Securities
Hong
Kong has the world's 10th largest securities
market and the second largest in Asia after
Tokyo (at the time of writing). As of March
2000 the Hong Kong Stock Exchange and the Futures
Exchange were merged into Hong Kong Exchanges
and Clearing (HKEx). The launch of the Growth
Enterprise Market (GEM) in November 1999 for
smaller and high growth companies has broadened
Hong Kong's stock market, although the timing
of GEM's launch was unfortunate, and the 'dotcom'
shakeout in 2000 weakened its initial impact.
Hong
Kong's securities market has been increasingly
internationalised. There has been a continued
rise in the participation of international investors
in the market. Many of the initial public offerings
through the Stock Exchange are also made globally.
The majority of these issuers are supernational
bodies, whose issues are almost invariably accompanied
by global fund raising.
In
January 2011, HKEx launched the second year
of its Strategic Plan 2010-2012, focusing on
three key components: accelerating its platform
infrastructure upgrade and necessary market
structure reforms, reinforcing its position
as a global listing venue by promoting international
listings, and developing its renminbi (RMB)
capability and Mainland compatibility.
HKEx and its subsidiaries (the Group) recorded
a profit attributable to shareholders of HKD3,478
million for the first nine months of 2010 (first
quarter: HKD1,127 million; second quarter: HKD1,131
million; third quarter: HKD1,220 million) compared
with HKD3,413 million for the same period in
2009 (2009 first quarter: HKD834 million; second
quarter: HKD1,353 million; third quarter: HKD1,226
million).
The rise in profit for the nine months ended
30 September 2010 against that for 2009 was
primarily attributable to the increase in Stock
Exchange listing fees and the higher turnoverrelated
income resulting from the increase in activity
in the Cash Market, but was partly offset by
the drop in net investment income on account
of lower net interest income earned in 2010.
Total operating expenses rose during the period
mainly due to higher staff costs and IT and
computer maintenance expenses but were partly
offset by a decrease in premises expenses.
HKEx’s profit attributable
to shareholders was HKD5.04bn for the year ended
December 31, 2010, a rise of 7% from the previous
year.
In
terms of trading activity, 2010 was a good year
for HKEx, when a number of trading records were
set. Total equity funds raised reached HKD850.1bn
by December 31, beating the previous annual
record of HKD642.1bn set in 2009. Funds raised
by Chinese mainland enterprises (IPO and post-IPO)
reached HKD466bn by year's end, well above the
previous record of HKD384.9bn set in 2006. New
listings surged 55% from the previous year and
two of the three largest IPOs in the world,
AIA Group Ltd and Agricultural Bank of China
Ltd, took place on the exchange which raised
USD20bn and USD12bn, respectively, in Hong Kong.
The
total number of shares traded in 2010 reached
just under 35 trillion by the end of the year,
surpassing 2008's record of 27.1 trillion. New
records were also set in trading turnover for
several instruments, including exchange-traded
funds, futures and options, index futures and
options, and stock options. The number of listed
companies on the exchange rose by 8.65% to 1,244
during 2010, and market capitalisation was just
under HKD30 trillion as at December 31, 2010,
17.86% higher than the end of 2009.
At
the end of the first quarter of 2011 there were
1,258 companies and a total of 8,200 securities
listed on the Main Board. Total turnover in
the first quarter in terms of value was HKD4.69
trillion (up from HKD3.9 trillion in Q1, 2010).
On
the GEM there were 168 listed companies at the
end of Q1, 2011. Total turnover was HKD22.6bn
(down from HKD31.5bn in Q1, 2010) and total
market capitalisation stood at HKD137.8bn (down
from HKD134.7bn at the end of Q1 2010).
Exchange
traded funds (ETFs) have been a strong growth
area for HKEx since the first one was listed
in 2000. As of mid 2011, there were 76 ETFs
listed on the exchange, accounting for about
3.5% of market turnover.
Technological
Developments
Hong
Kong Exchanges and Clearing (HKEx) introduced
AMS/3, a third generation automatic order matching
and execution system, in late 2000. In February
2001 it added an Order Routing System (ORS).
ORS is an open system that enables investors
to place stock market orders through the Internet,
mobile phones and other electronic channels,
which may be developed by HKEx or vendors. After
an order is placed through an electronic channel
connected to ORS, the system automatically sends
the order to a Stock Exchange Participant for
approval and submission to the market for matching
and execution.
More
than 100 Stock Exchange Participants have so
far connected to ORS, and are able to offer
their clients Internet trading. All Stock Exchange
Participants, including those who have connected
to the HKEx channel, will also be able to offer
their clients electronic trading services, including
Internet and mobile trading, through Proprietary
Network System (PNS) channels provided by vendors.
CCASS
provides settlement services under which securities
are credited or debited to participants' CCASS
stock accounts and funds are recorded in the
participants' money ledgers on settlement day.
Details
of all Exchange trades, including trade data
and trade amendments, are electronically and
automatically transmitted to CCASS by the Stock
Exchange on each trading (T) day. There is no
need for broker participants to input or further
confirm their trade details in CCASS. Broker
participants receive Provisional Clearing Statements
of their stock and money positions through their
CCASS terminals shortly after 1800 hours on
each T day for reconciliation. Final Clearing
Statements are available to broker participants
shortly after 1400 hours on T+1 day for confirmation
purposes.
