*********************************************

Following is a question by Dr the Hon David Chu and a reply by the Secretary for Financial Services, Mr Stephen Ip, in the Legislative Council today (November 14):

Question :

The Board of the Hong Kong Exchanges and Clearing Limited ("HKEx") decided in May last year to remove, with effect from 1 April 2002, the rule which sets a minimum rate of brokerage commission. In this connection, will the Government inform this Council whether:

(a) it knows if the Board of HKEx had, before making the decision, assessed the numbers of securities companies which may have to lay off their staff or close down their business upon the removal of the rule; and

(b) in view of the substantial reduction in the revenues of securities companies last year due to the low trading volume, the authorities will propose that the HKEx shelve its decision to remove the minimum commission rule, so as not to apply further pressure on the operation of securities companies; if not, of the reasons for that and the measures in place to increase the business opportunities and revenues of the securities sector?

Reply :

Madam President,

(a) On 17 May 2000, the Board of Hong Kong Exchanges and Clearing Limited (HKEx) approved the removal of the minimum brokerage commission rule from the Rules of the Exchange with effect from 1 April 2002. The decision was made after intensive discussion and consultation with the brokerage industry.

The Board of HKEx had taken into account the following factors when making the decision to remove the minimum brokerage commission rule:

(i) Thirteen of the fifteen largest stock markets (by market capitalisation) in the world had adopted a system of free negotiation of brokerage commission. The only two exceptions then were Hong Kong and Taiwan, ranking 10th and 13th respectively. Taiwan subsequently liberalised the brokerage commission rates on 1 July 2000.

(ii) It is a global trend to allow free negotiation of brokerage commission rates. The liberalisation of commission rates will create an environment conducive to free competition in the stock market. To meet the challenges of globalisation and technological advancement, Hong Kong must keep up with international developments and remain competitive.

(iii) The Board of HKEx had considered the possible impact of the liberalisation of commission rate on the industry but it was unable to assess the number of securities companies which might have to lay off staff or close down business upon the removal of the minimum brokerage commission rule. The Board considered that the liberalisation of brokerage commission would not necessarily result in a reduction in income for the brokerage industry, as the free negotiation of commission should stimulate trading, which will ultimately benefit the industry as a whole.

(iv) To allow sufficient time for the industry to adapt to the change, the Board of HKEx passed the decision to provide a two-year transitional period, thus deferring the liberalisation of brokerage commission for two years to April 2002.

(b) The Government has no intention to intervene in the decision made by the Board of HKEx. We believe that the liberalisation of brokerage commission will enhance the competitiveness of Hong Kong as an international financial centre. For brokers, they will be free to set the level of fees having regard to the package and nature of the services provided to clients. This will facilitate the diversification of services in the interest of the investing public.

The operational environment of the industry has deteriorated as the market turnover shrinks as a result of the prevailing economic condition. To tackle the problem, we are strengthening co-operation with the Mainland's financial services sector to create more business opportunities for the industry, taking advantage of Hong Kong's expertise and market infrastructure, and the huge potential of the Mainland market. Furthermore, the Government, SFC and HKEx are keeping the securities laws and listing rules under review, so as to facilitate the launching of new products and help the industry capture new market.

To assist the development of the securities industry, we are committed to improving market efficiency and lowering the industry's operating costs. The Government, together with the industry as well as the regulators, is looking into ways to streamline the licence application and renewal procedures under the current legislative framework. Once the Securities and Futures Bill is passed by the Legislative Council, we shall also introduce a "Single Licensing System" to replace the multiple registration system currently in place to streamline regulatory procedures. It is our hope that by implementing the "Single Licensing System", we shall have room for adjusting downward related licence fees. In addition, the Government and SFC are working on the enhancement of Hong Kong's financial infrastructure with a view to increasing clearing and settlement efficiency and reducing market risk.

End/Wednesday, November 14, 2001

NNNN