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Enhancement of the Financial Infrastructure in Hong Kong

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Enhancement of the Financial Infrastructure in Hong Kong

    Report on the

    Enhancement of the Financial Infrastructure

    in Hong Kong

An eFrastructure for a Leading eEconomy

    Steering Committee on the

    Enhancement of the Financial Infrastructure

    Hong Kong

    September 1999

    REPORT ON THE

    ENHANCEMENT OF THE FINANCIAL INFRASTRUCTURE IN HONG KONG

    “An eFrastructure for a Leading eEconomy”

    TABLE OF CONTENTS

     Chapters

    1. Introduction

    2. Embracing Market Challenges and Opportunities

    3. Vision for Success

    4. The eFrastructure

    5. Journey to the Future

Acknowledgements

Appendix

    A. SCEFI Terms of Reference

    B. Members of SCEFI and Working Groups

    SCEFI 1999

     1. Introduction

    CHAPTER ONE

    INTRODUCTION

    n his Budget Speech on March 3, 1999, the Financial Secretary I announced a comprehensive financial market reform to strengthen Hong Kong’s competitiveness and to enable Hong Kong to remain in the premier league of international financial centers.

    The Financial Secretary recognized, while Hong Kong’s securities and derivatives markets have achieved tremendous growth and success in the last decade, recent developments in the global market, such as the rapid advent of the eEconomy, emergence of alternative electronic trading systems, increasing sophistication of investors, and the globalization of markets and investments, have created increasing competition and challenged the position of Hong Kong as a leading regional and international financial center.

    Responding to these global market challenges, the Financial Secretary announced a three-prong reform program for the securities and futures “We need to embrace markets in Hong Kong: state-of-the-art

    technology to remain (1) Fundamental change in the market structure accomplished in the premier league of

    through the demutualization and merger of the exchanges and world financial centers.

    clearing houses; The reforms of our

    securities and futures (2) Enhancement of the financial infrastructure to improve risk markets are substantial management, increase efficiency, and reduce cost; and and their implications

    far-reaching.” (3) Regulatory and legislative reform to improve the supervisory

    framework and protection of market participants. The Financial

    Major reforms are on-going in the demutualization and merger of the Secretary

    exchanges and clearing houses. The Composite Securities and Futures Bill is in the final stages of drafting and will be submitted to the Legislative Council by early December 1999. To address the strengthening of the technology base in the securities and futures market, the Financial Secretary appointed a Steering Committee on the Enhancement of the Financial Infrastructure in Hong Kong (“SCEFI”), chaired by Mr. Andrew Sheng, the Chairman of the Securities and Futures Commission (“SFC”), in March 1999 to study and recommend the necessary improvements to the financial infrastructure in Hong Kong. The terms of reference and a list of members of SCEFI are included in Appendices A and B respectively. Over the period from March to September 1999. SCEFI met 12 times. The SCEFI study is aimed to specifically address the following issues with the objective of enhancing the competitiveness of Hong Kong as an international financial center in terms of risk management, increased efficiency and cost reduction:

    Page 1 SCEFI 1999

     1. Introduction

    ; Setting up of a single clearing arrangement for securities, stock

    options, futures and other exchange-traded transactions;

    ; Enhancing the financial technology infrastructure to facilitate

    straight-through processing of transactions across financial

    markets; and

    ; Moving towards a secure, scripless securities market. In order to understand the perspectives of the industry and relevant parties, and to obtain their input, the SCEFI set up a User Working Group (“UWG”) and a Technology Working Group (“TWG”). Over the period from March to September 1999, the UWG met 7 times and the TWG 13 times. They have provided invaluable contributions to the study. A list of members of the two working groups is included in Appendix B.

    This report documents the findings and recommendations of the SCEFI study. The market challenges and opportunities, and the vision for success will be discussed. The target financial infrastructure for Hong Kong will be elaborated in terms of the proposed single clearing arrangement, straight-through processing, scripless securities market, and technology structure. Finally, infrastructure initiatives are recommended for the journey to the future.

    Page 2 SCEFI 1999

     2. Embracing Market Challenges and Opportunities

    CHAPTER TWO

    EMBRACING MARKET CHALLENGES AND OPPORTUNITIES

    ong Kong has emerged as one of the leading service economies in H the world, with a “service sector value added”-to-GDP ratio of 84%.

    The World Bank estimates that from 1994-97, exports of services world-wide grew by more than 25%. After the Asian financial turmoil, however, with significant currency devaluations in the region, Hong Kong faces growing competition in terms of prices as well as in the range and quality of financial services offered by other Asian centers. Global markets and 24-hour trading also imply that competition for financial services comes from not only the Asia Pacific time zone, but also from centers in Europe and America.

Meeting competition through technology

    While rents and wages have adjusted significantly, Hong Kong recognizes that it must continue to upgrade the quality and range of its services, especially the value added through technology, innovation and user friendly access. Recent surveys suggest that the presence of advanced infrastructure, particularly in transport, communications, legal, accounting and commercial services, is the most important consideration in the location of regional headquarters, service and sourcing operations, and is the second most important factor in siting production. Recent developments in the United States demonstrate how relentless improvements in technology can compensate for high costs. The U.S. Department of Commerce’s report on “the Emerging Digital Economy II” (June 1999) indicated that the decline in U.S. inflation despite three years of robust GDP growth of 4% per annum was attributable to the massive price declines in the IT-producing industries. For example, in 1997, the falling prices of IT goods and services (a 7.5% decrease) offset the 2.6% price increase for the rest of the economy to give an overall inflation rate of 1.9%. This demonstrates that it is imperative for Hong Kong to use IT to help boost productivity, reduce costs and enhance competitiveness (Exhibit 2.1).

    Page 3 SCEFI 1999

     2. Embracing Market Challenges and Opportunities

    4.0%

    2.0%

    0.0%

    -2.0%ActualEstimated

    -4.0%

    Price changes

    -6.0%

    -8.0%