Almost two years after ending an agreement with Singapore, MSCI Inc has affirmed its decision to work with Hong Kong in creating equity derivative products that would allow investors to hedge risks in mainland China, the region's biggest capital market, a senior executive said.

"Hong Kong has become a major intermediary for mainland financial assets," said Baer Pettit, president and chief operating officer of the New York-based global index provider. It is "absolutely the right partner for us related to the Greater China opportunity."

China's US$9.4 trillion stock market is the biggest in Asia-Pacific, according to Bloomberg data. With Hong Kong's US$4.3 trillion market, the market is the deepest among key financial centres in the region, compared with US$5 trillion in Japan and US$378 billion in Singapore.

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That assessment came from the early success of its licensing agreement with the Hong Kong Exchanges and Clearing (HKEX) on 37 of its biggest and widely followed indices, in a huge coup for the city's bourse operator.

The decision in May 2020 to end the derivative agreement with Singapore Exchange (SGX) was based on a "larger customer base" in Hong Kong and the access to institutional and retail investors in Greater China, Henry Fernandez, chairman and chief executive officer at MSCI, said previously.

HKEX introduced futures based on the MSCI China A 50 Connect Index in October 2021, whose volume has since doubled to 22,000 contracts by July. Despite a slowdown in the third quarter, average daily volume of the futures reached 18,564 contracts over the January-to-September period this year, a 61 per cent increase over the October-to- December 2021 period, according to HKEX filing.

The offshore ecosystem was expanded in December with the listing of the first exchange-traded fund and derivative warrants on the index.

The A 50 Connect index is constructed from the MSCI China A Index, a broad gauge covering large- and mid-cap Chinese companies, including market leaders like lithium-battery maker Contemporary Amperex, liquor distiller Kweichow Moutai and electric-vehicle producer BYD.

Pettit said the cooperation with the HKEX may deepen "either by building a new index, or just licensing it for the right product at the right time," he said in an interview with the Post on Wednesday, during the Global Financial Leaders' Investment Summit. MSCI will continue to cooperate with Singapore Exchange in "a slightly different category" such as climate-related indices, he added.

"We've got plenty of upside here with the products we have," he added. With regard to the theme of global investors coming through Hong Kong to get exposure to China, " there will be a lot more we can do with that with HKEX, and doubtless, with other products as well."

SGX said last month it would license the recently-launched MSCI Climate Action indices for listed futures contracts. SGX will work with market participants to develop climate-related products, including futures contracts, to help investors reduce their portfolio carbon footprint, it added.

Today, Hong Kong is the world's most actively-traded listed structured products market, with over 11,900 listed products as at end-July. In the first seven months of 2022, the average daily turnover of HKEX's structured products market amounted to HK$17.9 billion (US$2.3 billion), or 13.4 per cent of the cash market.

Since the Stock Connect scheme started, the role of Hong Kong has been strong, and we believe it will continue to be so," Pettit added, referring to its advantage as the so-called super-connector to Chinese assets despite recent market wobbles.

Stock markets in mainland China and Hong Kong lost a combined US$700 billion last week before speculations about China's re-assessment of its zero-Covid policy sent stocks soaring this week. The Hang Seng Index slumped 3.1 per cent on Thursday on interest rate concerns, while the CSI 300 Index of onshore stocks slipped 1.2 per cent.

Commenting on the stock market, Pettit said the next six to 12 months would be very telling "as to how difficult things can get right."

Investors are generally not happy with the condition and its outlook, adding that "fragile" is the feeling expressed by clients, he added, but demand for derivatives as a hedging tool is usually stronger when the markets are more volatile.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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