INTRODUCTION

The Financial Secretary announced in his last Budget Speech a comprehensive reform for the securities and futures market of Hong Kong. This paper summarises the broad directions of this reform and the progress made so far in respect of the proposed market structure reform.

DETAILS

Background to the Reform

2. While the securities and futures market of Hong Kong has experienced significant growth over the last decade, globalisation of the international financial markets, the advancement in information technology, as well as the increasing sophistication of investors and investment products have created new challenges to domestic securities and futures market. Hong Kong must strengthen its competitiveness if it is to remain in the premier league of international financial centres.

3. Recent developments in the global financial market have gradually eroded our competitiveness and challenged our position as a major regional and international financial centre -

• the advancements in information technology and its application in the securities and futures markets have made cross-border trading increasingly convenient and popular, eroding the effectiveness of domestic market regulations and exchange monopolies;
  
  
• technological advances have also led to the emergence of alternative trading systems, posing direct challenges to traditional exchanges;
  
  
• market regulators are increasingly aware of the need to de-regulate to encourage innovations and enhance efficiency in the face of increasing global competition.

4. Globalisation of investment activities has become a trend. Issuers and investors who are sources of liquidity are becoming less geographically bound in their choice of market, and only markets which offer the products and services these issuers and investors need at competitive costs and efficiency will survive.

The Market Reforms for Hong Kong

5. To answer these challenges, our market will have to maintain and further strengthen its competitiveness. The Financial Secretary proposed a three-pronged reform in his 1999-2000 Budget Speech for the securities and futures market -

1. upgrading of market infrastructure;
   
   
2. regulatory reform; and
   
   
3. demutualisation and merger of the exchanges and clearing houses.

6. In respect of the first initiative, the Financial Secretary has appointed a Steering Committee on Enhancement of Financial Infrastructure ("SCEFI") chaired by the Chairman of the Securities and Futures Commission to look into the issue and submit recommendation and implementation timetable by mid September 1999. The key issues that the Steering Committee will consider include -

1. the setting up of a single clearing arrangement;
   
   
2. the feasibility and technical requirements for straight through processing across the financial markets; and
   
   
3. the introduction of a scripless securities market.

The Steering Committee has so far made satisfactory progress and expects to submit its recommendation and implementation timetable to the Financial Secretary by mid-September 1999 as mandated in the Budget Speech.

7. On the second initiative on the regulatory front, the aim is to bring the regulatory regime of Hong Kong for the investment market on par with latest international standards. This future regulatory regime will need to provide an effective and efficient regulatory framework for the market and at the same time not posing impediments to market activities and developments in response to global market trends. Building upon the earlier draft composite Securities and Futures Bill put forward by the SFC, the Securities and Futures Bill is being prepared with a view to being introduced into the Legislative Council by end 1999. The Administration expects to be ready to brief the Panel on the Bill in greater detail at its meeting in July.

The Market Structure Reform

8. The Financial Services Bureau issued a policy paper in March 1999 to set out the rationale for the demutualisation and merger, as well as outlining the necessary steps to be taken by the concerned parties to achieve the goal of the market reform.

9. It is proposed in the Policy paper to demutualise and merge the two Exchanges and their associating Clearing Houses into a new holding company, the NewCo, and ultimately list the shares of that company on the stock exchange for trading and wider public ownership.

10. The ownership of the new entity will be separated from trading rights. The latter will be opened up to allow wider access to the market, subject only to regulatory requirements and the payment of applicable fees.

11. To make the new entity more business-driven, it will be allowed to make profit and distribute dividends to its shareholders, a privilege which is at present not available to the members of the Exchanges. Its corporate governance structure will allow sufficient representation of the wider interests of the public and the overall economy of Hong Kong.

12. Whilst there are public policy aspects to be considered in the structuring of the new and integrated exchange and clearing corporation, the demutualisation and merger exercise is primarily a commercial transaction which requires the two exchanges to go through a commercial and due process.

Progress of Reform

13. Since the announcement of the reform measures, major market players and operators, including the Council/Board of the two Exchanges and Clearing Houses and members of the industry, as well as the community at large have expressed support for the market structure reform. The two Exchanges have in early March engaged professional advisers to assist in working out the demutualisation and merger schemes. At the motion debate by the Legislative Council on the issue on 5 May, Members have also expressed strong support for the proposed demutualisation and merger of the Exchanges and Clearing Houses. The different views transpiring from the debate on the various aspects of the reform will be taken into account in developing the detailed proposals for the merger as well as the future new company under which the existing market bodies are expected to integrate.

14. In addition, the Secretary for Financial Services has convened a Coordinating Committee on Market Structure Reform to oversee the progress of the reform and provide a forum for exchange of views on those issues which have a significant public interest or public policy dimension in the context of the demutualisation and merger exercise. The membership of the Committee includes the chairmen of the SFC, the two Exchanges and the Hongkong Clearing, leaders of the securities market as well as members of the securities and futures industry.

15. At the two meetings held in April and May respectively, matters discussed at the Committee included the public function of NewCo, its corporate governance structure, trading rights under NewCo, the rationalisation of regulatory functions between the SFC and the NewCo as well as issues relating to the clearing houses under the proposed merger. The Committee will continue to meet in June and hopes to conclude its work by next month.

16. It should be noted that the Committee is not concerned with the valuation exercise which should be left to the commercial process involving the parties to the transaction and their financial advisers and proceeding on the basis of the relevant laws and rules including the Hong Kong Takeovers and Mergers Code.

17. The Administration together with the Securities and Futures Commission will continue to work closely with the two Exchanges and Hongkong Clearing to bring the proposed demutualisation and merger to successful conclusion in accordance with the timetable set out by the Financial Secretary in his Budget Speech, which expects, inter alia, a decision on the reform by the members of the two Exchanges by the end of September 1999.


Financial Services Bureau
3 June 1999


[june-panel]