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Presentation to Hong Kong Securities Institute

Presentation to Hong Kong Securities Institute. HKEx STRATEGIC PLAN 2007-09. By Paul M Y Chow, Chief Executive, Hong Kong Exchanges and Clearing Limited 7 December 2006. AGENDA Page. HKEx Strategic Plan 2007-09. 1. Current HKEx Strategic Plan 2004-06 3 2. Recent progress 5

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Presentation to Hong Kong Securities Institute

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  1. Presentation to Hong Kong Securities Institute HKEx STRATEGIC PLAN 2007-09 By Paul M Y Chow, Chief Executive, Hong Kong Exchanges and Clearing Limited 7 December 2006

  2. AGENDA Page HKEx Strategic Plan 2007-09 1. Current HKEx Strategic Plan 2004-06 3 2. Recent progress 5 • Forthcoming HKEx Strategic Plan 2007-09 14 • Conclusion 20

  3. Strategic analysis 2003 General business strategies HKEx strategy 2004-06 Key factors of HKEx strategy • Difficult market conditions • Operational difficulties • Global / business diversification initiatives Mainland Partner • Home market advantage • Liquidity/critical mass Differentiation • Quality issuers • Quality intermediaries (capital, integrity) • Quality products • Quality infrastructure (system up-time) • Quality rules and regulations Quality Market Focus • Cost reduction • Concentration on key projects • Organisational restructuring • Improving operational efficiency Low-cost operation Consolidation HKEx Strategic Plan 2007-09 1. CURRENT HKEx STRATEGIC PLAN 2004-06

  4. HKEx Strategic Plan 2007-09 1. Current HKEx Strategic Plan 2004-06 Key initiatives 2004-06 Current status In progress Completed Completed In progress In progress Completed Completed Completed Completed Completed Completed Completed Completed Completed Completed Completed 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

  5. HKEx’s equity market has grown strongly HKEx Strategic Plan 2007-09 2. RECENT PROGRESS 2002 2005 2004 2003 30 Nov 2006 No. of listed companies 1,135 1,096 1,037 978 1,159 No. of newly listed companies (YTM) 46 67 70 73 117 Main Board 41 57 49 46 60 GEM 5 10 21 27 57 No. of delisted companies (YTM) 22 28 11 14 6 Main Board 13 15 9 6 4 GEM 7 11 0 2 0 Transfer from GEM to Main Board 2 2 2 6 2 Total equity funds raised (YTM) (HK$bn) 424.8 301.3 281.8 213.8 110.5 Funds raised by IPO (HK$bn) 275.0 165.7 97.2 59.1 52.0 Funds raised in secondary market (HK$bn) 149.9 135.6 184.6 154.6 58.5 YTM avg daily turnover – total market (HK$bn) 32.8 18.3 16.0 10.4 6.7 YTM avg daily turnover – equity (HK$bn) 25.3 14.6 13.7 9.3 6.1 Note: Total funds raised figure in 2005 excludes the HK$25.5 bn funds raised by the three REITs.

  6. Mainland China enterprises have contributed substantially to the Hong Kong securities market HKEx Strategic Plan 2007-09 2. Recent progress Mainland Total enterprises % of total 30 November 2006 Unit No. of listed companies Number 1,159 354 31% 26 Number 46 57% No. of newly listed companies (YTM) Main Board Number 41 21 51% GEM Number 5 5 100% Market capitalisation 48% HK$bn 12,196.8 5,801.3 Total equity funds raised (YTM) HK$bn 424.8 310.5 73% 253.7 Funds raised by IPOs HK$bn 275.0 92% Funds raised in secondary market HK$bn 149.9 38% 56.8 YTM avg daily turnover – equity HK$bn 25.3 14.9 59%

  7. HKEx Strategic Plan 2007-09 2. Recent progress Cash Trading (Main Board and GEM) – Aided by derivative warrants, turnover has nearly quadrupled Source: HKEx

  8. Derivatives Trading – Trading volume by product HKEx Strategic Plan 2007-09 2. Recent progress * Sum of the average daily volume of each product ** Products available for trading in 2002 and 2006 may be different Source: HKEx

  9. HKEx derivatives market daily volume (2002 – Nov 2006) HKEx Strategic Plan 2007-09 2. Recent progress Source: HKEx

  10. HKEx’s rankings among global exchanges HKEx Strategic Plan 2007-09 2. Recent progress Source of overseas exchanges’ statistics: World Federation of Exchanges

