Presentation to Hong Kong Securities Institute By Paul M Y Chow, Chief Executive, Hong Kong Exchanges and Clearing Limited 7 December 2006 HKEx STRATEGIC

Presentation to Hong Kong Securities Institute

By Paul M Y Chow, Chief Executive,

Hong Kong Exchanges and Clearing Limited

7 December 2006

HKEx STRATEGIC PLAN 2007-09

2

AGENDA Page

1. Current HKEx Strategic Plan 2004-06 3

2. Recent progress 5

3. Forthcoming HKEx Strategic Plan 2007-09 14

4. Conclusion 20

HKEx Strategic Plan 2007-09

3

1. CURRENT HKEx STRATEGIC PLAN 2004-06

• Home market advantage• Liquidity/critical mass

Key factors of HKEx strategy

• Quality issuers• Quality intermediaries (capital,

integrity)• Quality products• Quality infrastructure (system up-time)• Quality rules and regulations

• Cost reduction• Concentration on key projects• Organisational restructuring• Improving operational efficiency

General business strategies

Differentiation

Focus

Low-cost operation

• Difficult market conditions

• Operational difficulties

• Global / business diversification initiatives

Strategic analysis 2003

HKEx strategy 2004-06

Mainland Partner

Quality Market

Consolidation


4


1. Current HKEx Strategic Plan 2004-06

Key initiatives 2004-06

Listing • GEM review• New sponsor regulatory regime• Corporate Governance Action Plan – Listing Rule changes, Revised

Corporate Governance Code, Internal Control guidelines, Mainland directors and officers training

• Abolition of paid announcements• New listing decision-making structure

Trading • Trading spreads reduction (Phases I and IIa)• CBBC market framework• Review of derivative warrant market• Trading Hall renovation• Index futures and options on H shares and FTSE-Xinhua China 25• Revamp of stock options market (including raising position limits)

Clearing • Launch of DCASS• Enhancement of CCASS services

IT infrastructure • Implementation of SDNet• Upgrade of AMS/3, HKATS and DCASS capacity and hardware and

software replacement

Marketing • Opening of Beijing rep. office (2003), and Shanghai, Guangzhou branches

Current statusIn progressCompletedCompleted

In progressIn progress

CompletedCompletedCompletedCompletedCompletedCompleted

CompletedCompleted

CompletedCompleted

Completed

5

HKEx’s equity market has grown strongly

Note: Total funds raised figure in 2005 excludes the HK$25.5 bn funds raised by the three REITs.

2. RECENT PROGRESS

30 Nov 2006 2005 2004 2003

No. of listed companies 1,159 1,135 1,096 1,037No. of newly listed companies (YTM) 46 67 70 73 Main Board 41 57 49 46 GEM 5 10 21 27

No. of delisted companies (YTM) 22 28 11 14 Main Board 13 15 9 6 GEM 7 11 0 2 Transfer from GEM to Main Board 2 2 2 6

Total equity funds raised (YTM) (HK$bn) 424.8 301.3 281.8 213.8 Funds raised by IPO (HK$bn) 275.0 165.7 97.2 59.1 Funds raised in secondary market (HK$bn) 149.9 135.6 184.6 154.6

YTM avg daily turnover – total market (HK$bn) 32.8 18.3 16.0 10.4YTM avg daily turnover – equity (HK$bn) 25.3 14.6 13.7 9.3

2002

978

117

60

57

6

4

0

2

110.5

52.0

58.5

6.7

6.1


6

Mainland China enterprises have contributed substantially to the Hong Kong securities market

30 November 2006 Unit TotalMainland

enterprises % of total

No. of listed companies Number 1,159 354

No. of newly listed companies (YTM) Number 46

Main Board Number 41

GEM Number 5

Market capitalisation HK$bn 12,196.8 5,801.3

Total equity funds raised (YTM) HK$bn 424.8 310.5

Funds raised by IPOs HK$bn 275.0 253.7

Funds raised in secondary market HK$bn 149.9 56.8

YTM avg daily turnover – equity HK$bn 25.3


2. Recent progress

31%

100%

48%

73%

92%

38%

59%

57%

51%

26

21

5

14.9

7Source: HKEx


2. Recent progress

78%

81%87%

90%93%

22%

19%13%

10%

7%

0

4,000

8,000

12,000

16,000

20,000

24,000

28,000

32,000

36,000

2002 2003 2004 2005 Jan-Nov 2006

Avg. daily turnover (HK$m)

