Panel on Financial Affairs ( Minutes ) 3 May 99

LC Paper No. CB(1)1892/98-99
(These minutes have been seen by the Administration)

Ref : CB1/PL/FA/1

Legislative Council
Panel on Financial Affairs

Minutes of meeting held on
Monday, 3 May 1999, at 10:45 am
in the Chamber of the Legislative Council Building

Members present :

Hon Ambrose LAU Hon-chuen, JP (Chairman)
Hon Eric LI Ka-cheung, JP (Deputy Chairman)
Hon Kenneth TING Woo-shou, JP
Hon James TIEN Pei-chun, JP
Hon Cyd HO Sau-lan
Hon NG Leung-sing
Hon Ronald ARCULLI, JP
Hon James TO Kun-sun
Hon CHEUNG Man-kwong
Hon Ambrose CHEUNG Wing-sum, JP
Hon HUI Cheung-ching
Hon Bernard CHAN
Hon SIN Chung-kai
Hon Jasper TSANG Yok-sing, JP
Hon FUNG Chi-kin

Members absent :

Hon David CHU Yu-lin
Hon Albert HO Chun-yan
Hon Martin LEE Chu-ming, SC, JP
Dr Hon David LI Kwok-po, JP
Hon Margaret NG
Dr Hon Philip WONG Yu-hong
Hon Timothy FOK Tsun-ting, JP

Public officers attending :

Agenda item IV
Miss Vega WONG: Principal Assistant Secretary for the Treasury
Mr CHAU Ho-man: Chief Assessor (Computer)
Inland Revenue Department
Mr CHING Sik-fan: Assistant Director of Accounting Services (Computer), Treasury
Mr D R STEVENSON: Rating Adviser
Rating and Valuation Department
Mr CHAN Chun-tan: Principal Supplies Officer (System Administration)
Government Supplies Department
Agenda item V
Mr Joseph YAM, JP: Chief Executive
Hong Kong Monetary Authority
Mr Anthony LATTER, JP: Deputy Chief Executive
Hong Kong Monetary Authority
Mr James H LAU Jr., JP: Deputy Chief Executive (Acting)
Hong Kong Monetary Authority
Agenda items V and VI
Mr David CARSE, JP: Deputy Chief Executive
Hong Kong Monetary Authority
Agenda item VI
Mr Edmond LAU: Head of Banking Development Division
Hong Kong Monetary Authority
Miss Clara TANG: Principal Assistant Secretary for Financial Services
Agenda item VII: Mr Bryan P K CHAN
Principal Assistant Secretary for Financial Services (Securities)

Attendance by invitation :

Agenda item VII
Mr Randy GILMORE: Chief Executive
Hong Kong Futures Exchange
Mr Jimmy HO: Executive Director of Products Division
Hong Kong Futures Exchange
Mr Keith LUI: Director of Supervision of Markets Division
Securities & Futures Commission

Clerk in attendance :

Ms Estella CHAN: Chief Assistant Secretary (1)4

Staff in attendance :

Ms Connie SZETO: Senior Assistant Secretary (1)1
Agenda item VI
Mr KAU Kin-wah: Assistant Legal Adviser 6

I Confirmation of minutes and matters arising
(LC Paper Nos. CB(1)1106 and 1137/98-99)

The minutes of the meetings held on 14 November 1998 and 17 December 1998 were confirmed.

II Information paper issued since last meeting

2. Members noted that no information paper had been issued since last meeting.

III Items for discussion at the next meeting
(LC Paper No. CB(1)1230/98-99(01))

3. Members agreed to discuss the following items at the next regular meeting scheduled for Monday, 7 June 1999, at 9:45 am -

Overall economic development of Hong Kong; and
Securities and futures market reform.

4. Members also agreed that depending on the readiness and urgency to be advised by the Administration, either one of the following three subjects would also be included in the agenda. The remaining two items would be discussed at the regular meeting in July 1999 -

Privatization of Government services;
Progress of development of a Venture Board; and
Banking Sector Consultancy Study.

