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Following is the full text of the speech (English only) by the Secretary for Financial Services, Mr Rafael Hui, at the Venture Capital Conference co-organised by the Hong Kong General Chamber of Commerce and Hong Kong Venture Capital Association today (Wednesday):

"Hong Kong: The Financial Centre in the New Millennium"

Chairmen Tung and Lam,

Ladies and Gentlemen,

The theme of today's conference is venture capital. This morning's programme has already covered a broad range of issues on how to make venture investment a success. There is another half-day programme awaiting in the afternoon that touches more upon on the technical side of the subject. Over this luncheon speech, I have been asked, for a change, to speak on a different topic which I hope would complement in some ways today's programme by giving a broader backdrop as to what the new millennium would mean to Hong Kong as a financial centre. This suits me just fine, because I know very little about venture capital anyway.

In looking forward, it is necessary to briefly look back. In the aftermath of the 1987 stock and futures market meltdown, a major reform programme was undertaken. This programme had laid down three strong pillars that have put our securities and futures market on a much firmer foundation and have since supported our growth during the past decade.

These three pillars are first, the establishment of the Securities and Futures Commission as a professional market regulator outside the government; second, the modernisation of the constitution and management of both the Stock and Futures Exchanges; and third, the formation of the Hong Kong Securities Clearing Company and the electronic Central Clearing and Settlement System, or the "CCASS" for short. On the basis of these reforms, we embarked on a decade of phenomenal growth in the financial market in Hong Kong. During this period, our stock market capitalisation has grown by more than five times and our annual turnover increased 19 times to nearly HK$4 trillion. Our securities and futures market also has become truly international in terms of investor participation as well as presence of multinational intermediaries.

The innovations and changes since 1987 have provided a market structure and regulatory framework that has served us well in the last decade. Can they still be relied on to keep us on the growth track in the next millennium?

To answer that question, we need to first of all look at what challenges the new millennium would bring to the financial market. I would like to name four of them.

First, the advance of information technology and the proliferation of internet applications both domestically and on business has made access to market information and trading facilities so much easier than ever before for the investing public. Direct access to retail investors bypassing traditional intermediaries for financial institutions also has become financially and practically a viable and even appealing alternative. The proliferation of alternative trading systems and electronic communication networks is beginning to pose a serious challenge to all exchanges including without exception the most established, such as the New York and London Stock Exchanges.

Second, the growing importance of institutional investors has caused fundamental changes to many aspects of the capital market. Their demand for more sophisticated financial products, ever lower transaction costs, as well as more transparent and accountable corporate governance has been a major driving force for changes in the last decade. Derivatives have become an indispensable component of any mature and sophisticated financial market where unwanted, excessive risks in an investment can be sold as a commodity to those who wish to take them at a price.

Third, the growing demand for cross-border financial transactions that arose in the first place from the demand to settle payment for international trades has now become an international commercial activity in its own right. Cross-border activity represents a fundamental departure from traditional market operations and raises new challenges for policy-makers and market regulators everywhere.

Fourth, the emergence of a globalised market place that comprises multiple local and regional markets that are linked up by ever-expanding telecommunications technology has changed the landscape of the international financial market beyond recognition. These markets share the same stream of capital flows, the same bunch of investors and the same group of intermediaries, who see no boundary to investment or speculative opportunities. They drive the conformity of standards and regulations and bring competition to bear on even the closest markets in the world. At the same time, the ever-growing cross-border financing activities, including external lendings by banks and overseas issues of shares, as well as the trading of derivatives on an international scale mean that we are far more vulnerable to the ups and downs of external markets than ever before.

In the light of these four challenges, for financial centres throughout the world, it is no longer just a matter of comparative advantage but also a matter of survival in the next millennium.

In a sense, the unprecedented challenges of the Asian financial crisis that have swept through the region and shaken the foundations of many of the regional economies have confronted market operators, their regulators and policy makers with an unavoidable need for fundamental reappraisals of whether new perceptions and approaches are called for in meeting the demands of the market.