Derivative warrants

Equity and other securities*

6,652

10,419

15,960

18,301

32,806

* Equity warrants, ELI, CBBC, Unit trusts, Debt and iShares

Cash Trading (Main Board and GEM) – Aided by derivative warrants, turnover has nearly quadrupled

8

Derivatives Trading – Trading volume by product

Source: HKEx

Product

2002-2006

growth in

average daily

volume (%)

Jan – Nov 2006

2002 average

daily volumeAverage daily

volume % total

Hang Seng Index Futures 161.2% 51,200 30.4%19,602

Mini Hang Seng Index Futures 89.5% 8,569 5.1%4,522

H-shares Index Futures - 19,073 11.3%-

Other futures** (63.3%) 489 0.3% 1,332Stock options 355.8% 69,295 41.2% 15,203

Hang Seng Index Options 274.7% 16,372 9.7%4,369

H-shares Index Options - 2,919 1.7%-

Other options** 17.4% 250 0.1%213

Total average daily volume * 271.7% 168,167 100%45,241

Total volume - 38,341,774 - 11,029,404


2. Recent progress

* Sum of the average daily volume of each product** Products available for trading in 2002 and 2006 may be different

9

HKEx derivatives market daily volume (2002 – Nov 2006)

Source: HKEx


2. Recent progress

56% 56%61% 53%

47%44%44%

39%

47%

53%

104

168

45

59

79

0

20

40

60

80

100

120

140

160

180

200

2002 2003 2004 2005 Jan-Nov 2006

Th

ousa

nd

s of

con

trac

ts

Futures Options

10

HKEx’s rankings among global exchanges

Jan - Oct 2006 2002

% increase from 2002

Value/ volume

World ranking

Value/ volume

World ranking

Equity funds raised (US$m)658%

(10 months)50,539 3rd 6,665 8th

Market capitalisation (US$m) (Period end)

216% 1,464,750 8th 463,055 10th

Share trading value (US$m)227%

(10 months)635,039 14th 194,003 19th

Stock Index Options volume (mil contracts)

254%

(10 months)3.9 13th 1.1 17th

Stock Index Futures volume (mil contracts)

166%

(10 months)16 10th 6 14th

Stock Options volume (mil contracts)264%

(10 months)13.5 8th 3.7 16th

Index futures notional value (US$bn)

n.a. 1,322 8th n.a. n.a.

Source of overseas exchanges’ statistics: World Federation of Exchanges


2. Recent progress

11

HKEx ranks 3rd in the first 10 months of 2006 among global exchanges by equity funds raised

Source: World Federation of Exchanges, Oct 2006 statistics report downloaded on 21 Nov 2006


2. Recent progress

2005 Jan – June 2006 Rank Exchange

1 London SE 76.3

2 NYSE 70.43 Hong Kong Exchanges

4 Luxembourg SE5 TSX Group

6 Australian SE

7 BME Spanish Exchanges

8 Tokyo SE9 Euronext

Equity funds raised (US$bn) (Jan-Oct 2006)

Total IPO Post-IPO

42.0 23.5

34.346.9

50.5

35.2

33.3

2.0

17.2

33.2

34.1

26.8

19.5

17.116.7

7.8

12.0

26.3

14.8 8.9

n.a.

10.6

17.1

16.2 0.5

10...Sao Paulo SE 14.8 4.7 10.1

12 Nasdaq16 Shanghai SE

18 Deutsche Börse22 Korea Exchange

24 Singapore Exchange

27 Shenzhen SE

12.2 12.2 n.a.

9.0

8.2

4.94.5

3.7

8.5

8.2 0.5

2.7 3.7

2.2

0.8 1.0 2.7

31 Taiwan SE Corp. 1.5 0.8 0.7

n.a.

1st 3rd

2nd

2nd 1st

5th

12

HKEx income, operating expenses and profit

Costs have been contained, leading to out-performance in the current bull market.


2. Recent progress

2,6942,844

1,145

894

1,340

1,674

2,312

1,9981,808

2,020

2,394

1,2241,1651,1791,331

1,156

693589

734883

1,057

0

500

1,000

1,500

2,000

2,500

3,000

2000 2001 2002 2003 2004* 2005 Ninemonthsended

30/09/2006

Year

$ million

Income

Operating expenses

Profit attributable toshareholders

[0.58] [0.59] [0.64] [0.61] [0.48] [0.43] [0.31]

[ ] Cost-income ratio

* Following the adoption of HKAS 39 and HKFRS 4 (Amendment), certain 2004 figures previously reported were restated.