IV Year 2000 compliance in Government, Government-funded and Government-regulated organizations under the purview of the Finance Bureau
(LC Paper No. CB(1)1230/98-99(02))

5. The Principal Assistant Secretary for the Treasury (PAS/T) briefed Members on the progress of the Year 2000 (Y2K) compliance exercise in the Finance Bureau (FB) and the departments under its purview. She advised that out of the 803 mission-critical systems identified, 760 had been confirmed Y2K compliant. Rectification work for the remaining 43 systems was underway and most work was expected to be completed by June 1999.

6. Responding to Mr NG Leung-sing's enquiry about formulation of contingency plans to cope with possible problems arising from Y2K issues, PAS/T confirmed that in accordance with the guidelines issued by the Steering Committee on Y2K Compliance (Steering Committee) chaired by the Secretary for Information Technology and Broadcasting, contingency plans were required for those systems which could not be rectified by end June 1999. Departments under the purview of FB expected to have non-compliant systems by the deadline had taken actions to draw up respective contingency plans based on guidelines issued by the Steering Committee.

7. In reply to the enquiry about the progress of rectification work and testing for non-compliant systems in the Inland Revenue Department (IRD), the Chief Assessor (Computer) IRD (CA/IRD) advised that rectification for 29 out of the 34 non-compliant systems had already been completed, with testing of most systems conducted in April 1999. Progress of rectification work for another three systems was as follows -

System Position

Computer system for individual tax return Over 90% of the some 240 functions which required enhancement had been upgraded. The remaining functions would be rectified by mid-June 1999.
Computer system for workstations network The system involved about 1,500 workstations. Rectification for 42 out of a total of 44 pieces of hardware and software identified for upgrading had been completed. The remaining was expected to be completed by end of May 1999.
Computer system relating to stamp duty collection Rectification work was expected to be completed by mid-May 1999.

8. As regards the remaining two systems, i.e. the Private Automation Branch Exchange System and the Interactive Voice Response System, since they had been developed and implemented for years, rectification could not be accomplished by making enhancement to these systems. Arrangements had been made for these systems to be replaced by 31 July 1999. IRD in collaboration with the Office of the Telecommunications Authority (OFTA), which was the technical consultant responsible for the two systems, were evaluating tender bids for the replacement work and working out a detailed contingency plan which would be finalized in June 1999.

9. On the enquiry about the number of facilities and services providers involved in the system rectification work, PAS/T remarked that the majority of the rectification and verification work had been undertaken by professional staff in the Information Technology Services Department, the Electrical and Mechanical Services Department and OFTA as a lot of the mission-critical systems identified were developed by these technical experts. CA/IRD supplemented that only two systems in IRD had involved outside computer system providers in the rectification process.

10. Mr Eric LI enquired about the Y2K compliance programmes of some public and government-related organizations which acted as agents for collection of tax or government fees and charges, such as the Airport Authority collecting airport tax, the Exchanges collecting levies on securities and futures transactions, and the Hong Kong Jockey Club (HKJC) collecting betting duties. Any disruption caused by the Y2K problem in these organizations' systems might adversely affect FB's revenue collection function.

11. CA/IRD responded that, as far as IRD was concerned, interfaces with outside systems such as, electronic banking systems including the Automatic Teller Machine networks, the Easy Pay System and the Payment by Phone Service system, as well as the system connected with the Judiciary, had been rectified and tested for Y2K compliance. Moreover, as far as he was aware, the Exchanges and HKJC had already achieved Y2K compliance in their respective systems.

12. Noting Mr Eric LI's remark that FB should closely monitor Y2K readiness of these organizations, the Chairman requested the Administration to provide further information after the meeting on its monitoring of Y2K compliance of organizations which had interfaces with systems of FB or departments under its purview.	FB

V Hong Kong Monetary Authority's Annual Report 1998
(The Hong Kong Monetary Authority Annual Report tabled at the meeting)

13. Members noted that due to the tight printing schedule, Hong Kong Monetary Authority (HKMA)'s Annual Report 1998 (the Report) was only available at the time of the meeting.

