MESSAGE - Policy Address

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MESSAGE

During the year, we continued to pursue ourobjective of enhancing Hong Kong’s status as aninternational financial centre by further improvingour regulatory and infrastructural framework.

The Securities and Futures Bill which seeksto consolidate and modernize all legislationgoverning the securities and futures markets wasintroduced into the Legislative Council inNovember 2000. Good progress has been madein the legislative process. We look forward to theearly enactment of the Bill which will bring ourregulatory framework on par with international standards.

A modern and robust financial infrastructure will help mitigate risks,increase efficiency, and enhance market transparency and liquidity. Our goalis to build an eFrastructure that will enhance the competitiveness of ourmarket. The Steering Committee on the Enhancement of the FinancialInfrastructure in Hong Kong is taking steps to put in place the building blocksfor developing such infrastructure, bringing ultimately straight-throughprocessing, a scripless market and single clearing for stock and derivativetransactions.

Good corporate governance is essential to fostering a fair, open andefficient regime. In July this year, the Standing Committee on CompanyLaw Reform published a consultation document on proposals to furtherenhance our corporate governance standards. We would treasure publicviews on this very important subject. In the coming year, we would workwith other concerned bodies to further improve corporate governance.

In December 2000, the Mandatory Provident Fund System was fullyimplemented. We have worked closely with all relevant parties to ensurethe smooth operation of the System. A review on the operational aspectsof the Mandatory Provident Fund Schemes Ordinance will be conducted laterthis year.

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18th Floor, Tower I, Admiralty Centre, 18 Harcourt Road, Hong KongFax No.: 2528 3345 E-mail Address: [email protected]

Website: http://www.info.gov.hk/fsb

The last phase of deregulation of interest rate rules was implementedsmoothly in July 2001. All Hong Kong dollar deposit interest rates are nowdetermined by free market forces. This will enhance competition andefficiency of the banking industry, and give banking consumers more choice.The past year has also witnessed steady progress in establishing a depositinsurance scheme and a commercial credit reference agency in Hong Kong.Taking into account the views received in the public consultation exercise,we are now drawing up the details.

China’s imminent entry into the World Trade Organisation and thedevelopment of the Western Region will bring new opportunities andchallenges for Hong Kong’s financial services sector. In the coming year,we shall continue to work closely with the market so as to ensure that ourfinancial services sector is poised to benefit from the new businessopportunities. We shall build on our strong foundations to improve thequality and efficiency of our financial services sector, with a view to furtherbroadening and deepening our financial markets.

(Stephen Ip)Secretary for Financial Services

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International Financial Centre

Policy Objectiveand

Key Result Areas

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INTERNATIONAL FINANCIAL CENTRE

Our Policy Objective is to maintain and enhance Hong Kong’s statusas a major international financial centre through the provision of anappropriate economic and legal environment for an open, fair and efficientmarket.

Overall Targets

Our targets this year in pursuing this Policy Objective are –

l to ensure that Hong Kong’s financial infrastructure meetsinternational standards

l to ensure that our business laws continue to provide a levelplaying field

l to ensure that the various regulatory regimes in Hong Kong areconsistent with the international standards recommended by therespective international organisations

Progress

In the past 12 months, we made good progress in enhancing HongKong’s status as a major international financial centre.

We have continued to upgrade our financial infrastructure to meet thebest international standards in respect of risk management and enhancingefficiency in our financial markets. The Steering Committee on theEnhancement of the Financial Infrastructure in Hong Kong (SCEFI)reconvened by the Securities and Futures Commission (SFC) has set updedicated working groups to take forward proposals to enable straight-through processing, achieve single clearing of stock and derivativetransactions and develop a scripless market. SCEFI has achieved goodprogress in setting up the FinNet, a secure financial conduit connecting thefinancial regulators and market participants in the financial sector, such asbrokers and banks to facilitate straight-through processing. We have also

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reinforced Hong Kong’s financial infrastructure with the full implementationof a US dollar Clearing System at the end of 2000. The system furtherenhances Hong Kong’s status as an international financial centre by pavingthe way to a capital market that offers a wide range of US dollar denominatedproducts. In 2001, we have completed a comprehensive review of retailpayment systems in Hong Kong in view of the rapid evolution in this area.The review concluded that in terms of payment instruments and efficiency,Hong Kong’s retail payment systems function well and compare favourablywith major overseas markets. The review nevertheless identified a numberof issues meriting further attention and analysis. The Hong Kong MonetaryAuthority (HKMA) will follow up on these in consultation with the paymentsystem operators.

An open and orderly market with a high degree of transparency is alsoessential for an international financial centre. In this aspect, we introducedthe Securities and Futures Bill into the Legislative Council in November2000. The Bill aims to consolidate and modernise all existing ordinancesgoverning the securities and futures market. We shall continue to work withthe Bills Committee set up to scrutinise the Bill, and hope to bring the newregulatory framework into operation as early as practicable.

We have carried out the banking reforms as planned to encouragemarket competition. The full and final deregulation of interest rates tookplace in July 2001, removing interest rate caps on all types of deposits inHong Kong. Deregulation would benefit customers in terms of greatervariety of services offered and banks in terms of more efficient pricing. Thisyear, the HKMA has completed public consultation on two major proposalsto enhance safety and soundness of the banking sector: (i) enhancingdepositor protection and (ii) establishing a commercial credit referenceagency. Good progress was made during the year in improving the standardsof financial disclosure by authorised institutions (AIs) and in furtherdeveloping and implementing the risk-based supervisory framework.Besides, we have also seen the Hong Kong dollar remaining stable duringthe past year against an external environment which had become increasinglyvolatile.

We have also taken steps to facilitate the further development of ourfinancial market in line with globalisation. The two exchanges and theirthree associated clearing houses successfully merged and demutualised inMarch 2000. The merged Hong Kong Exchanges and Clearing Limited

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(HKEx) has actively sought to establish strategic alliances with majorinternational exchanges and to continue to develop new financial productsand services with a view to enhancing its competitiveness in the globalmarket.