  11. HKEx ranks 3rd in the first 10 months of 2006 among global exchanges by equity funds raised HKEx Strategic Plan 2007-09 2. Recent progress Equity funds raised (US$bn) (Jan-Oct 2006) 2005 Jan – June 2006 Rank Exchange IPO Post-IPO Total 1st 2nd 1 London SE 76.3 42.0 34.3 3rd 1st 46.9 23.5 2 NYSE 70.4 2nd 5th 33.3 3 Hong Kong Exchanges 17.2 50.5 33.2 4 Luxembourg SE 2.0 35.2 5 TSX Group 34.1 26.3 7.8 6 Australian SE 26.8 12.0 14.8 10.6 7 BME Spanish Exchanges 8.9 19.5 8 Tokyo SE 17.1 17.1 n.a. 0.5 9 Euronext 16.7 16.2 10.1 10 . . . Sao Paulo SE 14.8 4.7 n.a. 12 Nasdaq 12.2 12.2 16 Shanghai SE 8.5 9.0 0.5 n.a. 18 Deutsche Börse 8.2 8.2 22 Korea Exchange 2.7 4.9 2.2 24 Singapore Exchange 4.5 3.7 0.8 27 Shenzhen SE 3.7 1.0 2.7 1.5 0.8 0.7 31 Taiwan SE Corp. Source: World Federation of Exchanges, Oct 2006 statistics report downloaded on 21 Nov 2006

  12. HKEx Strategic Plan 2007-09 2. Recent progress HKEx income, operating expenses and profit [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. Costs have been contained, leading to out-performance in the current bull market.

  13. HKEx Strategic Plan 2007-09 2. Recent progress HKEx share price movement (27 June 2000 – 30 November 2006)

  14. 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.” HKEx Strategic Plan 2007-09 3. FORTHCOMING HKEx STRATEGIC PLAN 2007-09

  15. Substantial progress made: New challenges: New opportunities: • Mainland listings • Capital-raisings (ICBC was world’s largest) • Derivatives volumes • Market quality • Infrastructure reliability • Internal operations • Cost control • Resumption of Mainland IPOs • Gradual Mainland market opening • Gradual RMB liberalisation • Overseas exchange and OTC competition • Increasing influence of hedge funds The present scale of the Hong Kong market may support more products, services and business initiatives HKEx Strategic Plan 2007-09 3. Forthcoming HKEx Strategic Plan 2007-09 New challenges and opportunities ahead.

  16. HKEx Strategy 2004-06 HKEx Strategic Plan 2007-09 3. Forthcoming HKEx Strategic Plan 2007-09 HKEx Strategy 2007-09 General business strategies Mainland Positioning Differentiation Mainland Partner Business Expansion Building a Quality Market Focus Service Improvement Consolidation Low-cost operation The new strategies continue those of the existing plan but step up a level.

  17. HKEx Strategic Plan 2007-09 3. Forthcoming HKEx Strategic Plan 2007-09 Themes Meaning Implications Mainland Positioning • China’s international exchange • Complements Mainland exchanges • Partners Mainland • RMB products • A:H shares • Mutual transparency (eg. share price display) • Mainland intermediaries • Mainland investors (QDII) • Seeking new customers • Seeking more business from existing customers • Overseas issuers and intermediaries • Commodity and climate products • Asian focus • New Cash and Derivatives products Business Expansion Service Enterprise • Service mentality • Cost-effectiveness • Focus on customers • Transparency and speed • Service culture • MIS – finance and customer • Internal efficiency/automation • Accountability and organisation structure • Compensation linked to service / performance

  18. Selected key initiatives 2007-09Exchange HKEx Strategic Plan 2007-09 3. Forthcoming HKEx Strategic Plan 2007-09 • 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) HKEx Strategic Plan 2007-09 3. Forthcoming HKEx Strategic Plan 2007-09 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. HKEx Strategic Plan 2007-09 4. CONCLUSION By the end of 2009, HKEx should have • 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

  21. Market Quality An orderly, informed and fair marketplace Market liquidity Investor Confidence Order flow HKEx Strategic Plan 2007-09 4. Conclusion Market quality is the key to market growth and sustainability

  22. HKEx Strategic Plan 2007-09 4. Conclusion *** THANK YOU ***

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