14. At the Chairman's invitation, the Chief Executive of HKMA (CE/HKMA) presented the Report. He highlighted HKMA's major work in 1998, in particular, the achievements in maintaining currency and banking stability during a period of intense regional financial turmoil and domestic economic downturn, and the success of the August market operation in fending off currency speculators and restoring order in the financial market. He also gave views on the prospects in the monetary and banking environments in the rest of 1999 and beyond, and briefed the Panel on HKMA's new initiatives. He further assured members that HKMA would continue to pursue the policy of transparency and accessibility in its operation.

(CE/HKMA's speaking note was tabled at the meeting after the presentation.)

15. Whilst praising HKMA's achievement in maintaining currency and banking stability during the exceptionally difficult year of 1998, Mr James TIEN remarked that with forecasts of continued difficult monetary environment, high real interest rate and weak economy, HKMA should consider implementing programmes to assist economic recovery and to ease the rising unemployment. Mr Ambrose CHEUNG echoed the views and opined that HKMA should introduce measures to expedite local economic recovery while pursuing its objective of maintaining currency stability. However, Mr James TO expressed reservation about HKMA taking a pro-active role in re-vitalizing the economy which might conflict with its roles as the currency board and the regulator of banks.

16. In response, CE/HKMA stressed that given HKMA's important policy objective of maintaining currency stability within the framework of the linked exchange rate (LER) system, HKMA should refrain from taking direct monetary measures to promote employment and improve the economic conditions. Nevertheless, through promoting a stable monetary environment, which would help dampening interest rate volatility, improving investment sentiment, and boosting international and local confidence in Hong Kong, coupled with Government's appropriate fiscal policies, such as increased public spending and investment in infrastructure projects, HKMA would contribute indirectly in reviving the local economy.

17. On the concern about the high level of real interest rates and the possible adverse impact on the economy, CE/HKMA remarked that with the return to a more stable monetary environment in Hong Kong and easing of speculative pressures on the Hong Kong dollar, interest rates had declined significantly from the peaks in 1998. Nominal interest rates in Hong Kong presently stood at or below pre-crisis levels and the spread over the United States (US) short-term interest rates had virtually disappeared in recent months. The local interest rates were only 50 basis points higher than US interest rates. Under the LER system, the local and US interest rates should in theory be at par. This was the case for about 30% of the time during the period between October 1983 when LER system was established and mid-1997 when the financial turmoil broke out, when the interest rate differentials between Hong Kong and US had moved within a narrow range of 25 basis points. Indeed, from mid 1980s onwards local interest rates were constantly lower than the US interest rates due to continuing capital inflows into Hong Kong. As domestic prices had come down along with the sharp downturn in economic activity and with a nil inflation rate, it was a matter of course that the real interest rates remained at a high level. However, with the enhancement in international and local confidence in the markets, the continued trend of capital inflow, and successful completion of economic adjustment restoring Hong Kong's competitiveness, interest rate pressures would ease further and the differential with the US interest rates could be reduced and even eliminated. The local economy would get back to its growing track. Whilst banks were cautious about lending during the financial turmoil in anticipation of continuing decline in asset prices and uncertainties in the regional and global conditions, their attitude had become more positive recently as regional and global market environment continued to improve. Improvement in the external economic environment would enable further reduction in local interest rates.

18. On Mr James TO's enquiry about the possibility of further attacks on the currency, CE/HKMA said that despite the improved stability in the local and global markets, the Hong Kong dollar might still be vulnerable to speculative attacks. Although the set of seven technical measures introduced in September 1998 had refined the mechanisms of the currency board system to help insulate it against manipulation, there had been signs of manipulative activities around the Lunar New Year and Easter periods in 1999. Hence, HKMA had to remain constantly vigilant and be alert of such dangers. It would make every endeavor to take prompt actions, whenever necessary, to combat cross-market manipulative activities, and to furstrate double-play in the markets.

