Following is the full text of the speech (English only) delivered by the Secretary for Financial Services, Mr Stephen Ip, at the Luncheon Seminar hosted by the Hong Kong Securities Institute today (July 26):
"A Year of Reform : Landscape of the Hong Kong Securities Market"
Bill, Distinguished Guests, Ladies and Gentlemen,
First of all, I would like to thank the Hong Kong Securities Institute for the free lunch and for giving me the opportunity of saying a few words to such a distinguished audience about our securities market.
I have been in the Financial Services Bureau for about a year now. Our mission in the Financial Services Bureau is to maintain and enhance the position of Hong Kong as an international financial center. To this end, we see it as our task to ensure that our laws and regulations are on a par with international standards and practices, that there is a level playing field for all to compete and thrive, and that we continue to upgrade our infrastructure to promote efficiency.
Over the past two years, we have taken some major steps to reform our securities and futures market. I trust you will agree that reform is mainly a process of reallocating capital and human resources from inefficient areas into areas of growth. The process involves re-adjustment, challenges and opportunities. The underlying aim of our reform programme is to increase efficiency and innovation whilst making sure that the integrity and soundness of the securities market is maintained with adequate protection for our investors.
At the heart of this strategy is the consolidation of the originally fragmented market structure into one single entity. This was accomplished with the establishment of the HKEx in March last year and its subsequent listing in June. We believe the streamlined market structure in Hong Kong will enable the HKEx to gain economies of scale and respond quickly to market forces.
With over 800 listed companies and a market capitalization of US$580 billion, the Hong Kong market now ranks ninth in the world. We are the second largest market in the region after Tokyo. There is of course no room for complacency. I am glad to see the many initiatives being taken by the HKEx to improve its trading and operation efficiency. Last year was also an eventful year for product development for the HKEx. We saw the introduction of live trading in selected NASDAQ shares, the launch of Mini-Hang Seng Index Futures, MSCI China Free Index Futures and Exchange-Traded Funds that track foreign stock indices.
On the cost side, in April next year the HKEx will remove the rules on minimum brokerage commission rates for stock and futures transactions. This move, together with the approved reduction in stamp duty to take effect on 1 September, will help to lower trading costs and enhance market competitiveness.
This takes me to the second major plank of our reform package. Increased competition unleashed by deregulation is a global trend that no one can resist. We cannot afford to standstill when others are fast liberalizing commission charges and other rigidities in the market. Adjustments will have to be made on an individual firm level to adapt to the changing operating environment. On the systemic side, we have taken a closer look at our regulatory framework to ensure that it minimizes potential risks in the system, and to increase its overall soundness taking into account international practices as well as local characteristics and needs.
The Securities and Futures Bill is the culmination of years of hard work. The initiative was formally announced in the 1999 Budget. Since then, we have engaged the market in intensive consultations through the publication of policy papers in July 1999, and the legislative proposals in the White Bill in April 2000 and Blue Bill in November the same year. This process is on-going, as without the input of market participants, the regulatory reform simply could not move ahead.
Since the introduction of the Bill into the Legislative Council last November, we have held nearly 40 meetings with the Bills Committee set up to scrutinize the Bill. Essentially the Bills Committee deliberations are divided into three stages : Stage I is the policy discussion which finished in May; Stage II is the Clause-by-Clause discussion, about half of the 395 clauses have been covered so far; and Stage III is consideration of the Committee Stage Amendments.
I am sure it will cause all of you indigestion if I go over each and every clause in the Bill to explain to you its contents. I believe most of you know very well the proposed single license regime; the powers of SFC to regulate, investigate and discipline; the setting up of a new tribunal to deal with market misconduct; and the new rules for disclosure of price sensitive information. I am grateful that the market and industry have given us constructive comments and suggestions throughout the process. We reckon that the scrutiny undertaken in the Bills Committee is an important part of the legislative process and we thank our legislators for their time and efforts. As always, we will co-operate fully with Legco Members in their consideration of the Bill.
Talking about our regulatory framework, I cannot really skip the topic of corporate governance. This will indeed be the main focus of the Financial Services Bureau's work in the coming year.
