Paul M Y Chow, Chief Executive Hong Kong Exchanges and Clearing Limited CEO Forum 2007

1. GLOBAL EXCHANGE MERGERS AND ACQUISITIONS (M&A) Paul M Y Chow, Chief Executive Hong Kong Exchanges and Clearing Limited CEO Forum 2007 City University of Hong Kong 18 March 2007

2. AGENDA 1. Development of exchange entities 2. In-country exchange consolidation & HKEx case 3. Cross-border exchange consolidation 4. Outlook for HKEx

3. 1. Development of exchange entities • In the first industrialised countries, stock exchanges served local communities • Improved technology, intensified domestic competition, centralisation of financial activities led to concentration - • Except where regionalism and related protectionism were particularly strong • Over the past decade, there has been a clear trend to demutualise exchanges • As well as merging exchanges horizontally, vertical integration is another option • Cross-border cooperation has been another clear trend in the global exchange arena • It may take different forms: MOU, strategic alliance, investment and merger and acquisition Horizontal In-country Consolidation Demutualisation Vertical In-country Consolidation Cross-Border Cooperation 3

4. 2. In-country exchange consolidation In-country exchange consolidation brings the following benefits: • Critical mass • Consolidation of liquidity pool • Price formation (a single price for same share) • Economies of scale • Rationalisation and sharing of overheads • Higher global profile • Easier to maintain regulatory standards

5. 2. In-country exchange consolidation - HKEx case HKEx followed a long history of exchange mergers in Hong Kong Year Brief History HKEx was one of the earlier listed exchanges – almost a pioneer!

6. 2. In-country exchange consolidation - HKEx case Driving forces behind the HKEx merger in 2000 • Government leadership • Convincing rationale • Synergies • Inefficiencies of mutual form • Desire to create a commercial and listable entity • Vertical integration with Hong Kong Securities Clearing valuable • Shares / cash alternatives to members of the pre-merger entities • Trading rights regime retained • Catalyst: • Asian Financial Crisis (highlighted need for a central market operator)

7. 2. In-country exchange consolidation – HKEx Case The merger has delivered tremendous benefits to HKEx and the market: • Commercial management replaced mutual-style • Market alignment • Horizontally (cash market and derivatives market) • Vertically (trading and clearing operations) • More coordinated market development • Consolidation of liquidity pool • Better risk management • Synergies • Economies of scale • Rationalisation • Sharing of overheads • Enhanced efficiency

8. 3. Cross-border exchange consolidation There is limited synergy from cross border M&A of exchanges • Home market effect limits cross-listing potential • Advances in technology and presence of international intermediaries allow global, round-the-clock securities trading Client Base • Different local market needs, including service and product offerings • Different operating procedures and trading mechanisms • Different currencies • Different financial reporting and regulatory standards Operations

9. There is limited synergy from cross border M&A of exchanges 3. Cross-border exchange consolidation • Maintaining marketplace in each territory requires separate infrastructures • Difficult to share overheads • Possible diseconomies of scale from additional need of coordination Economies of Scale • Different setup of infrastructure, location and local standards present challenges to full system integration Information Technology • Different languages, culture, local laws and regulations • Requirement to maintain separate infrastructures may limit scope for staff reduction Human Resources 9

10. Other issues related to cross border M&A of exchanges Political and Regulatory Issues 3. Cross-border exchange consolidation • Exchanges are often crown jewels of their home territories • Political resistance • Ring fence • Statutory regulation and supervision • Difficult questions arise • Primary / leading location of key functions and headquarters? • Primary location of data centre? Management and Control Issues • Investment value declines in a bear market • Investment choices should be left to shareholders Costly Investment 10

11. 4. Outlook for HKEx Currently, lack of sound rationale for any cross-border M&A for HKEx • Cross-border merger currently not attractive due to no evident synergies • Lack of synergies with other Asian exchanges • Synergies with other world exchanges – even more remote • Risk of diseconomies due to distance, culture, market needs, politics, etc. • HKEx’s profitability, ROE, cost-income ratio are among the highest of global exchanges • Business synergies with Mainland, but • One Country, Two Systems • Different market models and infrastructure • Different regulatory frameworks • Mainland exchanges not demutualised • Mainland still largely closed • RMB not freely convertible • Vertically integrated businesses help secure HKEx’s position • One-stop-shop service • Overall systems investment and risk management effort • Cross-subsidisation of costs 11

12. 4. Outlook for HKEx HKEx focuses on its core competence • HKEx is the vertically-integrated sole Hong Kong market operator • Mission: “To be a leading international marketplace for securities and derivative products focused on Hong Kong, Mainland China and the rest of Asia.” • HKEx’s strategies focus on • Market quality • Infrastructure improvement • Service enhancement • Regulatory integrity • Dividend payout ratio of 90% • Regular sharing of knowledge with other exchanges (MOU, MORC, etc) • Maintain cooperative relationships with Mainland entities (e.g. A+H Working Group)

13. Thank You