19. Commenting that it was understandable for foreign banks to withdraw funds from the local market to defend their own home capital positions which had been squeezed during the financial turmoil, Mr Ronald ARCULLI was concerned about the deterioration of the problem of credit crunch in the local lending market and enquired about measures to address this in the interim and the long run.

20. The Deputy Chief Executive of HKMA (DCE/HKMA) said that domestic lending shrank by $122 billion in 1998 with over 60% accounted for by foreign banks, in particular, institutions incorporated in Japan and Europe. While the reduction in the availability of credit might be a temporary phenomenon as banks withdrew their funds from Asian markets due to the perception of high credit risk, it also revealed structural problems in some economies. The trend of Japanese banks retreating from Hong Kong for the medium term was a concern as this had adversely affected the availability of credit and the market would need some time to adjust to this. Incidentally, in the recent Banking Sector Consultancy Study, the consultants recommended that in order to make Hong Kong more attractive as an international centre of finance, it was necessary to enhance the competitiveness of the Hong Kong banking market by allowing easier access for foreign banks.

21. Mr Ronald ARCULLI remarked that allowing free capital flows had also made it easier for foreign banks to exit from the local market. He opined that the issue needed to be addressed and the consultants' recommendation of further opening up the banking market to foreign banks to enhance competition might not be an appropriate solution to the problem.

22. DCE/HKMA said that while issues related to removing barriers for foreign banks should be further discussed in the context of the Banking Sector Consultancy Study, the consultants were of the view that enhancing the competitiveness of the banking market, rather than tightening up the regulations and imposing more stringent requirements, would make Hong Kong a more attractive place for foreign banks and hence, benefit the local lending market.

23. Mr FUNG Chi-kin praised HKMA for its success in maintaining a sound and healthy local banking system amid the regional financial turmoil. He enquired about a recent press report that in order to tackle the problems of a local bank' HKMA had considered replacing the entire management and taking over the bank's operation.

24. CE/HKMA said that although banks were required to seek HKMA's approval in the appointment of their senior management, HKMA would refrain from taking a heavy-handed approach in supervising banks and endeavor to resolve management problems with banks through discussions and meetings.

25. Noting that with increasing Exchange Fund (EF)'s investments in subsidiary companies, including Hong Kong Note Printing Limited, the Hong Kong Mortgage Corporation Limited and Exchange Fund Investment Limited, Mr SIN Chung-kai considered this to be a rapid expansion of HKMA's functions. He queried whether HKMA had acted outside the scope of its authority provided under EF Ordinance (EFO) (Cap. 66) and asked whether EFO should be amended to provide for a clear delineation of the powers and duties of HKMA.

26. CE/HKMA advised that EFO was amended in 1992 to provide for the establishment of HKMA. The Financial Secretary (FS) could regulate the exchange value of the Hong Kong dollar through HKMA's operation. While Mr SIN's question could be a subject of further debate, EF's investments in market infrastructures did play a vital role in improving the efficiency, integrity and development of the financial system, and this was consistent with HKMA's objective of maintaining the stability of the Hong Kong dollar exchange rate.

27. Mr Eric LI observed that other major international financial centres had responded to the trends of globalization and conglomerization in the financial services industry by establishing independent market authorities to take over the regulatory functions from government bodies, which instead would focus on formulating relevant policies, restructuring government bodies to enhance their operational efficiency and co-ordination, as well as involving greater participation of independent regulatory authorities in international financial co-operations. He quoted the example in which G7 (Group of seven leading industrialized nations) had co-opted representatives from independent regulatory authorities of member nations into the organization and sought HKMA's views on these developments.