We also achieved the following progress in our four Key Result Areas(KRAs).

1 Maintain monetary and banking stability in Hong Kong

In the past year, the linked exchange rate system continued to functionsmoothly to deliver a stable and predictable monetary environment,which provided an anchor of stability against an increasingly uncertainglobal economic environment. Following the completion of anextensive public consultation exercise on enhancing depositorprotection, the Executive Council has approved in principle theproposal to introduce a deposit insurance scheme in Hong Kong.Since then, the HKMA has been undertaking more detailed work witha view to producing a set of final recommendations on how the schemeshould be structured. The public consultation on the establishmentof a commercial credit reference agency to enable banks to betterassess their corporate customers has also been completed. We haveset up a working group comprising cross-industry representatives totake forward this important proposal.

2 Further improve the regulatory framework

In November 2000, we introduced the Securities and Futures Bill intothe Legislative Council after more than 18 months of intensiveconsultation with the market and other concerned parties. The Billseeks to consolidate all securities and futures-related ordinances andimprove the regulatory framework to bring it on par with internationalstandards. The objectives are to upgrade the quality of intermediaryservices, enhance market transparency, reduce market manipulation,facilitate market innovation and provide better investor protection.Major proposals include streamlining the licensing regime for marketintermediaries, setting up a Market Misconduct Tribunal andenhancing the requirements for disclosure of securities interests. Weintroduced concurrently the Banking (Amendment) Bill 2000 to applyconsistent regulatory standards and enhance the HKMA’s regulatoryfunctions in relation to the securities and futures businesses conducted

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by AIs. The Legislative Council has set up a Bills Committee toconsider the two Bills. We are working closely with the Committeewith a view to bringing the new regulatory arrangements into operationas early as practicable.

Following the introduction of the risk-based supervisory approach, theHKMA has completed the first round of risk-focused examinationsof the small and medium sized local banks and is extending theseexaminations to large local banks and foreign bank branches. We havealso introduced the Banking (Amendment) Bill 2001, which aims toimprove the general working of the Banking Ordinance in the lightof recent market developments. It contains legislative proposalsrelating to Internet advertisements for deposits, the HKMA’s powerof control over places of business of AIs and enhancement of existingprovisions relating to the fitness and properness of managers. TheHKMA has been working closely with the banking sector to preparefor the implementation of the New Capital Accord, proposed by theBasel Committee on Banking Supervision, to succeed the 1988 CapitalAccord currently adopted in Hong Kong and worldwide. With thetarget implementation year of 2005, the New Capital Accord has theoverall objective of aligning regulatory requirements more closely withthe key elements of banking risks and to provide incentives for banksto enhance their risk management and related capabilities.

The Mandatory Provident Fund (MPF) System was successfullylaunched in December 2000 as scheduled.

In July 2001, the Standing Committee on Company Law Reformissued a public consultation document on the first phase of itsproposals to raise Hong Kong’s corporate governance standards. Thisrepresents a major step in the Corporate Governance Review initiatedin 2000. The proposals span over the three main areas of directors’duties and responsibilities, shareholders’ rights and corporatereporting.

3 Improve the infrastructure required for a first classinternational financial centre

In 2000, we reached another milestone by implementing a US dollarClearing System. The System significantly enhances the settlementefficiency and reduces the settlement risk of US dollar transactions

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in Hong Kong. Moreover, this infrastructure encourages the issue ofUS dollar debt and equity securities in Hong Kong, thereby attractingmore global investors to Hong Kong.

We also completed a number of short-term measures to upgrade ourfinancial infrastructure, including electronic filing of financial returnsby intermediaries to the SFC. The first electronic Initial PublicOffering (eIPO) was also successfully launched in September 2000.Last year, the third generation of the Automatic Order Matching andExecution System was successfully implemented to enhance marketcapability and support new trading methods. The advisory committeeestablished to co-ordinate a human resources development strategy forthe financial services sector submitted recommendations to improvehuman resources development and enhance Hong Kong’scompetitiveness in its first report to the Government in January 2001.

4 Spearhead the further development of the financial market

In July 2001, we further enhanced competition and therefore efficiencyin the banking sector by removing the remaining interest rate ruleson savings and current account deposits. This final step of thederegulation process was implemented smoothly. There was alsoprogress on banking consolidation through mergers and acquisitions.In addition, the “three-building condition” is expected to be furtherrelaxed before the end of 2001. Foreign banks will be allowed to openunlimited number of branches in Hong Kong. At the instigation ofthe Legislative Council, the HKMA prepared and submitted acomparative study on banking consumer protection and competitionarrangements in three different jurisdictions, namely Australia, HongKong and the United Kingdom. We are now consulting the public,with a view to adopting appropriate measures to enhance the protectionfor banking consumers.

The second board, now known as the Growth Enterprise Market(GEM) was launched by the Stock Exchange of Hong Kong Limitedin November 1999 as an alternative market to provide emerginggrowth companies easier access to the funds of the investing public.The SFC and the HKEx have completed a review of the key aspectsof the GEM’s listing requirements in the light of the actual operationof the market. The agreed principles for the rule changes wereannounced in July 2001 and the detailed rule amendments werepublished in September 2001.

CORRIGENDUM

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Progress on each previously announced initiative under the aboveKRAs is set out in the “Detailed Progress” section of this report.

Looking Forward

To achieve our overall targets this year, we will undertake thefollowing initiatives and targets under each of the KRAs for the coming year.

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1 Maintain monetary and banking stability in HongKong

Hong Kong is an externally-oriented economy with a high proportionof its GDP derived from international trade and investment. The maintenanceof a stable exchange rate is essential to the promotion of international tradeand to the status of Hong Kong as an international financial centre.

