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Speech by Secretary for Financial Services


Following is the speech by the Secretary for Financial Services, Mr Stephen Ip, at the Welcoming Dinner for the Regional Conference of the International Securities Services Association (ISSA) this evening (May 9):

Ladies and Gentlemen,

Thank you for giving me this opportunity to speak to such a distinguished gathering tonight. Hong Kong is indeed honoured to be the host of a series of important events this week. The Fortune Global Forum may have stolen some limelight but I can assure you that we treasure your presence as much.

When this Conference was last held in 1999 in Hong Kong, we were just recovering from the aftermath of the Asian financial crisis. One lesson we have learnt is that we must ensure that our financial system has the capacity and capability to respond quickly to changes in the global environment.

Globalization and technological advances are the driving forces behind such changes. High-powered computers and low-cost telecommunications have made the world more closely-knitted. They have brought about immense mobility of investors, diversification of markets, and made cross-border trading and listing increasingly popular and convenient. Building on the strong foundation of our outward looking and liberal financial system, we are tasked to build an even more robust infrastructure that can cope with the speed and sophistication of modern, borderless transactions.

We have been working hard to accomplish this task. First, we have streamlined our market structure to make it more competitive. The co-host today, the Hong Kong Exchanges and Clearing Limited, or HKEx in short, is a new entity born from the merger and demutualization of two exchanges and three clearing houses in March 2000. The consolidated entity is now up and running, and listed on its own stock exchange. With a total market capitalization of US$544 billion, Hong Kong's stock market now ranks tenth in the world and third in Asia. Last year, it raised a total of US$59 billion, a record high in the history of our market. It is our belief that the streamlined market architecture will bring about economy of scale in terms of operational efficiency, quick response to market forces, greater attention to developing coherent business strategies, and rationalization of regulatory functions.

The benefits of this new market structure have been shown in the development of new products by the HKEx, its increased cooperation with overseas exchanges, and upgrading of the trading system with the successful launch of the third generation automatic order matching and execution system, generally known as AMS/3. With greater cohesiveness in internal structure, more energy can now be devoted to meeting external competition and mapping out future development strategies.

Second, we continue to modernize our regulatory framework. The Securities and Futures Bill was introduced into our Legislative Council in November last year. The Bill modernises and consolidates ten existing ordinances into a composite piece of legislation governing the securities and futures markets. It introduces a number of major regulatory initiatives, including a single licensing regime to streamline regulatory requirements and upgrade the quality of intermediary services, a Market Misconduct Tribunal to promote a fair and orderly market, better disclosure of interests by market participants to enhance market transparency, and more flexible measures to facilitate introduction of new market systems and products. It also gives the regulator the necessary investigative powers, with adequate checks and balances, and provides a more efficient channel of appeal. Overall, the Bill strikes a reasonable balance between promoting market development and protecting investors. This improved framework is important for Hong Kong to move forward as an international financial centre. We look forward to the early enactment of the Bill, to ensure that our regulatory regime is in line with international standards.

We also attach great importance to raising the standards of corporate governance of our companies. We know very well that capital will only flow to those markets and companies with good corporate governance. We all know that corporate governance is not only about regulations and regulators; it needs the concerted efforts of all the parties concerned in both the public and private sector and it involves fundamental cultural change.

One of Hong Kong's strong points is that it has a well-established company law regime, listing rules and codes of practices. Currently the Standing Committee on Company Law Reform is conducting an overall Corporate Governance Review, and has established subcommittees to look at issues concerning directors' duties, shareholders' rights and corporate reporting. The Standing Committee is now in the process of drawing up recommendations with a view to publishing them for public consultation in the next few months. At the same time, the Securities and Futures Commission has recently released a consultation paper on the Codes on Takeovers and Mergers and Share Repurchases. It proposes lowering the trigger level for mandatory offer and other measures to bring the regime in line with international practice to enhance minority shareholders protection. Together with the Securities and Futures Commission, the HKEx is also embarking on a comprehensive review of the Listing Rules of both the Main Board and the Growth Enterprises Market, and aims to consult the market on the proposed changes later this year. Important issues such as reporting requirements for listed companies, disclosure of directors' remuneration, incorporation of the current Code of Best Practice into the Listing Rules and strengthening of disciplinary sanctions will be covered.

Let me now turn to the third pillar of our reform which bears direct relevance to this Conference. This concerns the development of an "eFrastructure" for Hong Kong's financial system. As stated in the Report of the Steering Committee on the Enhancement of the Financial Infrastructure in Hong Kong, our vision is to develop an infrastructure that will "allow local and global market participants to access the full spectrum of financial products and services, which are interconnected by an open, robust, secure and high performance network." Within this new infrastructure, transactions will be processed electronically and straight through.

We are on the way to realizing this vision. For example, the Securities and Futures Commission has built a secure network known as the SD Net (which means the Securities and Derivatives Network) to enable electronic submissions of financial returns from brokers to the Commission It also facilitates data transfer between brokers and share registrars in electronic IPOs, the first one of which was launched successfully in September last year. The HKEx has also commenced major infrastractural projects to strengthen its clearing systems for both the securities and derivatives markets with added capacity to match its powerful trading engines to realize their full potential and flexibility to better respond to market needs.

With the participation of key financial agencies including the HKEx, the Steering Committee is now working in full steam to make this grand design happen. The major building blocks include developing straight through processing, building a scripless market and putting in place a single clearing process for both the securities and derivatives markets. The topics to be covered in the Conference tomorrow will provide timely input to the Steering Committee's deliberations. I would like to take this opportunity to pay tribute to ISSA for bringing together institutions such as custodian banks, clearing organizations, central depositories, stock exchanges, brokers and asset managers to look at these important issues.

Now let me say a few words about the Hong Kong economy. We achieved a 10.5 per cent GDP growth last year and we expect the economy to grow steadily by about 4% this year. Hong Kong is well placed to benefit from the Mainland's economic growth -- it achieved 8.1% GDP growth in the first quarter of this year. We will also benefit from its imminent accession to the World Trade Organisation and its strategy to open up the Western Region.

As at the end of last year, 119 out of 794 companies listed in the HKEx were Mainland enterprises, comprising H-share and red chip companies. These companies accounted for 27% of our total market turnover. For the same period, 74% of the funds raised in the HKEx were for Mainland companies.

The growth of the Hong Kong stock market has been accounted for by such factors as high liquidity, openness, rule-based regulatory regime, world class financial intermediaries, and a high level of participation by institutional investors. These factors will also enable Hong Kong to play a key role in the further development of the Mainland's financial markets. The demand for finance in the Mainland market is on the rise. The need for fund raising for the infrastructural development in the Western region, for example, is huge. We have a lot to offer to be the Mainland's premier capital formation centre.

Indeed, I believe that better co-operation between financial markets worldwide will provide a sustainable source of growth for all. Hong Kong will continue to explore opportunities for co-operation. Co-operation can take various forms and shapes but it must be to the mutual benefits of the markets concerned. I am glad to note efforts in various quarters to study the feasibility of inter-connecting exchanges' trading systems with a view to providing investors around the world with an efficient, round-the-clock trading mechanism. The Conference tomorrow will certainly help provide valuable input to this process. I wish all of you a very successful and rewarding Conference. You will find that Hong Kong is a place to work hard, to enjoy life and, of course, to make money. Please take time to do a bit of shopping, golfing and sightseeing to help our economy!

Thank you.

End/Wednesday, May 9, 2001


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