Hong Kong was hit by the contagion, but with our robust operational and regulatory systems, we have survived the most stormy period. An often asked question is 'What's next?'. As the economic tide turns and the dawn of the millennium breaks, it is of utmost importance to ensure that we not only recover, but also do this on an even healthier footing, particularly in the face of the increasing globalisation of the world's economies and the further advancement of technology.

So, what are the criteria to be such an international financial centre in the new age? Free and open market policies must continue to be imperative. Equally important are the possession of a stable and liquid capital market, with world-class market infrastructure, making use of the most advanced information technology and telecommunications, sophisticated but flexible regulation, strong foundations for the rule of law, high calibre personnel and professionals, and political and social stability. Hong Kong does have all of those qualities, which should help to consolidate our position as a world class financial centre.

In March this year, the Financial Secretary commissioned a Steering Committee on the Enhancement of Financial Infrastructure in Hong Kong under the chairmanship of Mr Andrew Sheng to make recommendations to strengthen our financial infrastructure and to spearhead the development of the financial market. The Steering Committee completed the study and put forward its recommendations a couple weeks ago, including the development of a technology infrastructure, to be named the "eFrastructure".

The eFrastructure will include the components of a single clearing arrangement for better risk management; end-to-end straight through processing for improved cost-effectiveness; a scripless securities market for enhanced efficiency and legal certainty and an open, robust, current and scalable technology structure for local and remote connectivity and high performance. With implementation of the eFrastructure, and with the expected growth in the Mainland market, Hong Kong can aspire to become a major centre for liquidity, clearing, settlement and risk management in Asia and the portal for strategic links with global markets in this, as well as other, time zones.

The global crisis over the last two years has provided challenges and opportunities which have also prompted the need to undertake a comprehensive reform of the regulation of our securities and futures markets. Now this is well underway. Our legislative reform seeks to modernise our regulatory regime to strengthen our competitiveness and aim to promote a fair, orderly and transparent market and facilitate introduction of new products and trading systems. This new framework would include much clearer regulatory objectives and strengthened supervisory and investigative powers for our regulator and bring in new regulations on internet trading and streamline the licensing regime for market intermediaries. The renewed and strengthened legislative framework will provide a solid foundation upon which our securities and futures markets will continue to grow and cope with the ever-changing international market practices and developments. The Legislative Council will be invited to scrutinize and pass the proposed legislation next year.

The making of alliances among exchanges and technology development are also global trends and the success of demutualisation and merger of our stock and futures markets will be an important step to reinforce Hong Kong's position as an international financial centre in the new millenium. The merger will facilitate a more efficient and market-driven platform on which our market participants compete with their counterparts in an increasingly globalised market. With a clear business objective and streamlined governance structure, the demutualised and merged exchange will pursue efficiently its commercial goals and perform its public functions. Our vision has been shared and widely supported by the members of the Exchanges and the investing public. During the last five weeks, the merger proposal was approved by the members of the two Exchanges with an overwhelming majority and sanctioned by the Court. The enabling legislation is now ready and I hope that this will be passed by the Legislative Council early next year and the merger will be completed by next March. The Hong Kong Exchanges and Clearing Limited (HKEC), which is the holding company of the merged exchanges and clearing houses, will be listed as soon as possible thereafter.

But are all these reforms and initiatives, however substantial and significant, enough to sustain the momentum of further developing our position as a world class financial centre? I think more still needs to be done. In the first few years of the next millenium, we should continue to focus on at least three areas.

First, corporate governance is an essential element in attracting investment and fostering business prosperity. We have a record of promoting good governance which is a continuous process. In the past ten years, we have strengthened our legislation to promote better disclosure of shareholder's interests, to enhance the investigatory powers of the Securities and Futures Commission into suspected misconduct of listed companies; and to prescribe stronger measures to deal with directors of companies who have proved to be patently unsuited to continue as directors. Furthermore, our company law is constantly being reviewed by the Standing Committee on Company Law Reform. This Committee was formed in 1984 to advise the Financial Secretary on necessary amendments to the Companies Ordinance, Securities Ordinance and the Protection of Investors Ordinance. Chaired by a High Court Judge, the Standing Committee comprises members from the legal and accountancy professions, academics, market participants and financial service regulators. In the past five years (1993-98) this pool of experts put forward a total of 33 proposals to strengthen our legislation. We have implemented so far over half of these recommendations and another 11 proposals would be put before the Legislative Council in the current session.