The Government is fully committed to the maintenance of the linkedexchange rate system. The robustness of the link is underpinned by soundeconomic fundamentals, characterised by substantial foreign exchangereserves, strong fiscal discipline, a healthy banking system as well as anadvanced financial infrastructure. Against an external economic environmentwhich has become more volatile in recent months, the Hong Kong MonetaryAuthority (HKMA) will continue to keep abreast of the latest developmentswith a view to ensuring the stability of the Hong Kong dollar under the linkedexchange rate system and to review the currency board arrangements asappropriate. In the coming year, the HKMA will continue its effort toimprove the operation of the Banking Ordinance and carry on the bankingreforms to maintain the stability and effective working of the banking system.Among the various initiatives, we shall produce detailed recommendationson the establishment of a deposit insurance scheme and a commercial creditreference agency.

We will assess our performance in respect of this KRA against thefollowing indicators –

l Stability of our currency. Our target is to continue to maintainthe exchange rate at HK$7.80 to the US dollar within theframework of the linked exchange rate system.

l Effectiveness of the banking regulatory framework for prudentialsupervision of authorised institutions which is fully in line withinternational standards. Our target is to achieve generalcompliance with international standards established by the BaselCommittee on Banking Supervision.

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We will pursue the following initiatives and targets to deliver resultsin this area –

Initiative * Target

To introduce a deposit insurancescheme in Hong Kong

(Hong Kong Monetary Authority(HKMA))

To introduce detailedrecommendations in 2002

To establish a credit referenceagency for commercial enterprisesin Hong Kong

(HKMA)

To introduce detailedrecommendations in 2002

* the bracketed information denotes the agency with lead responsibility for the initiative

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Hong Kong has a well-established regulatory framework for thefinancial services sector, which operates smoothly. Nevertheless, theGovernment will continue to further enhance the regulatory framework inthe light of international experience and standards through co-operation withregulators in other jurisdictions and to maintain a level playing field.

On the banking side, the Hong Kong Monetary Authority (HKMA)will continue to maintain a close dialogue with the Basel Committee onBanking Supervision with a view to preparing for the implementation of theNew Capital Accord and to discussing specific aspects of the latest proposalswith the banking industry. The HKMA will also update the SupervisoryPolicy Manual, which was introduced in 2000 to reflect latest bankingsupervisory standards and practices for the industry’s reference.

A modern and flexible regulatory framework for the securities andfutures market facilitates the development of new financial products andeffective trading methods, and enhances protection for the investing public.Such a framework is essential to strengthen our competitive edge amidstrapid changes in the international financial markets. In this connection, theGovernment has worked closely with the Securities and Futures Commission,the statutory regulator overseeing the securities and futures market, inreviewing our regulatory regime and making recommendations forimprovement.

On corporate governance, in July 2001, the Standing Committee onCompany Law Reform (SCCLR) issued a public consultation document onthe first phase of its proposals to raise Hong Kong’s corporate governancestandards. We will monitor closely the outcome of the public consultationexercise and seek to implement the necessary measures to further enhanceour corporate governance regime. The SCCLR will continue with its reviewwith a view to developing further proposals by phases in 2002.

Separately, the Mandatory Provident Fund (MPF) System was fullyimplemented as scheduled in December 2000. At the end of August 2001,88% of employers, 94% of employees and 91% of self-employed personsparticipated in MPF schemes. We will continue to work with the Mandatory

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Provident Fund Schemes Authority to ensure the effective operation of theSystem.


l The extent of free and orderly operation of the regulated financialmarkets. Our target is to further improve the regulatory regimeas well as implementation and enforcement to ensure a levelplaying field.

l The extent of compliance with the obligations and commitmentsof the World Trade Organisation in respect of financial services.Our target is to achieve general compliance.

l The extent of compliance with the regulatory standardsrecommended by the International Organisation of SecuritiesCommissions in respect of the securities sector. Our target is toachieve general compliance.

l The extent of compliance with the international standardsestablished by the Basel Committee on Banking Supervision inrespect of the banking sector. Our target is to achieve generalcompliance.

l The extent of compliance with the regulatory standardsrecommended by the International Association of InsuranceSupervisors in respect of the insurance sector. Our target is toachieve general compliance.

We will pursue the following initiatives and targets to deliver resultsin this area –

Initiative Target

To implement recommendationsarising from the CorporateGovernance Review beingundertaken by phases by theStanding Committee on CompanyLaw Reform

(Financial Services Bureau (FSB))

To implement therecommendations by phasesstarting from 2002

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Initiative Target

To further enhance the efficiencyand effectiveness of the MandatoryProvident Fund (MPF) System

(FSB)

l To commence the first phase ofthe review on the administrativeand operational aspects of theMPF System in late 2001

l To put forward the first phase oflegislative amendments to theMPF Schemes Ordinance in2002 on the basis of thefindings of the review

To prepare for the implementationof the New Capital Accord by theBasel Committee on BankingSupervision


l To review the consultationdocuments issued by the BaselCommittee on BankingSupervision in 2002

l To develop a suitable actionplan by end-2002

To conduct a consultancy study onthe feasibility of establishinginsurance policy holders’protection funds so as to enhancethe protection of policy holders

(Office of the Commissioner ofInsurance)

To commence the study in2002-03 and to consult theinsurance industry and the generalpublic thereafter

To review and update the HKMAGuideline on Prevention of MoneyLaundering to incorporate therevisions in the Financial ActionTask Force’s 40 Recommendationsand Basel Committee’s proposalson “Customer Due Diligence forBanks”

(HKMA)

To complete the review and updateby end-2002

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The Government is committed to maintaining Hong Kong’s positionas a premier international financial centre by, among other things, developingstate-of-the-art financial infrastructure and nurturing a well-trained, adaptableworkforce. Through these measures the Government aims to enhance thecompetitiveness of Hong Kong, in terms of more professional services,reduced risk and increased efficiency.

To remain competitive, it is necessary to capitalise on the latestdevelopments in information technology and its applications to enhancesystem security and efficiency of our financial infrastructure. This willrequire careful planning and much commitment, particularly on the part ofthe industry.

Building on the success of the introduction of a US dollar Real TimeGross Settlement payment system, the Hong Kong Monetary Authority(HKMA) will promote the use of the system in our time zone throughoffering the service and explaining the benefits in terms of risk managementto market participants in other jurisdictions.

