CEP Industry Research Group 2

1. CEP Industry ResearchGroup 2 Hong Kong Financial Regulation and Supervision

2. Introduction • Hong Kong financial regulations divided into two parts: • Banking (Hong Kong Monetary Authority) • Security (Security and Futures Commission) • Focused on their functions, objectives and policies

3. Hong Kong Monetary Authority (HKMA) • Was established on 1st April 1993 • Merged the Office of the Exchange Fund and the Office of the Commissioner of Banking • Main responsibility: maintain the monetary and banking stability • Governed by the Exchange Fund Ordinance and the Banking Ordinance

4. HKMA’s Function • Keeping Hong Kong dollar stable • Enable money to flow smoothly, freely and without obstruction • Promoting safety of Hong Kong’s banking system • Managing the Exchange Fund

5. HKMA – Related organizations • Exchange Fund Investment Limited (EFIL) • Established in October 1998 • A privated limited company • Manage the Hang Seng Index stocks acquired for the account of the Exchange Fund in August 1998 • Manages the portfolio of Hong Kong equities

6. 2. Hong Kong Institute for Monetary Research (HKIMR) • Formed in August 1999 • Conduct the research of the monetary policy, banking and finance • On the issue about the monetary and financial developments in Hong Kong and the region

7. 3. Hong Kong Mortgage Corporation Limited (HKMC) • A public limited company • Develop the secondary mortgage market • Purchase of the mortgage loans for its own portfolio • Securitises mortgage into the Mortgage Backed Securities

8. 4. Hong Kong Note Printing Limited (HKNPL) • Prints all the banknotes of the Hong Kong’s currency for the three note-issuing banks • HKSAR mainly owns the company • Prints about 320 million banknotes every year

9. HKMA banking policy and supervision • Supervision Approach • Promote the safety and stability • Follows international practices recommended by Basle Committee • Based on a policy of continuous supervision

10. 2. Authorization of Authorized Institutions • Ensure only fit and proper institutions are entrusted with public deposits • HKMA – authorization, suspension and revocation of three types of authorized institutions • Overseas – a restricted license bank or deposit-taking company

11. 3. Banking Ordinance • Legal framework for banking supervision in Hong Kong • Maintain adequate liquidity and capital adequacy ratios • Submit periodic returns to HKMA

12. 4. Three-tier Banking System • Licensed banks, restricted licensed banks and deposit-taking companies • Highest concentrations of banking institutions • 75 of the largest banks in the world • April 2002, 141 licensed banks, 48 restricted licensed banks and 48 deposit-taking companies

13. The Regulators ofHK Securities Industry

14. Securities and Future Commission (SFC) • Established 1989 • An independent statutory body • Consists of five executive directors and five non-executive directors appointed by government • Responsible for setting up the laws • facilitate and encourage the markets development

15. Historical Background • After stock market crashed down between 1973 and 1974 • HK government intervened and set up core legislation • Two Commissions administrated the legislation • Securities & commodities trading

16. Historical Background • The stock crisis in 1987 revealed the deficiencies of the regulatory structure. • Securities Review Committee was formed • A single statutory body must be formed • Have powers to govern the markets

17. Regulatory Objectives • To maintain and promote the fairness, efficiency and transparency of the markets • To promote understanding by the public about the operation and functioning • To provide protection for members of the public investing in or holding financial products;

18. Regulatory Objectives • To minimize crime and misconduct • To reduce systemic risks • To assist the Financial Secretary in maintaining the financial stability of Hong Kong.

19. Regulatory Structure

20. Corporate Governance of SFC • regulatory reports to the Financial Secretary and Legislative Council Panel • Submits its annual estimates of income and expenditure to the Chief Executive • Monitored by the Process Review Panel (PRP) • PRP determines if the Commission is fair in handling investigations and making decisions

21. Responsibilities of SFC • Set up licensing requirements and approve licenses • Supervise licensed persons • Issues codes and guidelines • Handle complaints of misconduct of registered person • Investigate and take action against the misconduct

22. Responsibilities of SFC • Regulates the performance of HKEx • Approve the new market creation, changes of its rules and regulations • Monitor • HKEx’s compliance with the Listing rules • trading of shares and options futures on the markets • Ensure functioning and developing of trading, settlement and operational systems.

23. Responsibilities of SFC SFC regulates the listed companies in HK • Approve the changes of Listing rules • Monitor share dealings • Inspecting listed companies • Supervise listing-related activities of Stock Exchange of Hong Kong • All the participants need to be regulated --> prevent unusual market movements ~END~