LegCo Panel on Financial Affairs

Clerk in attendance:

Ms Estella CHAN

Chief Assistant Secretary (1)4

Staff in attendance :

Miss Anita SIT

Senior Assistant Secretary (1)6

I Confirmation of minutes of meeting
II Information papers issued since last meeting
III Items for discussion for the next meeting
IV Price volatility in second and third liner stocks and stock market movements on 28 November 1996

Handling of abnormal price movements by SEHK
Handling of abnormal price movements by SFC
V Manpower planning for the financial services sector
VI Follow-up on bullion trading

I Confirmation of minutes of meeting

(LegCo Paper No. CB(1) 280/96-97)

The minutes of the meeting held on 10 October 1996 were confirmed.

II Information papers issued since last meeting

2. The Chairman noted that the Securities and Futures Commission (SFC) had sent a document entitled "A consultation paper on Management, Supervision and Internal Control Guidelines for Persons Registered with or Licensed by the Securities and Futures Commission" to each Panel member direct. Members agreed that the Panel might discuss the subject at a future meeting.

III Items for discussion for the next meeting

3. Members agreed that the Panel would follow up the issue of supervision of stock brokers in the light of the recent incidents concerning malpractices of stock brokers and securities companies at a future meeting.

4. Members noted the list of outstanding items for discussion and agreed that an additional meeting would be held in December 1996 and the Chairman would decide on the order of discussion of the items.

IV Price volatility in second and third liner stocks and stock market movements on 28 November 1996

[Paper No. CB(1) 426/96-97(01)]

5. Members enquired about the responsive actions taken by the Stock Exchange of Hong Kong (SEHK) and the Securities and Futures Commission (SFC) in respect of the unusual stock price movements on 28 November 1996. Mr Paul CHOW advised that when the surveillance system of SEHK detected abnormal price movements of a number of stocks a few minutes after the commencement of the trading day, SEHK liaised with SFC immediately and made enquiries with the members of SEHK. SEHK was now awaiting its members’ explanation on their trading activities on that day. He said that these responsive actions were taken in accordance with the established surveillance procedures of SEHK. Mr Anthony NEOH supplemented that on 28 November 1996, SEHK, the Hong Kong Futures Exchange and SFC had exchanged information by about 10:15 am. On this occasion, a significant number of the Hang Seng Index (HSI) component stocks had seen abnormal price movements but it was believed that the abnormal price movements were not attributable to any specific activities of the listed companies concerned. Thus enquiries were mainly directed at those SEHK members who had been actively involved in the trading of those stocks on that day.

6. In response to a member’s observation that Hang Seng Index (HSI) component stocks usually had greater price fluctuations on the last trading day of HSI futures each month, Mr NEOH advised that to ensure that the settlement price for HSI futures on the last trading day was not unduly affected by stock price fluctuations, the settlement price was computed by averaging the HSIs taken from every five minutes of the trading day. If there was more than 3% fluctuation in the HSI within any of the five-minute periods, the HSI of that period would be discounted.

7. On the requirement for disclosure of disposal of substantial amount of shares by directors or substantial shareholders, Mr NEOH advised that under the Securities (Disclosure of Interest) Ordinance (Cap. 396), a filing should be made within five days of any disposal or acquisition of shares by a director or by a substantial shareholder, i.e. a shareholder holding 10% or more of the shares of the listed company. He added that SFC had recommended to shorten the disclosure period from five days to two days and had recently issued the relevant consultation paper.

8. In reply to members’ enquiries on the responsive actions of SEHK and SFC in respect of market rumors, Mr CHOW advised that the Listing Division of SEHK would attend to every piece of price sensitive information concerning listed companies. The Listing Division scanned through all local newspapers everyday to spot any such information and contacted the representative of the listed issuer concerned to ascertain if the issuer should inform the public of anything about the listed company under the Listing Rules. If that was the case, the issuer would be asked to make timely announcements to the public through the Teletext system of SEHK and in the local newspapers.

