2004 and beyond - HKEx’s perspective

2004 and beyond - HKEx’s perspective Paul Chow Chief Executive, Hong Kong Exchanges and Clearing Ltd Presentation at Economic Summit 2004 16 December 2003

2004 and beyond - HKEx’s perspective • HKEx has recently completed a strategic planning exercise • To implement the Strategic Plan, we will need the support of our stakeholders and market players like you. • This presentation highlights the vision, directions and key strategies of HKEx in the next 3 years • A special focus will be given to our strategies in China development, market infrastructures and investor protection.

Agenda • HKEx’s roles • HKEx’s vision • Direction and strategies • Key initiative - China • Key initiative - Market infrastructures • Key initiative - Investor protection • Conclusion

1. HKEx’s roles HKEx is a complex institution with at least 3 distinct roles • Maintain an open, secure, fair, orderly and transparent marketplace contributing to HK’s status as an international financial centre and premier capital market for China • Front-line regulator of issuers • Regulator of participants’ compliance with HKEx’s trading and clearing rules • Operator of market infrastructures • For-profit company • Offer listing, trading, clearing & settlement and information services Public organisation Regulator Business entity

1. HKEx’s role (cont’d) HKEx has many stakeholders SFC/ Government Investors Brokers Issuers Data vendors Investment advisers /professionals Suppliers Shareholders Banks Staff

Check & Balance Check & Balance 1. HKEx’s roles (cont’d) In pursuing long-term success, HKEx has to balance its three roles and work closely with its stakeholders. There are various check and balance measures to avoid conflicts of interest. Public Regulatory Business

2. HKEx’s vision Goals • Operate a quality market • Focus on Mainland China and Hong Kong business • An independent exchange based in Hong Kong seeking closer cooperation with China counterparts • Focus on core market operations, including securities and derivatives trading, clearing, settlement and depository, information services as well as regulation General Geography Status Business scope

2. HKEx’s vision The mission of HKEx is to operate a world-class marketplace for Hong Kong and Mainland China securities and derivatives products. By offering issuers access to international capital markets and maintaining an open, secure, fair, orderly, efficient and transparent marketplace, HKEx contributes to Hong Kong’s status as an international financial centre and the premier capital market for China. By servicing China’s substantial long-term demand for capital and exchange services in accordance with international standards and practices, HKEx has the potential to become one of the world’s pre-eminent exchanges. Mission statement

3. Direction & Strategies Goals • International gateway for Mainland issuers and (when possible) investors • Become a domestic Mainland player in the long run China positioning • A gateway for international players to access China • Become one of the world’s larger exchanges with international standards and practices Global positioning

3. Direction & Strategies (cont’d) HKEx will base its success on three building blocks • Expand China offerings • Solicit Mainland investors (when permitted) • Venture into Mainland domestic business Becoming a Mainland Partner • Strengthen regulatory regime • Foster corporate governance culture • Improve market infrastructures • Increase market liquidity • Raise customer satisfaction & investors’ confidence • Improve investor education/information dissemination. Building a quality market • Cost rationalisation • Prioritise projects & streamline internal processes • Strengthen staff team • Strengthen risk management Consolidation Time

Agenda • HKEx’s roles • HKEx’s vision • Direction and strategies • Key initiative - China development • Key initiative - Market infrastructures • Key initiative - Investor protection • Conclusion

Key initiatives - China development Achievements of the past decade • The largest offshore listing and trading centre for China stocks • A total of 254 Mainland companies, including H share, red chip and private enterprises, have been listed on HKEx. Their total market capitalisation as at Nov 2003 was HK$1,518 billion • Over HK$754 billion was raised by Mainland companies via IPO and post-listing fund raising • Seven out of eight largest IPO (capital raised > HK$10 bil) were Mainland companies • Trading of China stocks reached HK$864 billion, representing over 43% of total equity turnover

Key initiatives - China development (cont’d)

Key initiatives - China development(cont’d) Turnover of China stocks fluctuates from time to time. This year, H shares and red chip companies alone have contributed over 40% of total equity turnover. Their aggregate weighting in Hong Kong’s total market capitalisation is also large.