The Hong Kong Exchanges and Clearing Limited (HKEx) hasembarked on the project to improve the efficiency of the current CentralClearing and Settlement System. When fully launched in 2002, the upgradedsystem will form the backbone of the Financial Network (FinNet). TheSteering Committee on the Enhancement of the Financial Infrastructure inHong Kong is also working on how to achieve Delivery versus Payment(DvP) in securities settlement with the money payment system. The goal isto achieve DvP for institutional, retail and on-line trading to further enablestraight-through processing. Concurrently, we are seeking input from marketpractitioners for developing options for achieving a scripless market. Theaim is to issue a consultation paper and develop the necessary legislativeproposals in the coming year.

A robust physical infrastructure functions effectively only with humaninput of the right calibre. Human resources have long been one of the mostimportant assets of Hong Kong. While financial products are becoming more

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sophisticated and financial transactions are moving towards full automationand straight-through processing, there is a need to ensure that we have aworkforce that is adaptable and well-equipped to meet the challenges aheadand to reap the benefits offered by the new opportunities. The AdvisoryCommittee on Human Resources Development in the Financial ServicesSector (FinMan Committee), established in June 2000 to co-ordinate thestrategy of meeting the sector’s demand for human resources development,submitted its first report to the Government in January 2001. Included inthe report is the recommendation to broaden students’ outlook by increasingthe number of exchange programmes and corporate internships forundergraduates. In June 2001, the FinMan Committee organised a forumfor prominent members of the financial services sector and the academia toexchange views with undergraduates on the needs of the industry.

We will assess our performance in respect of this KRA against thefollowing indicator –

l Availability of more efficient and professional financial servicescomparable to those of other international financial centres. Ourtarget is to facilitate full implementation of a series ofenhancement measures to strengthen the financial infrastructureas quickly as possible.

In addition, we will pursue the following initiatives and targets todeliver results in this area –

Initiative Target

To release the results of the 2001Population Census

(Census and Statistics Department(C&SD))

To complete the release of theCensus results by mid-2002

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Initiative Target

To introduce electronic filing,processing and dissemination ofcorporate information in theCompanies Registry

(Companies Registry)

To establish statistical systems forthe compilation of annual statisticson international investmentposition, quarterly statistics onexternal debts, and enhancedstatistics on portfolio investment

(C&SD)

To complete the setting up of thenecessary statistical systems byearly 2002

To implement an IntegratedCompanies Registry InformationSystem in phases by 2005

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4 Spearhead the further development of the financialmarket

In order to maintain our position as an international financial centre,we have to develop new products and raise our regulatory, infrastructural,analytical and statistical standards. The Government, financial regulatorybodies, exchanges and clearing houses will continue to move in this direction.

We foster creativity in the market and encourage it to introduce newfinancial and securities products so that new channels for raising capital willemerge. Our aim is to offer quality financial intermediary services,comparable to those available in New York and London. To this end, weare exploring innovative ways to further develop our financial markets.

The two Exchanges under the management of their holding company,the Hong Kong Exchanges and Clearing Limited (HKEx), are committed tointroducing new financial products and services to meet the demand ofinvestors. The HKEx has introduced MSCI China Free Index Futures,Exchange Traded Funds on regional index and other new financial products.It is also actively seeking to establish strategic alliances with majorinternational exchanges and to continue to develop Hong Kong as a majorfund raising centre in the region.

We shall continue to play an active role in promoting bond marketdevelopment in the region. The HKMA will examine the scope for enhancingthe Central Moneymarkets Unit service to deepen the development of thedebt market and support the fund management industry. We shall alsocontinue to seek opportunities to extend linkages with central clearing anddepository systems outside Hong Kong. Such linkages can raise efficiencyand reduce the settlement risk in cross-boundary securities trade byfacilitating Delivery versus Payment settlement. The Hong Kong MortgageCorporation will continue to play a prominent role in the development ofthe secondary mortgage market.

In an increasingly deregulated and competitive banking environment,concerns have been raised as to how far the Government should be involvedin consumer issues relating to banking services. The HKMA already playsan important part in formulating industry standards through participating in

CORRIGENDUM

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the review of the Code of Banking Practice. We shall consider thearrangements for protecting consumers of banking services, including thequestion of whether and to what extent the Government should play a role.


l The willingness of the parties concerned to introduce newfinancial products and services and the efforts to develop theliquidity, breadth and depth of these new products and services.Our target is to encourage the HKEx to further develop their clientand product base, and to improve their market infrastructure tosupport market growth and meet changing needs of investors.

l The extent to which Hong Kong plays a role in the trend ofglobalization of international financial markets. Our target is toencourage the HKEx to actively explore opportunities to establishstrategic alliances with reputable international exchanges.

l The competitiveness and efficiency of our banking sector. Ourtarget is to promote competition in the banking sector byremoving unnecessary regulatory barriers and allow market forcesto play a larger role in the consolidation of the banking industry.

Apart from the various initiatives undertaken in the past years, wewill also pursue the following initiative and target to deliver results in thisarea –

Initiative Target

To review the arrangements forprotecting consumers of bankingservices


To recommend a policy approachwithin 2002 based on commentsreceived from the public on thecomparative study published bythe HKMA

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International Financial Centre

Detailed Progress

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Initiative * Target # Present Position +

1 Maintain monetary and banking stability in HongKong

To achieve results in this area, various initiatives have been undertakenin the past years. Details are set out below –

To promote theestablishment of acommercial creditreference agency forthe banking industry inHong Kong

(HKMA)

To enhance depositprotection in HongKong

(Hong Kong MonetaryAuthority (HKMA))

To consult the publicon therecommendations of theConsultancy Study onDeposit Protection andsubject to the results ofthe consultation, toinitiate appropriatemeasures in 2001

(2000)

Following the completionof a public consultation,the Executive Council hasapproved, in principle, theproposal to introduce adeposit insurance schemein Hong Kong. TheHKMA has commenceddetailed work with a viewto producing a set of finalrecommendations on howthe scheme should bestructured.