Handling of abnormal price movements by SEHK

9. On the criteria for initiating inquiries into stock price movements, Mr CHOW advised that SEHK would initiate an inquiry in the case that the opening price of any stock was four basis points higher or lower than the closing price of the stock on the previous trading day, or the price of any stock had fluctuated by more than 20% within one trading day. The Listing Division of SEHK would contact the representative of the listed issuer concerned and the Compliance Division would contact the SEHK members who had been active in trading the stock on that day. In addition to these general principles, there were other specific criteria in respect of different types of stocks built into the surveillance system of SEHK. He added that SEHK’s surveillance system was fully automatic and was capable of maintaining a comprehensive database of all the trading activities of its members. Although SEHK did not have access to the information on the trading activities of its members’ clients, there were statutory provisions for SEHK to refer suspicious cases involving its members’ clients to SFC for investigation.

10. On the allegation that SEHK was more inclined to investigate the trading activities on second and third liner stocks than those on blue-chip stocks, Mr CHOW advised that this was a misconception. The fact was that second and third liner stocks usually had lower prices and smaller number of shares available for open trading in the market, thus their prices were more susceptible to fluctuation than blue-chip stocks. He stressed that SEHK’s objective was not to intervene in the market but to ensure that all investors had equal access to information in making investment decisions.

11. Members enquired if there was any analysis of the types of stocks concerned and the causes for the 614 cases of abnormal price fluctuation recorded by SEHK from 1 October to 18 November 1996. To put the number of abnormal price movements in perspective, Mr CHOW advised that there were about 70,000 to 90,000 transactions on each trading day during the period. He explained that the 614 cases were only cases of abnormal price movements identified by the computerised surveillance system of SEHK. They did not necessarily entail any breach of the Listing Rules or regulations of SEHK. As regards disclosure of the results of the inquiries in respect of these cases, he said that the results of the inquiries involving issuers’ price sensitive activities would always be disclosed through public announcements. However, it would not be practical nor acceptable to the market for SEHK to disclose the results of all the inquiries made in respect of cases of abnormal price movements.

12. Regarding statistics on the disciplinary cases handled by SEHK, Mr CHOW advised that details of the inquiries and disciplinary actions taken by SEHK were set out in SEHK’s annual reports. Some members opined that there was still room for improving the transparency of SEHK’s activities in supervising its members, in particular the disclosure of the results of its investigations. In response, Mr CHOW said that SEHK’s operation was subject to very strict supervision. Apart from the internal audits on each division of SEHK conducted twice a year, SEHK’s operation and management was subject to regular and ad hoc audits by SFC and the Independent Commission Against Corruption.

Handling of abnormal price movements by SFC

13. Members noted that SFC had prosecuted two cases of market manipulation in the past three years and enquired whether the seemingly low rate of prosecution was owing to difficulties in the investigation and prosecution process. Mr NEOH advised that a successful prosecution against insider trading or market manipulation required a very high standard of proof under the law, i.e. a proof of the offence beyond all reasonable doubts. Mr Gerald McMahon supplemented that from the stage of an abnormal activity being detected to the filing of a case of prosecution, a number of steps of scrutiny of evidence were involved. If SFC found that the evidence available might not be sufficient for filing a criminal prosecution, SFC might resort to administrative actions such as suspension of the licence of the intermediary concerned or referring the case to the compliance enforcement unit of SEHK for its consideration of taking disciplinary actions. He further remarked that market manipulation activities were very difficult to investigate and to prove worldwide. The low rate of prosecution was not attributable to SFC’s lack of manpower nor any inherent defect of the regulatory regime.

14. On the surveillance system of SFC, Mr NEOH advised that SFC had a set of objective and quantitative criteria in respect of individual stocks to determine whether the trading activities on a stock warranted initiation of investigation by SFC. Mr McMahon added that SFC carried out its surveillance over stock trading activities on a minute-by-minute basis in co-ordination with SEHK. If SFC suspected that certain stocks were being ramped, SFC would sent out letters in accordance with section 31 of the SFC Ordinance (Cap. 24) to those brokers that were involved in the suspected dealings and inquire into the names of their clients, with an aim to finding out why the unusual transactions or price movements had taken place and whether there was any breach of the statutory provisions.