28. CE/HKMA remarked that the benefits of the structural and regulatory reforms in the financial systems in the United Kingdom and Australia had yet to be seen. On the other hand, given the transparency in HKMA's operation and the extremely limited discretion it had over the rule-based currency board system, the need for similar changes in Hong Kong was much less. The local securities and futures market bodies were already proceeding towards consolidation and it was pre-mature at this stage to consider the need for further integration of supervisory functions into a new body. In any case, there had also been a "Chinese wall" within HKMA separating the operations of monetary and reserve management from banking supervision, and there has no question of any conflicts between the two.

29. Pointing out that the senior staff of large corporations and statutory bodies had faced substantial pay cuts in the difficult year of 1998, Mr CHEUNG Man-kwong queried the pay rise for HKMA's senior staff and sought its explanation for only implementing a pay-freeze in 1999-2000 instead of following the market trend to reduce salary. He further remarked that the Administration had acceded to Members' request to re-consider the remuneration proposals for the senior management of the Mandatory Provident Fund Authority in the light of current economic conditions and made a 20% downward adjustment.

30. CE/HKMA said that the 6.8% pay rise referred in the annual report was for the year 1998-99. Having regard to the downturn of the economy, the senior staff of HKMA had volunteered in July 1998 to freeze their salary packages until March 2000. As for the other HKMA staff, a pay review was conducted in March 1999. FS, on the advice of the Exchange Fund Advisory Committee, approved a freeze on the pay of all HKMA staff for 1999. This had taken into account on the one hand the increased workload of HKMA especially during difficult years and the achievements it had made despite challenging market conditions, and on the other hand the difficult economic conditions Hong Kong was facing.

VI Briefing on Banking (Amendment) Bill 1999
(LC Paper No. CB(1)1230/98-99(03))

31. DCE/HKMA briefed Members that the purposes of the Banking (Amendment) Bill 1999 (the Bill) were to bring Hong Kong's banking supervisory regime in line with the Basle Committee's Core Principles for Effective Banking Supervision and to improve the operation of the Banking Ordinance (BO) (Cap. 155) in the light of market developments. The Bill included provisions to , inter alia, require a locally incorporated authorized institution (AI) to seek prior approval of any major acquisition or investment in a company (including establishment of a company) which was 5% or more of the capital base of AI except in certain specific cases (Core Principle 5), remove the restriction on disclosure of individual customers' information by AIs to overseas supervisory authorities (Core Principle 25), and give HKMA the right to attend court hearings on a winding-up petition in respect of an AI and to support or oppose such a petition (Core Principle 22).

32. Mr CHEUNG Man-kwong noted that under Core Principle 22 in the booklet on "Core Principle for Effective Banking Supervision - An Assessment of the Position in Hong Kong" enclosed to the Administration's information paper, HKMA might take stringent supervisory measures against banks, such as appointing a manager to take control of the institution's affairs as provided under section 52 of BO, in order to bring about timely corrective actions regarding prudential requirements, regulatory violations or protection of depositors' interests. In this connection, he sought further information on HKMA's alleged actions against a troubled local bank as reported in the press recently.

33. While refraining from giving details on supervisory measures taken against individual banks, DCE/HKMA stated categorically that the press report referred to by Mr CHEUNG was unfounded. HKMA had invoked the formal powers under section 52 of BO in two cases in 1998. Moreover, there were a number of occasions where banks breached various requirements relating to capital ratio and liquidity ratio which necessitated HKMA demanding immediate remedial actions from these institutions. Nonetheless, HKMA maintained frequent contact with the senior management of banks to discuss their management problems on an informal basis without necessarily resorting to the statutory power provided under BO. He further advised that beside observing the statutory criteria for using the powers vested under BO, HKMA was obliged to disclose these cases, which were detailed in the Annual Report 1998, subject to limits required for protection of commercial secrecy.

34. Mr SIN Chung-kai envisaged that a Bills Committee may be formed to study the Bill as it involved important policy implication of widening HKMA's banking supervisory powers. He enquired about the Administration's timetable for passing the Bill.