(Action in Progress: OnSchedule)

* the bracketed information denotes the agency with lead responsibility for the initiative# the bracketed information denotes the year in which the target was set+ the bracketed information denotes the status of the target

To initiate appropriatemeasures in early 2001having regard to theviews collected fromthe public consultationon this subject

(2000)

A working groupcomprising representativesfrom the banking industry,the corporate sector andvarious relatedGovernment departmentshas been formed to pursuethe detailed arrangementsfor the establishment of acommercial creditreference agency.

(Action Completed)

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Initiative Target Present Position

To continue to improvefinancial disclosurerequirements for thebanking industry in linewith international bestpractices

(HKMA)

To transform thecurrent disclosurerecommendations forauthorised institutionsinto a formal set ofguidelines with legalbacking under theBanking Ordinance in2001

(2000)

HKMA is formalising therequirements as modulesof the Supervisory PolicyManual.


To continue refiningthe currency boardarrangements

(HKMA)

To review, on anongoing basis, thecurrency boardarrangements andintroduce refinementsas appropriate,especially with regardto convertibility of andtransferability amongthe various monetarybase components

(2000)

The Exchange FundSubcommittee on CurrencyBoard Operations hasfurther reviewed theconvertibility andtransferability issues. TheSub-committee considersthat the presentarrangements have workedwell and should continuefor the time being.


To conduct a detailedstudy on the issue offurther enhancingdepositor protection inHong Kong and reviewthe desirability ofsetting an assetmaintenancerequirement forlicensed banks inrelation to the PriorityPayment Scheme forsmall depositors underthe CompaniesOrdinance

(HKMA)

To commence the studyin the first half of 2000and to consult thebanking industry andthe general publicthereafter

(1999)

The consultancy reportwas completed in July2000. The bankingindustry and the generalpublic were consulted inJanuary 2001.Government agreed, inprinciple, to proceed witha deposit insurancescheme. Detailedproposals are beingworked out.

(Action Completed)

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To monitor theoperation of theMandatory ProvidentFund (MPF) Systemupon fullimplementation inDecember 2000

(Financial ServicesBureau (FSB))

The MandatoryProvident FundSchemes Authority(MPFA) to regulate,supervise and monitorthe MPF System inaccordance with theMPF SchemesOrdinance

(2000 and 1999)

The MPF System was fullyimplemented in December2000. MPFA continues tomonitor compliance withthe MPF legislation byMPF trustees, other serviceproviders and employers.


To conduct acomprehensive reviewon the regulatorysystem in respect of theOccupationalRetirement Schemes

(FSB)

To complete the reviewby mid-2001

(2000)

Comprehensive reviewcompleted and proposedareas for legislativeamendment identified.The relevant groups andprofessional organisationsare being consulted on theproposals.

(Action Completed)

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To enhance thestandards of corporategovernance in HongKong

(FSB)

The StandingCommittee onCompany Law Reform(SCCLR) tocommission aCorporate GovernanceReview in 2000-2001

(2000)

The SCCLR commencedits Corporate GovernanceReview in 2000. A publicconsultation paper on thefirst phase of its proposalswas published in July2001. The SCCLR willcontinue with the reviewwith a view to developingfurther proposals in respectof Hong Kong’s CorporateGovernance regime in2002.

(Action Completed)

To conduct a study onthe future role of theOfficial Receiver

(FSB/OfficialReceiver’s Office(ORO))

To identify possibleoptions on the futurerole of the OfficialReceiver by 2001-2002

(2000)

A consultant wasappointed in March 2001to conduct the study. Thestudy is underway.


To enhance theprotection given toinsurance policyholders

(Office of theCommissioner ofInsurance (OCI))

In 2001 to prescribe,by regulation, thatappointed actuaries ofinsurers shall complywith the ProfessionalStandard 1 issued bythe Actuarial Society ofHong Kong

(2000)

The Insurance Companies(Actuaries’ Standards)Regulation came intoeffect on 1 January 2001,requiring appointedactuaries of insurers tocomply with theProfessional Standard 1issued by the ActuarialSociety of Hong Kong.

(Action Completed)

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To conduct acomprehensive reviewof the regulatorysystem for insuranceintermediaries, in thelight of operationalexperience and marketdevelopments since thescheme wasimplemented in 1995

(OCI)

To report the outcomeof the review in 2001

(2000)

The review was completedin July 2001. Aconsultation document hasbeen issued to the relevantparties for comments.

(Action Completed)

To develop guidelineson the use of Internetin the insurance sectorfor the purpose ofenhancing the healthygrowth of the industryin the new IT era

(OCI)

To issue guidelines onthe use of Internet inthe insurance sector inthe first half of 2001

(2000)

The Guidance Note on theUse of Internet forInsurance Activities wasissued in January 2001.

(Action Completed)

To consolidate andmodernise all existingordinances governingthe securities andfutures market into asingle piece oflegislation to enableHong Kong to bettermeet the competitivechallenge as a result ofincreasing globalisation

(FSB)

To introduce theSecurities and FuturesBill into the LegislativeCouncil in November2000

(2000, 1998 and 1995)

The Securities and FuturesBill was introduced intothe Legislative Council inNovember 2000, and isnow being scrutinised by aBills Committee.


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To amend the BankingOrdinance to enhancethe regulation ofauthorised institutions(AIs) which will beexempt from theSecurities and FuturesBill and to improve theoperation of theBanking Ordinance inthe light of recentmarket developments

(FSB)

To implement therelevant amendments tothe Banking Ordinancein 2001

(2000)

The Banking (Amendment)Bill 2000 is under scrutinyby Bills Committee of theLegislative Council.


To review the listingrules of the GrowthEnterprises Market aswell as the relatedregulatory and legalregime

(Securities and FuturesCommission (SFC))

To implement byend-2000 proposedchanges to the listingrules and relatedregulatory regime inthe light of commentsreceived during amarket consultationexercise conducted inJune 2000

(2000)

The SFC and the StockExchange of Hong Konghave completed a reviewof the key aspects of thelisting requirements andannounced in July 2001the agreed principles. Thedetailed rule changes werepublished in September2001.