16. On the supervision over SEHK, Mr NEOH advised that SFC conducted regular audits of SEHK’s operation and would liaise with SEHK’s management regarding the problems identified with a view to making improvements continually. Under the existing legislation, SFC was bound to maintain confidentiality of the contents of those audits.

17. Regarding the penalty for the offence of market manipulation, Mr NEOH and Mr McMahon advised that SFC viewed that the present statutory penalty was not commensurate with the nature of the offence. Under the existing legislation, the maximum penalty for market manipulation was two years’ imprisonment or a $50,000 fine. In the rationalisation exercise for securities related ordinances, SFC had proposed to increase it to seven years’ imprisonment or a $2 million fine.

V Manpower planning for the financial services sector

[Paper No. CB(1) 426/96-97(02)]

18. The Secretary for Financial Services (SFS) advised that the Financial Secretary had had some discussion on the subject of manpower planning for the financial services sector with the principals of the local tertiary institutions. The majority view of the principals was to develop the education programmes in the area of finance based on the existing system of tertiary education whereby individual institutions would continue to build on their respective specialties and strengths. An integrated institution might not be appropriate for the time being. He remarked that the Administration had not formed a definitive view on the matter at this stage.

19. On the growth trend of the financial services sector, Mr NEOH advised that apart from the banking and the insurance industries, the size of the workforce in the sector had grown from about 6,600 in 1989 to 16,000 at present. In terms of the number of financial institutions, there were about 1,300 in 1989 and 1,600 at present. With a significant number of international and regional financial institutions entering into the local financial markets since 1993, the growth of the sector had accelerated for the past few years and the trend was likely to continue.

20. Mr NEOH further advised that a consultancy study on the education and training for the financial industries had recently been completed and a steering group was being formed to follow up the issue, in particular to further explore the idea of establishing an institute of finance. He remarked that the institute might not be an education institution. It might be a centre to co-ordinate the concerned parties in organising training programmes and in carrying forward the standardisation of qualifications for market practitioners in the sector. He remarked that SFC was concerned with the qualifications of practitioners because it was the licensing authority of intermediaries. With standardisation, the respective qualifications required for different types of intermediaries could be objectively set out in the Fit and Proper Criteria for licensing. He stressed that SFC should only play a supporting role in promoting manpower training and standardisation of qualifications of practitioners. The main initiatives and inputs should come from the industries and the Administration.

21. Mr Eric LI Ka-cheung pointed out that there had been calls from some financial industries for standardisation of the qualifications for market practitioners. He considered that standardisation was essential for effective manpower planning and for ensuring the quality of services. Recently, the quality of the services of small securities companies had aroused serious concern within the sector as it was noticed that there was a tendency of these companies to lower their operational costs at the expense of their quality of services. He opined that the Government had an important role to play in the way towards standardization and professionalization. It should at least provide guidance to the market on the qualifications required for the critical positions of financial institutions. Mr SIN Chung-kai suggested that the Administration and the regulatory authorities should aim at offering comprehensive and systematic in-service training programmes for market practitioners in the form of accredited courses which would lead to the award of recognized academic qualifications.

23. In response to a member’s observation that over the past few years, there had been an increasing number of expatriates employed by financial institutions in Hong Kong to fill both senior and junior positions, Mr NEOH advised that SFC did not have information on the nationalities of the employees of the institutions. From his personal observation, the branches or subsidiaries of overseas financial institutions in Hong Kong were more willing to employ local employees than their counterparts in other Asian countries. He was not aware of any discriminatory employment policy being practiced by local or overseas institutions. However, he acknowledged that Hong Kong was relatively short of qualified personnel in some areas such as corporate finance, risk management and derivatives trading.

VI Follow-up on bullion trading

[Paper No. CB(1) 426/96-97(03)]

25. Members noted the report provided by the Administration on its follow-up actions pursuant to the Panel’s discussion on bullion trading at the meeting on 29 July 1996 and had no further queries.

26. The meeting ended at 10:40 am.

Legislative Council Secretariat
20 January 1997