The Standing Committee on Company Law Reform (SCCLR) has just completed the first phase of a root and branch examination of our corporate governance regime. Last week, it published a consultation paper on proposals relating to directors' duties and responsibilities, shareholders' rights and corporate disclosure. The paper has made proposals relating to the avoidance of conflict of interest in the directors' share transactions and their voting decisions; improvement in the procedures for nominating and electing directors so that shareholders have a meaningful right to nominate and elect directors; making connected transactions subject to voting by disinterested shareholders; and increasing shareholders' legitimate access to company information and strengthening the corporate reporting process.
The Government welcomes the publication of the consultation paper and look forward to hearing public comments on the proposals. The consultation period will end on 15 October. I hope you will take time to consider these important issues and express your views early.
In parallel to the examination of the above specific topics, the SCCLR has also engaged consultants to conduct reviews on fundamental issues like the attitudes of institutional investors towards corporate governance standards in Hong Kong; the corporate governance regimes in other jurisdictions; the correlation between the performance of listed companies in Hong Kong with their shareholders profile; and the roles and functions of audit, nomination and remuneration committees. Results of the review are expected to be available by early 2002. Later this year, the Committee will also commission a study on company information flow and shareholders' rights of access to such information. The results of this study should be available by mid 2002. The Committee will publish a further batch of recommendations for consultation, after considering the findings of these studies.
The SFC and HKEx also play an important role in upgrading the corporate governance regime in Hong Kong. The SFC released a consultation paper on a Review of the Codes on Takeovers and Mergers and Share Repurchases in April proposing, among other things, lowering the trigger threshold for a mandatory offer from 35% to 30%. The consultation ended in mid June. The SFC is now reviewing the public responses and the revised Code is expected to be issued in the coming quarter.
Last month, the SFC also set up a Shareholders Group to advise it on a wide variety of areas of shareholders interest. The Group met a few weeks ago to discuss its role and the work items to be addressed in the time ahead. The initiative is a very worthwhile one and will complement the work of the SCCLR.
A number of initiatives are also being taken to review the Exchange's listing rules and their administration in order to improve their effectiveness.
As you all know, the HKEx is conducting an overall review of its listing rules and will consult the market on issues such as quarterly reports. Coupled with the imminent restructuring of the Exchange's committee set-up for processing listing applications and enforcing the listing rules, the Hong Kong market will continue to live up to its name of being fair, transparent and efficient.
Upgrading of our physical, or if you like, the virtual financial architecture is as important as the continued search to upgrade its software. This is now in the capable hands of Andrew Sheng, Chairman of the SFC, who is working with other regulators, including the HKEx, the Bureau and market participants to implement a number of longer-term initiatives including straight-through processing, scripless transactions and arrangements for a single clearing system. These initiatives will, among other things, help reduce the settlement risks for brokers and help them concentrate on client instead of back office services.
Indeed, with the increase in the speed of trading, an efficient and reliable clearing and settlement system will form the backbone of a modern market. To this end, I am glad to see that the HKEx is seeking to upgrade its clearing and settlement systems to a third generation of the current one, or CCASS3 in short. CCASS3, which is expected to be in place in a year or so, can support longer operational hours and products with different settlement cycles. This will pave the way for the introduction of new products as well as trading and settlement of products from different time zones.
All the above initiatives gear towards the development of a strong market that attracts liquidity and manage risks before they begin to appear. Looking into the future, we have to watch closely market developments in the Mainland and explore areas of cooperation to achieve a win-win situation.
China's GDP growth reached an enviable 8% last year. Its impending accession to the WTO, its strategy to open up the West and its successful bid for the 2008 Olympics add to the feel good factor and provides new business opportunities for Hong Kong.
There are always different views as to how we may manage the opportunities and challenges stemming from the growth of the Mainland market. We welcome debates, views and suggestions. As a member of the recent HKSAR delegation to the Western region of China, I have seen for myself the considerable potential of the Chinese market which is still largely untapped. And the Mainland and Hong Kong securities markets combined has reached a total market capitalization of US $1200 billion, making China the fifth largest market in the world. I am confident that Hong Kong will have a significant role to play in Mainland's further integration with the international market, and her continuous economic development. We will continue to be an effective conduit of funds, international knowledge, information and expertise as we are determined to keep our open system buttressed by the rule of the law.
I think I better stop here. Thank you for your patience. I'll try to answer a few questions, if there are questions and if I know the answers. Thank you.
End/Thursday, July 26, 2001