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

Following is a question by the Hon Henry Wu and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (May 14):

Question

In October 2000, the then Secretary for Financial Services advised the Panel on Financial Affairs of this Council that the Steering Committee on the Enhancement of Financial Infrastructure would be convened with a view to implementing straight-through processing of securities transactions whereby investors can place and match orders directly, and introducing a scripless securities market as soon as possible. He expected to implement these initiatives in three years. In this connection, will the Government inform this Council of the progress in implementing such initiatives and whether it has assessed if it is feasible to implement them in Hong Kong; if the assessment result is in the affirmative, of the details of the assessment and the timetable for implementation; if not, the reasons for that?

Reply :

Madam President,

The Securities and Futures Commission (SFC) published in December 2002 a report setting out the strategy for implementing the various initiatives of the Steering Committee on the Enhancement of the Financial Infrastructure in Hong Kong (SCEFI), including straight through processing of securities transactions and scripless securities market.

In relation to introducing a scripless securities market, the SFC conducted a market-wide consultation on the proposed model in February 2002. Views were collected from various focus groups of listed companies, legal and regulatory profession and market participants. We are now drafting the enabling legislation to allow for scripless trading. The draft legislation is targetted for public consultation in the third quarter of 2003 and introduction to the Legislative Council in the next legislative session. In parallel, the SFC is drawing up operational details of the scripless model for public consultation.

With regard to the implementation of straight through processing (STP) for securities transactions, STP for trading at the retail level has been made available since the Hong Kong Exchanges and Clearing Ltd (HKEx) launched the Automatic Order Matching and Execution System/Third Generation (AMS/3) by phases from October 2000 to February 2001. AMS/3 is equipped with new peripheral systems, including Multi-workstation System (MWS) (note 1), Broker Supplied System (BSS) (note 2) and Order Routing System (ORS) (note 3). Investors can now enter orders directly into their brokers' MWS or BSS through various electronic means (the Internet, mobile phones or Personal Digital Assistants (PDAs)) for execution on AMS/3.

To enhance investor protection and settlement efficiency at the retail level of STP, the SFC has established a Task Force on Investor Participant (IP) Account Enhancement (the Task Force), with participation of the HKEx and the stockbroking industry. The objective of the Task Force is to look into ways to enhance the current IP Account structure to provide for full STP for retail investors (i.e. enabling trading, securities and money settlement to be conducted by a single instruction). In this regard, we have asked the SFC and the HKEx to accord priority to the development of a user-friendly and cost-effective IP Account model. We note that this will help enhance the competitiveness of the small and medium sized brokers. We have also encouraged the stockbroking industry to participate actively in the design and set up of the IP Account by offering their views to the Task Force. The HKEx plans to release the proposed detailed operational model for market consultation once it is finalised. The target implementation date is in the first half of 2004.

As for STP for clearing and settlement, both the SFC and the HKEx are making progress in eliminating paper/manual processing that will tie in with scripless trading, further integrating the securities settlement and money payment systems, and adopting internationally acceptable communication standards.

Note 1: MWS is a network system provided by HKEx for installation at Stock Exchange Participants' office, which allows at most 8 workstations per trading right to enter orders simultaneously into the AMS/3 for execution.

Note 2: BSS is a network system developed by brokers (or their software vendors) for order entry and risk management functions.

Note 3: ORS is an Internet-based front-end order entry system developed and provided by HKEx as an option for subscription by Stock Exchange Participants to allow their clients to enter orders directly through the Internet, mobile phones or PDAs.

End/Wednesday, May 14, 2003

NNNN