35. DCE/HKMA advised that while the Basle Committee's Core Principles served as a basic reference for supervisory authorities around the world to review their existing supervisory frameworks, international arrangement was still being considered for monitoring authorities' compliance with the principles. For instance, there was a proposal to set up a special team under the International Monetary Fund for undertaking reviews of individual countries' compliance with the principles. Hence, although there was no particular timetable for passing the Bill, HKMA hoped that it could be enacted as soon as possible within the following 12 months after it was introduced into the Legislative Council by end of May 1999.

VII Migration of Hang Seng Index futures and options contracts to the Automated Trading System
(LC Paper No. CB(1)1230/98-99(04))

36. Mr FUNG Chi-kin declared interest as a securities dealer.

37. At the Chairman's invitation, the Chief Executive, Hong Kong Futures Exchange (CE/HKFE) briefed Members on the progress of the migration of trading of Hang Seng Index (HSI) futures and options contracts to the Hong Kong Futures Automated Trading System (HKATS) as detailed in the information paper. He said that with concerted efforts of HKFE, its members, the Securities and Futures Commission (SFC) and the Administration for over a year, HKATS was brought into production on 19 April 1999 for the trading of seven key products. Performance of the system had been satisfactory and no difficulty was encountered in the first ten and a half trading days. He added that the Special Committee formed under HKFE Board of Directors (the Board) to oversee the project were reviewing HKFE's electronic trading rules and procedures to ensure that they were appropriate for the trading of HSI futures and options on HKATS, and would recommend the actual dates of migration very soon.

38. Pointing out that trading large futures markets in the world, such as the New York Futures Exchange, was still conducted in an open outcry environment, Mr FUNG Chi-kin queried the rationale for introducing full electronic trading for the local derivatives market.

39. In response, CE/HKFE remarked that the Board, in recognition of future business development, decided in April 1997 that HKFE should become a fully automated marketplace. According to the results of HKFE's survey conducted in December 1997, with a total membership of 118, 77% of the 113 responding Exchange members supported the Board's view. Notwithstanding the slow development in electronic trading in US derivative markets, experience in European markets showed that electronic trading was the way for the future and its development had not only increased the competitiveness of markets in capturing new business but, more importantly, had enabled markets to maintain and further enhance their status as international financial centres. For instance, EUREX, the electronic trading and settlement system jointly developed by the futures exchanges in Germany and Switzerland, after beginning operation in 1994, had become the single largest derivatives marketplace in the world. It's world ranking in terms of trading volume had jumped from the fifth in early 1998 to the first in March 1999. At present, it handled 1.3 million contracts on average daily. In a demonstration conducted in 1998, when an open outcry system was run in parallel with the electronic trading system, it only took four days for the latter to take over all the business from the open outcry system, hence proving the efficiency of the electronic trading system.

40. The Principal Assistant Secretary for Financial Services (PAS/FS) re-affirmed the Administration's stance that automation of securities and derivatives trading was the global trend and the right direction towards which the Hong Kong securities and futures markets should move. The Administration was in support of HKFE's policy decision to move towards full automation of trading and to migrate its HSI futures and options trading from open outcry to HKATS in recognition of the advantages of enhancing transparency, efficiency, and fairness in trading, as well as facilitating market surveillance. It had always supported early migration of HSI products to ATS provided the new system was ready, stable and reliable. Noting the implications on the market, HKFE and its members, the Administration would continue to work in collaboration with SFC and HKFE with a view to ensuring a smooth migration.

41. Referring to a recent press report that SFC's consultancy report had expressed concern about the readiness of the system and HKFE members for the migration, Mr Bernard CHAN echoed the same concern and asked whether SFC's report would be disclosed. Noting that no exchange in the world had attempted to move the trading of a high established volume of futures and / or options contracts from an open outcry environment to an electronic order matching system, Mr FUNG Chi-kin was concerned about the competence of HKATS in handling the large trading volume and enquired about the tests conducted on the system.