13

HKEx share price movement (27 June 2000 – 30 November 2006)


2. Recent progress

0

10

20

30

40

50

60

70

80

27/0

6/20

00

16/0

2/20

01

12/1

0/20

01

10/0

6/20

02

27/0

1/20

03

18/0

9/20

03

11/0

5/20

04

29/1

2/20

04

22/0

8/20

05

12/0

4/20

06

30/1

1/20

06

(HK$)

14


3. FORTHCOMING HKEx STRATEGIC PLAN 2007-09

Mission 2004-06

“To operate a world-class marketplace for Hong Kong and Mainland China securities and derivatives products.”

Mission 2007-09

“To be a leading international marketplace for securities and derivatives products focused on Hong Kong, Mainland China and

the rest of Asia.”

15

New challenges and opportunities ahead.


3. Forthcoming HKEx Strategic Plan 2007-09

Mainland listings Capital-raisings (ICBC was

world’s largest) Derivatives volumes Market quality Infrastructure reliability Internal operations Cost control

Substantial progress made:

Resumption of Mainland IPOs

Gradual Mainland market opening

Gradual RMB liberalisation

Overseas exchange and OTC competition

Increasing influence of hedge funds

New challenges:

The present scale of the Hong Kong market may support more products, services and business initiatives

New opportunities:

16



The new strategies continue those of the existing plan but step up a level.

HKEx Strategy 2004-06 HKEx Strategy 2007-09

Mainland Partner

Consolidation

Building a Quality Market

Mainland Positioning

Business Expansion

Service Improvement

Differentiation

Low-cost operation

Focus

General business strategies

17



Mainland Positioning

China’s international exchange

Complements Mainland exchanges

Partners Mainland

Meaning Implications

Overseas issuers and intermediaries Commodity and climate products Asian focus New Cash and Derivatives products

Service mentality Cost-effectiveness Focus on customers Transparency and

speed

RMB products A:H shares Mutual transparency (eg. share price display) Mainland intermediaries Mainland investors (QDII)

Business Expansion

Service Enterprise

Seeking new customers

Seeking more business from existing customers

Service culture MIS – finance and customer Internal efficiency/automation Accountability and organisation structure Compensation linked to service /

performance

Themes

18

Selected key initiatives 2007-09

Exchange

Improve trading rights regime

Review barriers to Cash Market trading

- Short selling

- Stock lending

- Stamp duty

- Product regulatory framework

Review barriers to Derivatives Market trading

- Position limits

Introduce further Mainland-related and RMB-denominated products

- RMB products

Explore new product and service areas

- Commodity futures

- Climate products



19



Selected key initiatives 2007-09 (cont’d)

Clearing Review overseas-based clearing participants Improve IP Accounts and Stock Segregated Accounts

Listing Complete GEM review Support SFC/Government in implementing “statutory backing” Open equity listing regime to overseas issuers

Corporate

Strengthen accountability regime, compensation structure, training and succession planning Review HKEx organisation structure and resource deployment Work towards consolidation of HKEx offices and data centres Review fee structure Further develop HKEx MIS – finance and customer Review HKEx IT systems for possible efficiency improvement

20


Further strengthened its position vis-à-vis the Mainland:- more Mainland-related listings- more Mainland-related products (eg. RMB products)- more Mainland-related participants and investors

Expanded its business into new areas:- an Asian focus- new product types (eg. commodities? carbon?)

Become a more business-orientated organisation:- stronger accountability for business results

- improved market mechanisms, systems and procedures Improved its service:

- service offering- better internal infrastructure supporting service delivery

4. CONCLUSION

By the end of 2009, HKEx should have

21

Market quality is the key to market growth and sustainability

Market QualityMarket Quality

Investor Confidence

Investor Confidence

Order flowOrder flow

Market liquidity

Market liquidity

An orderly, informed and fair marketplace


4. Conclusion

22

*** THANK YOU ***


4. Conclusion

Documents

Presentation to Hong Kong Securities Institute By Paul M Y Chow, Chief Executive, Hong Kong Exchanges and Clearing Limited 7 December 2006 HKEx STRATEGIC