Benefits for Hong Kong Diversifying the portfolio of Hong Kong listed companies Improving market width and depth Creating a unique selling point to global player Developing a sophisticated domestic pool of China market experts Becoming the information hub for China market Key initiatives - China development(cont’d) China listing in Hong Kong has created a win-win situation Benefits for Mainland China • Raising international capital to support its rapid economic growth • Speeding up enterprise reform, quality management and corporate governance in China • Facilitating the development of China’s capital market • Offering exposure to international standards and market practices

Our vision China, being a very large and developing economy, has vast long term demand for capital and exchange services Such demand cannot be fully met domestically As long as Hong Kong can maintain its quality advantage in the context of the Mainland market opening process, it can grow to a large scale in both cash and derivatives markets Key initiatives - China business(cont’d) In the next 3 years, HKEx will continue to improve its services to Mainland and seek new business opportunities there Goals • Continue existing successful business on issuer side • When regulation permits, Hong Kong can serve Mainland investors and intermediaries too • Gradual opening of Mainland market under WTO and CEPA will provide opportunities for HKEx’s further involvement in Mainland business (in particular, Pearl River Delta region)

Key initiatives - China business(cont’d) • Attract more major, high quality Mainland enterprises • Enhance listing services to Mainland issuers • Develop China-related products (e.g. H share index futures/options) • Explore crude oil contract with Shanghai Futures Exchange • Explore cooperation with Shenzhen Stock Exchange • Promote HKEx’s business on the Mainland • When permitted, facilitate Mainland investors’ access to HK • Explore possibility of allowing Mainland EPs’ access to HK China listing China products Cooperation Marketing & others

1993 1996 2000 1999 2000 2001 2003 1992 2003 Launch of AMS Launch of off-floor trading system Launch of AMS/3 Launch of HKATS Abolition of Trading Floor Migration of stock options trading to HKATS HKATS upgrade (OMex 17.1) Launch of CCASS CCASS/3 5. Key initiatives - Market infrastructures A critical factor of Hong Kong’s success is the offering of efficient, secure and reliable market infrastructures. Cash Derivatives Clearing

Ensure that market infrastructures and operations meet international standards Offer secure, reliable, efficient and high quality market infrastructures Increase operational efficiency and reduce operating costs Launch of DCASS Harmonise and where appropriate, consolidate derivatives clearing operations Increase immobalisation of securities in HKSCC Depository Strengthen the reliability, security and availability of market systems Explore the potential and market impacts of a scripless market Introduce Enhanced CCASS Investor Participant Account services Explore the possibility of network consolidation (i.e. AMS/3, CCASS/3, HKATS and Market Data Feed) to seek cost reduction without sacrificing serviceability and manageability 5. Key initiatives - Market infrastructures (cont’d) In the next 3 years, HKEx will continue to ensure that our market infrastructures meet the demands of our customers and the changing marketplace Policy Market System Network

6. Key initiatives - Investor protection Investor confidence is vital for the success of HKEx markets.In the next three years, HKEx will take action to enhance the current structure, policy and operations to boost investor confidence • Improve the listing regulatory structure based upon the outcome of the Government review • Revamp the Listing Committee’s role in decision-making and related structures • Improve disciplinary process • Promote the statutory backing for selected Listing Rules • Further develop corporate governance • Review initial listing criteria and continuing obligations • Consider delisting mechanism • Regulate sponsors and IFAs Structure Policy

6. Key initiatives - Investor protection (cont’d) • Review and improve enforcement process • Improve efficiency of listing application and IPO vetting process • Increase transparency of Listing Unit’s operations • Improve investor education • Further improve Listing Unit’s staff quality and service culture • Seek to improve directors’ understanding of Listing Rules and regulatory requirements • Foster closer working relationship with other regulatory bodies Practice

7. Conclusion • The rapid growth of China’s economy and its opening will create new opportunities for Hong Kong securities and derivatives industry • HKEx’s future success will be built on three building blocks: consolidation, building a quality market and becoming a Mainland Partner • Expansion of our Mainland business, improvement of our market infrastructures and the strengthening of investor confidence will be the key to the accomplishment of our goals.

THANK YOU !

2004 and beyond - HKEx’s perspective