(Action Completed)

To refine the existingregulatory frameworkfor electronic banking


l To devote moreresources (includingsetting up anadditional specialistteam) to strengthenthe supervision ofelectronic bankingactivities

l A specialist team hasbeen established.

(Action Completed)

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l To issue a guidelineon Internetadvertisements fordeposits in the firsthalf of 2001

l Proposals for legislativeamendments have beenincorporated into theBanking AmendmentBill 2001 which wasintroduced into theLegislative Council inthe first half of 2001.The guideline will beissued following theBill’s enactment.


l To develop anexaminationprogramme forelectronic bankingactivities of AIs inthe second half of2000 and startconductingexamination in 2001

(2000)

l Three pilotexaminations have beenconducted.

(Action Completed)

To maintain highstandards of corporategovernance within thebanking industry

(HKMA)

To ensure that alllocally incorporatedAIs have adopted thesound corporategovernance standardsset out in the Guidelineon CorporateGovernance issued bythe HKMA in May2000 no later than theend of June 2001

(2000)

All local AIs are largely incompliance with thecorporate governancestandards set out in theGuideline issued by theHKMA.

(Action Completed)

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To develop aSupervisory PolicyManual to support therisk-based supervisoryapproach to AIs adoptedby the HKMA

(HKMA)

To complete theManual by the end of2001

(2000)

A substantial proportion ofthe Manual has beencompleted, but this is nowseen as an ongoing projectand will be updatedregularly.


To monitor thedevelopment of theNew Capital Accord bythe Basel Committeeon BankingSupervision and assessits impact on thebanking sector

(HKMA)

To review consultativedocuments to be issuedby the Basel Committeein early 2001 andcomment on issues thatmay affect the HongKong banking sectorby the deadline to beset by the Committee

(2000)

Another round ofconsultation will beconducted in early tomid-2002 when furtherdocuments are issued bythe Basel Committee.

(Action Completed)

To review and updatethe Guide to Applicantsfor Authorisation underthe Banking Ordinance

(HKMA)

To finalise the reviewin the first quarter of2001

(2000)

The review has beencompleted.

(Action Completed)

To review and updatethe Guideline forPrevention of MoneyLaundering issued bythe HKMA to bringAIs’ policies andprocedures to combatmoney launderingactivities fully in linewith internationalstandards

(HKMA)

To complete the reviewand update theGuideline forPrevention of MoneyLaundering byend-2000

(2000)

The review and updatehave been completed.

(Action Completed)

28


To establish a MarketMisconduct Tribunalfor tackling marketmisconduct in thesecurities and futuresmarket

(FSB)

To introduce theSecurities and FuturesBill into the LegislativeCouncil in November2000 and set up theTribunal when the lawcomes into operation

(2000 and 1999)

The Securities and FuturesBill provides for theestablishment andoperation of the Tribunal.The Bill was introducedinto the LegislativeCouncil in November 2000as scheduled and is nowbeing scrutinised by a BillsCommittee. We will setup the Tribunal when thelaw comes into operation.


To establish aSecurities and FuturesAppeals Tribunal forhandling appealslodged againstdecisions made by theSFC

(FSB)

To introduce theSecurities and FuturesBill into the LegislativeCouncil in November2000 and set up theTribunal when the lawcomes into operation

(2000 and 1999)

The Securities and FuturesBill provides for theestablishment andoperation of the Tribunal.The Bill was introducedinto the LegislativeCouncil in November 2000as scheduled and is nowbeing scrutinised by a BillsCommittee. We will setup the Tribunal when thelaw comes into operation.


To establish anindependent ProcessReview Panel forreviewing the internaloperations, includinginvestigativeprocedures, of the SFC

(FSB)

To set up the Panel in2000

(2000 and 1999)

The Panel was set up inNovember 2000.

(Action Completed)

29


To streamline thelicensing regime forsecurities and futuresintermediaries

(FSB and SFC)

To introduce theSecurities and FuturesBill into the LegislativeCouncil in November2000 and set up thenew licensing regimewhen the law comesinto operation

(2000 and 1999)

The Securities and FuturesBill provides for theoperation of the newlicensing regime. The Billwas introduced into theLegislative Council inNovember 2000 asscheduled and is nowbeing scrutinised by a BillsCommittee. We will setup the new licensingregime when the lawcomes into operation.


To enhance thedisclosure of interestsin securities

(FSB and SFC)

To introduce theSecurities and FuturesBill into the LegislativeCouncil in November2000 and enhance thedisclosure requirementswhen the law comesinto operation

(2000 and 1999)

The Securities and FuturesBill provides for thedisclosure of interests insecurities. The Bill wasintroduced into theLegislative Council inNovember 2000 asscheduled and is nowbeing scrutinised by a BillsCommittee. We willenhance the disclosurerequirements when the lawcomes into operation.


30


To encouragecompetition amongprivate sectorinsolvency practitionersthrough their increasingparticipation in theadministering ofcompulsory liquidationcases

(ORO)

To closely monitor theasset quality of localbanks

(HKMA)

To conduct on-siteexaminations of thelocal banks semi-annually ahead of theyear-end resultannouncements for1999 and the interimand year-end resultannouncements for2000

(1999)

Action completed. HKMAwill continue to closelymonitor asset quality oflocal banks.

(Action Completed)

To attract more firms tojoin the Panelsestablished under theORO for contractingout insolvency work toprivate practitioners in2000-2001

(1999)

The ORO reviewed theentry requirements of itsadministrative panel forcontracting out ofsummary winding upcases. Following thereview, a new set of entryrequirements aiming atfacilitating moreparticipation by eligibleprivate sector insolvencypractitioners has beenimplemented since March2001.

(Action Completed)

To implement the LawReform Commission(LRC)’s proposal onlicensing insolvencypractitioners

(ORO)

To consult professionaland academic bodieswith a view to settingstandards for thelicensing ofpractitioners

(1999)

Consultation exercisecompleted in June 2000.The LRC’s proposal willbe examined in the contextof the consultancy studybeing conducted on thefuture role of the OfficialReceiver.


