaching over 5,600 attendees.

The Initial Public Offering (IPO) of Postal Savings Bank of China, the largest IPO globally year-to-date, took place during Q3 2016 raising $59.2 billion.

HKEX continues to promote Hong Kong as the preferred offshore listing venue for Mainland enterprises through seminars, training programmes and also sponsored a simulation game to familiarise Mainland investors with Hong Kong's trading rules and listed products. New programmes have also been introduced to expand coverage of Cash Market data in the Mainland. To prepare for the launch of SZ-HK Connect, HKEX introduced two new programmes including an Enhanced Volume Discount Scheme and a One-Off Six-Month Fixed Fee Programme which aim to increase real-time data visibility and services that meet Mainland investors' needs.

Phase One of the Closing Auction Session, which facilitates trade executions at securities' closing prices, was successfully implemented on 25 July 2016 for selected securities and has been operating smoothly to-date. The Volatility Control Mechanism, another market microstructure enhancement which safeguards the securities market from abnormal price fluctuations, was also successfully rolled out on 22 August 2016 with no triggering of the mechanism recorded to date.

On 23 September 2016, the Stock Exchange published the findings of a review of the corporate governance reports of 81 listed issuers with a financial year-end date of 30 June 2015. This review, together with two earlier reviews (for issuers with financial year-end dates of 31 December 2014 and 31 March 2015), has examined a total of 1,636 issuers' corporate governance reports. The Stock Exchange will continue conducting periodic reviews of issuers' corporate governance practices.