42. CE/HKFE confirmed that while SFC's consultancy report had been submitted to the Board for consideration, he had to check whether the report could be made available to other interested parties. On the concern about readiness of HKFE members for the migration, CE/HKFE said that as revealed in surveys conducted after each round of system test, the competence level of HKATS and that of members in handling the system were on the rise. A 95% competence level for both aspects was recorded in the system test held in early April 1999. With continued training provided for members' employees and more operational experience, HKFE was confident that members were ready for integrating into the new system. At present, out of the total of 116 HKFE members who were trading HSI futures and options directly, 110 members had connected to HKATS and conducted trading through the system, the remaining six members were in various stages of being connected to the system.

43. As regards the competence of HKATS in handling a large volume of trading, CE/HKFE stressed that the system was subject to various stringent tests on its capacity including system-wide simulated trading tests and stress tests conducted with participation of HKFE members. The total time of tests conducted in the last five months was equivalent to 18 man years. Encouraging results had been achieved. For example, in the last simulated trading test, the system had proven to be able to handle more than the average weekly trading volume in less than two hours. Moreover, in a stress test with simulation of 100 users trading in the system at the opening hours of the market, i.e. the busiest periods of a trading day, the system was capable of processing ten times the value of trade ever experienced in a real market environment. On the other hand, HKATS was modeled on those systems used for over a year in the derivatives markets in Stockholm and Sydney. The performance of the systems in these markets, which had trading volumes substantially greater than those in Hong Kong, had been very satisfactory. In 1998, the system in Stockholm market handled 45 million contracts with 99.8% up-time whilst 35 million contracts were handled by the Sydney market. Hence, HKFE was confident about the capacity and robustness of HKATS.

44. As regards contingency measures to cope with failure of HKATS, CE/HKFE advised that two back-up systems were in place. The hot off-site backups were running concurrently with the main system with automatic fallback in the event of machine failure or process crash in the main system. To avoid possible disruption to the market during the transition to a full electronic marketplace, HKFE members had been requested to maintain their old ATS for two weeks after 19 April 1999.

45. Concurring that electronic trading was the order of the day for financial markets, Mr SIN Chung-kai opined that the timetable for migration of HSI futures and options to HKATS should be disclosed as early as possible to all parties concerned, in particular HKFE members, in order to facilitate their preparation for the migration. Mr Eric LI remarked that HKFE members should be consulted on the dates of migration as these would affect their operation and preparation of contingency plans. He also suggested that details on testing of the system and results of reviews by consultants should be disclosed to enhance HKFE members' confidence in the system.

46. As far as the migration dates were concerned, CE/HKFE said that the Special Committee would made recommendation on this for the consideration of the Board after completing the review on trading rules and procedures, and having regard to the results of review of members' readiness for migration. Besides, the Board would determine the actual migration dates within May 1999 based on the technical report made by the third party consultant - PricewaterhouseCoopers, which would be available sometime later this month. Nevertheless, the Board had already announced that migration would occur in two phases, beginning with HSI futures and followed by HSI options four to six weeks later. PAS/FS added that the Administration and SFC would closely liaise with HKFE on the dates of migration to ensure a successful transition to the full electronic trading environment.

47. On the concern about staff redundancy and the possibility that experienced floor traders who were laid off would move to other derivatives markets in the region, CE/HKFE remarked that automatic trading would enhance market efficiency and could inevitably lead to redundancy of some positions such as, phone callers and floor traders. Whilst it was possible that redundant staff could move to other outcry markets in the region, HKFE did not envisage any significant impact on the development of the local futures market. Recognizing the impact of full automatic trading on staff and to address their concerns, HKFE was working diligently to minimize layoffs and to re-deploy redundant staff to other jobs.

VIII Any other business

48. There being no other business, the meeting ended at 12:50 pm.

Legislative Council Secretariat
9 September 1999

Legislative Council Panel on Financial Affairs Minutes of meeting held on Monday, 3 May 1999, at 10:45 am in the Chamber of the Legislative Council Building

Legislative Council
Panel on Financial Affairs

Minutes of meeting held on
Monday, 3 May 1999, at 10:45 am
in the Chamber of the Legislative Council Building