31


To provide for statutorycorporate rescueprocedure to allow aviable business tosurvive as a goingconcern

(ORO)

To introduce thelegislative proposalsinto the LegislativeCouncil beforeend-1999

(1999 and 1996)

Legislative proposals wereintroduced into theLegislative Council in its1999-2000 session. Due totime constraints, the BillsCommittee did notcomplete the scrutiny ofthe proposals. TheCompanies (CorporateRescue) Bill which wasintroduced into theLegislative Council in May2001 is now beingscrutinised by a BillsCommittee.

(Action in Progress:Behind Schedule)

To further strengthenliaison with overseasinsurance regulators toenhance Hong Kong’sstatus as a regionalinsurance centre

(OCI)

l To step up ourparticipation in theInternationalAssociation ofInsuranceSupervisors (IAIS)by becoming amember of itstechnical committeesand contributingtowards thedevelopment ofinternationalstandards ofinsurance regulation

l Representatives of theOCI will continue toattend the relevant sub-committee meetings atthe Annual Conferenceof the IAIS and play anactive role in thesemeetings. The OCI hasalso joined as a memberof the Insurance FraudSub-committee of theIAIS.

(Action Completed)

l To promulgate andmonitor complianceof Hong Konginsurance companieswith internationalstandards ofinsurance regulations

l The OCI haspromulgated relevantstandards of insuranceregulations issued bythe IAIS. Hong Konginsurance companieshave complied withthese standards.

(Action Completed)

32


l To discuss and signMemoranda ofUnderstanding withmajor overseasinsurance regulators

(1999)

l The OCI has initiateddiscussions with severalmajor overseasinsurance regulators,and will continue itseffort in this aspect.


To further strengthenthe discipline andtransparency of thesecurities and futuresmarkets

(FSB)

To implement the newmeasures in the30-point programmeconcerning the shortselling regime, riskmanagement, ruleenforcement, inter-market surveillance andcontingency power.Where legislativeamendments arenecessary, to introducethe legislativeproposals as soon aspossible

(1998)

Of the 30-pointprogramme, 24 measureshave been implementedand four are in progress.The proposal to reduce thethreshold for specialmargin in futures andoptions contracts formspart of the overallderivative market riskmanagement being keptunder regular review bythe Hong Kong Exchangesand Clearing Limited. TheSFC has conducted a studyon the regulation of shareregistrars and issued adraft code of conduct forconsultation with themarket.


33


To ensure that the legalframework forcompanies is conduciveto the running ofbusiness in Hong Kongthrough the review ofthe CompaniesOrdinance and relatedbankruptcy andinsolvency legislation

(Companies Registry/ORO)

To examine theconsultancy report onthe Review of theCompanies Ordinanceand the publicsubmissions, and theLRC’s proposals oninsolvency legislationin 1999 and introducelegislative amendmentsif appropriate from2000 onwards

(1998 and 1996)

l Legislative proposalsarising from theStanding Committee onCompany Law Reform’sReport on theconsultant’srecommendations willbe introduced into theLegislative Councilfrom 2001-2002onwards.

l Legislative proposalsmade by the LRC onthe winding upprovisions will beintroduced into theLegislative Councilfrom 2001-2002onwards.


To consider theestablishment of theInsurance Authority asan independentregulatory body

(FSB)

To consider theestablishment in 1997

(1996)

A consultancy study willbe commissioned in2001-2002 to examine thefuture institutionalarrangements for theInsurance Authority.


To introduce legislationto provide statutoryimmunity for auditorsof listed companieswho report suspectedillegal acts by theirclients

(FSB)

To introduce thelegislation into theLegislative Council

(1995)

The Securities and FuturesBill, which provides forthe statutory immunityconcerned, was introducedinto the LegislativeCouncil in November2000.

(Action Completed)

34




To implement a seriesof measures containedin the Report of theSteering Committee onthe Enhancement of theFinancial Infrastructureto enhance the financialinfrastructure with aview to improving riskmanagement, increasingefficiency, andreducing cost; and toencourage the financialindustry and partiesconcerned to implementthe enhancementmeasures as quickly aspossible, having regardto their developmentplans

(Securities and FuturesCommission (SFC),Hong Kong MonetaryAuthority (HKMA) andFinancial ServicesBureau (FSB))

l To complete anumber ofshort-term measuresincludingconsolidated accountreporting forsecurities and futurestrading, andelectronic filing forintermediaries by theend of 2000

l Short-term measureshave been implemented.For instance, the SFCcan now accept thefiling of electronicsubmissions fromintermediaries under itssupervision through asecure FinancialNetwork (FinNet).

(Action Completed)

l To complete longerterm measuresincluding theprovision of straight-through processingfor securities andderivatives trading,and upgrading ofclearingarrangements by theend of 2002

(2000)

l SFC has reconvened theSteering Committee onthe Enhancement of theFinancial Infrastructureto take forward therelevant measures toenable straight-throughprocessing of securities,single clearing of stockand derivativetransactions, anddevelop a scriplessmarket.


35


To conduct aPopulation Census toprovide up-to-datebenchmark informationon the social andeconomiccharacteristics of thepopulation for use byGovernment informulating policiesand plans and by theprivate sector inconducting businessand research

(Census and StatisticsDepartment (C&SD))

To complete allplanning work andestablish the necessarystatistical systems in2000 for conductingthe Population Censusin March 2001

(2000)

The Population Censuswas conducted in March2001.

(Action Completed)

To produce timely anddetailed quarterlyBalance of Paymentsaccounts to facilitatethe analysis andmonitoring of thefinancial market

(C&SD)

To release detailedBalance of Paymentsstatistics on a quarterlybasis within threemonths after thereference quarter by theend of 2000

(2000)

Detailed quarterly Balanceof Payments statisticsstarted to be releasedwithin three months afterthe reference quarter inDecember 2000.