In 1994, Government commissioned a consultant to conduct an Overall Review of the Companies Ordinance. A Report was submitted to the Government and the Standing Committee was invited to scrutinize its findings. Good progress has been made and I understand that the Standing Committee will be putting forward its views on the Report early next year. The reform of our company law is an important exercise, as it is crucial that our legislation is kept abreast of the times. The Government will seriously consider the Standing Committee's recommendations.

In going forward, further enhancement in corporate governance sooner or later will have to confront at least two very complicated and highly contentious issues. There have been much discussion, both in Hong Kong and overseas, on directors' duties. The international trend is the increasing responsibilities placed upon directors. How far should we go, particularly in respect of non-executive directors? This is the first question. The second question relates to a very special feature of the companies listed in Hong Kong. Many of those are controlled by their founders and their families and this naturally raises the question of the protection of minorities and institutional investors. What should be the extent of protection and the right balance? These questions, as well as many others, will be taken up by the Standing Committee which places corporate governance as a top priority for its work in the next few years.

Second, together with the trend of globalization, advance in information technology and increased openness of domestic financial markets allow capital to flow in and out of an economy in huge amounts and within a very short time. According to the Bank for International Settlements, the global value of foreign exchange transactions taking place on an average day in April 1998 was US$1.5 trillion. Rapid increase in the quantity and volatility of capital flows has led to new problems and challenges, especially for small, open markets like Hong Kong.

As an international financial centre, we have no alternative but to face these problems and challenges. It is essential that the market is anchored by a robust system that can cushion massive short-term liquidity fluctuations. Continuing efforts will have to be made to constantly review the strength of our financial systems. Cross-sector risk management is a crucial component. After the merger of the exchanges and clearing houses, HKEC will play an important role in ensuring that market risks are properly and effectively managed. A Risk Management Committee will be established under the HKEC to look specifically at the risk issues and to consider the establishment of the financial infrastructure to link up the various financial sectors including banking, securities, futures, insurance and MPF and all the regulators concerned will be represented on this Committee.

Finally, as the different sectors of the financial markets become more closely intertwined and the needs of investors for cross-market services continue to grow, we can only expect that there will be more and more hybrid financial products and giant financial conglomerates in the market. Coupled with that, the trend of "dis-intermediation" in the financial sector will be here to stay as direct market penetration right to the consumer level, has been and will continue to be, made much easier and feasible with technological advances. As a result, more trades will divert from traditional exchanges to the over-the-counter markets or alternative trading systems. Both trends pose serious challenges to regulators and policy makers who will need to formulate the most appropriate response in order to maintain market integrity, to prevent regulatory arbitrage and to protect investors.

Ladies and gentlemen, business opportunities ahead of us are enormous - but the competition will only be even more fierce. Whether Hong Kong will be a winner or loser in the next millenium will hinge on our determination and commitment to remain free and open, to resist the temptation for protectionist and restrictive practices and to be firmly plugged into the global market. Many experts have predicted that it will not be too long before truly international financial centres will congregate to just a handful of places where liquidity will tend to flow. Hong Kong should strive to be one of those few. We already have the foundation. What it takes is a determined unwillingness to be content with being a regional player, forever relying on our domestic liquidity and the support from the Mainland.

In his Policy Address, our Chief Executive has made international metropolises such as London and New York our aim and our benchmark. In the field of financial services, which will be the undisputed Asian Pacific equivalent of these two cities in the new millenium? Hong Kong should be a front-runner. Given our headstart, provided we do not stand still, we must constantly remind ourselves that it is a prize not so much for us to win, but, more important, for us to lose.

End/Wednesday, October 27, 1999

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