(Action Completed)

To produce production-based Gross DomesticProduct (GDP(P)) atconstant prices tofacilitate analysis of theperformance ofdifferent economicsectors

(C&SD)

To conduct relatedresearch studies andestablish the necessarystatistical systems forthe compilation ofconstant price GDP(P)statistics with a view tocompleting the studiesin early 2001 andsetting up the entirecompilation frameworkby the end of 2001 andreleasing the statisticswith major sectoralbreakdowns in mid-2002

(2000)

Related research studieshave been completed. Thecompilation framework isprogressively being set up.It is aimed to publish theestimates from the secondhalf of 2002 onwards.


36


To enhance settlementefficiency and reducesettlement risks byproviding US dollarsettlement in the Asiantime zone and Deliveryversus Paymentsettlement for debtsecurities and sharesdenominated in USdollars

(HKMA)

To fully implement theUS dollar ClearingSystem in Hong Kongin December 2000

(2000)

A US dollar ClearingSystem was established inHong Kong in 2000.

(Action Completed)

To conduct acomprehensive reviewof retail paymentservices in Hong Kong.The review will covercurrent means of retailpayment, the likelyfuture trends giventechnologicaldevelopments, the risksassociated withdifferent means ofpayment, and theefficiency, pricing andthe degree ofcompetition in theprovision of retailpayment services

(HKMA)

To complete the reviewin the first half of 2001

(2000)

The review has beencompleted and HKMA isdrawing up a work planand taking follow-upaction in consultation withthe payment systemoperators.

(Action Completed)

To study the feasibilityof introducingelectronic filing,processing anddissemination ofcorporate informationin the CompaniesRegistry

(Companies Registry)

To complete a furtherconsultancy study byMay 2001

(2000)

The study was completedin May 2001. TheCompanies Registry isimplementing theconsultant’srecommendations.

(Action Completed)

37


To ensure the provisionof an effective andefficient insolvencyservice

(Official Receiver’sOffice)

To replace the existingroster appointmentsystem of private sectorinsolvency practitionerunder the contractingout scheme forsummary court windingup cases by acompetitive tenderingsystem in 2000-2001

(2000)

A competitive tenderingsystem has been put inplace since November2000.

(Action Completed)

To reduce the pressureon credit expansion ofthe banking system andon the payment systemfrom heavily over-subscribed InitialPublic Offer ofsecurities on the StockExchange of HongKong

(SFC)

To introduce measuresto reduce the pressure

(1997)

We introduced the firstelectronic initial publicoffering (eIPO) ofsecurities successfully inSeptember 2000. We keepthe arrangements for eIPOunder regular review tofurther improve themechanism for suchofferings.

(Action Completed)

To house all majorfinancial authoritiesunder one roof

(FSB)

To house all majorfinancial institutionsunder one roof in thefuture Hong KongInternational FinanceCentre (HKIFC) whichwill be strategicallylocated at the CentralWaterfront

(1997)

The Mandatory ProvidentFund Schemes Authoritymoved into the HKIFC inJuly 1999, followed by theHong Kong Exchanges andClearing Limited in March2000. The HKMA plansto move into the HKIFC in2004.


38

4 Spearhead the further development of the financialmarket



To deregulate theremaining interest raterules on savings andcurrent accounts


To complete thederegulation in July2001, subject to theeconomic and financialenvironment not beingunfavourable

(2000)

Final and full deregulationtook place on 3 July 2001.

(Action Completed)

To review the three-tierauthorisation system

(HKMA)

To complete the reviewin the first half of 2001and implement anyreform as appropriateby the end of 2001

(2000)

The review has beencompleted and aconsultation paper will beissued.


To consider furtherrelaxation of the three-building conditionwhich allows foreignbanks to operate nomore than threebranches

(HKMA)

To complete the reviewin the first half of 2001

(2000)

The review has beencompleted and the HKMAis consulting the industryon further relaxation of thethree-building condition.

(Action Completed)

To review the existingmarket entryrequirements for a localbanking licence

(HKMA)

To complete the reviewin the second half of2001

(2000)

The review is in progressand will be completedbefore end-2001.


39


In collaboration withthe industryassociations, to reviewthe Code of BankingPractice in order topromote good businesspractices in the bankingindustry

(HKMA)

To conduct the reviewin the second half of2000 and to consultrelevant partiesthereafter

(2000)

The revised Code will beissued shortly.

(Action Completed)

To promote furtherdevelopment of thelocal debt market byenhancing thereliability of thebenchmark yield curve

(HKMA)

To complete byend-2000 the review ofthe balance of issuancebetween ExchangeFund Bills and Notesof various maturitieswith a view todeveloping the longerterm debt market

(2000)

Some short-term ExchangeFund Bills have beenreplaced by longer-termExchange Fund paper withtenor of one year andbeyond since December2000. This move has beenwell-received by themarket.

(Action Completed)

To promote bilaterallinks with otherfinancial centres inPayment versusPayment and Deliveryversus Paymenttransactions

(HKMA)

l To establish abilateral linkbetween the CentralMoneymarkets Unitand the CentralSecuritiesDepository inSingapore by 2001

(2000)

l The initiative now restswith Singapore whetherto pursue the linkage.

(Action Completed)

40


l To set up a bilaterallinkage betweenHKMA’s CMU andthe GovernmentSecurities BookEntry System of theMainland tofacilitate cross-boundary tradingand holding of HongKong and Mainlanddebt securities in1999

(1998)

l The People’s Bank ofChina is considering theproposal.


l To reduce thesettlement risk inforeign exchangetransactions bypursuing theestablishment of aPayment versusPayment linkbetween the localpayment system andthose in the region,including theMainland

(2000 and 1997)

l No business case yetdemonstrated. Also,project would need toawait the furtherdevelopment of Real-Time Gross SettlementSystems in the regionand relaxations ofexchange controls.


To promote the furtherdevelopment of thelocal debt marketthrough the activities ofthe Hong KongMortgage Corporation(HKMC) andMandatory ProvidentFund Schemes

(HKMA)

HKMC to increase theissuance of debtsecurities in 1999

(1998)

As at mid-September 2001,the total amount ofoutstanding debts issuedby the HKMC wasHK$22.47 billion.

(Action Completed)

Documents

MESSAGE - Policy Address