In
October 2010, HKEx published a paper to provide
market participants with information about upgrades
of AMS/3 and Market Data System (MDS). The upgrades,
which are named AMS/3.8 and MDS/3.8 respectively,
are scheduled for completion by the end of 2011.
HKEx says they will increase the market's efficiency
and transparency and pave the way for future
growth.
"HKEx is committed to devoting its best
effort and resources to the provision of high
quality market infrastructure and services for
the investing community," said HKEx Chief
Executive Charles Li. “The AMS/3.8 and
MDS/3.8 upgrades will play a crucial role in
maintaining the competitive edge of Hong Kong’s
securities market and helping us capture new
growth opportunities.”
AMS/3.8 will essentially operate in the same
way as the current version of the securities
market trading system. However, the system upgrade
will increase the processing capacity over the
existing system by about 10-fold to 30,000 orders
per second, and reduce average latency to 9
milliseconds, 16 times faster than present.
Market transparency will also be improved as
AMS/3.8 will display the 10 best price levels
compared to the five best price levels in the
current system. In addition, some legacy system
functions will be streamlined to improve Exchange
Participants’ operational efficiency.
Upon
the rollout of MDS/3.8, throughput for market
data dissemination will be increased to 2,000
stock page updates per second from 1,000 stock
page updates per second, the message rate target
that the existing system will use at the end
of 2010. As a transitional arrangement, HKEx
will disseminate market data at both message
rates in the first year following the upgrade.
HKEx
plans to introduce a new set of real-time market
datafeed products about six to nine months after
the rollout of MDS/3.8 to meet the increasing
demand for deeper and faster market data. Market
users will be provided with more data product
choices and flexibility in choosing the market
datafeed which best fits their needs and reception
capability.
Generally,
online securities trading in Hong Kong was an
early casualty of the dot-com meltdown and the
international equity slump, with a number of
major US brokerages retreating from the SAR
in 2001 almost as quickly as they had arrived
in 1999 and 2000, but by 2003 it seemed that
on-line trading would finally have its day in
Hong Kong, as a combination of better technology,
burgeoning interest from mainland visitors and
the impact of SARS pushed on-line trading volumes
to historic highs.
Regulation
The Stock Exchange of Hong Kong (SEHK) operates
as a private entity. Thus when the stock market
crashed in 1987, the Securities Commission had
no legal authority to intervene in the affairs
of the SEHK. The regulatory infrastructure for
the securities industry has since been revamped
and, in 1989, the Securities and Futures Commission
Ordinance was enacted. The Ordinance provides
the legal basis for the SFC to supervise and
regulate the securities industry. The SFC now
has the authority to take actions necessary
to protect the safety of the securities market
and to prosecute individuals who breach securities
market ordinances and codes.
After
the stock market crash of 1987, the SFC was
charged with overhauling the regulations that
govern securities market participants. Applicants
for a license to deal in securities or operate
as an investment adviser are now required to
meet the "fit and proper person" criterion.
Applicants seeking a dealer’s license must
also have minimum net capital of HK$5 million.
There is a compensating fund for individuals
whose brokers default on funds owed.
In
1991 the Securities (Insider Dealing) Ordinance
was amended, resulting in higher penalties for
insider trading. Fraud and misrepresentation
are also punishable by the SFC. Another ordinance
enacted in 1991 calls on a company’s directors
and executives, as well as those who acquire
more than 10 percent of a company’s voting
shares, to publicly disclose their dealings.
Firms seeking to list on the SEHK must make
a prospectus publicly available. The SFC has
the authority to determine which clearinghouses
are permitted to settle accounts and their rules
of operation in order to ensure a sound clearinghouse
system.
In
November 2000 the Hong Kong Government introduced
the Composite Securities and Futures Bill which
combined and replaced all ten existing pieces
of securities and futures legislation. The new
law gives the Securities and Futures Commission
(SFC) the power to regulate Internet trading.
In addition the SFC is also able to seize the
working papers of market professionals during
investigations. The Bill became law in 2001.
An independent non-statutory body, known as
the Process Review Panel, has been established
to ensure that the SFC's internal operations,
including its investigative and disciplinary
procedures, are fair and consistent.
Despite
the Securities and Futures Ordinance, the government
has pushed for further integration of financial
regulation, modelled on the UK's Financial Services
Authority (FSA). In particular, the government
was keen to address the perceived conflict of
interest created by the fact that the current
stock market regulator, Hong Kong Exchanges
and Clearing (HKEx) is also itself a profit-making
listed firm.
In
March, 2004, it became clear that the SFC was
to be the sole regulator for listing sponsors.
SFC chairman, Andrew Sheng explained that: "In
line with the wishes of the market, there will
be a single regulatory regime for sponsors,
and both the HKEx and Commission agree that
we will enforce that regime."
He
went on to add that that although investment
banks sponsoring companies hoping to list on
the stock exchange would not be expected to
assume issuer liability: "They have to be liable
for their own standards of conduct and their
role in due diligence."
SFC
MoU With the Financial Reporting Council
Hong
Kong's Securities and Futures Commission and
the Financial Reporting Council signed a memorandum
of understanding, to enhance co-ordination and
exchange of information between the two parties,
in November, 2007.
According
to a government statement, the pact outlines
the working arrangements between the two bodies
in areas of potential authority overlap and
matters of common interest, so that they can
discharge their functions effectively and enhance
investor protection.
The
agreement also outlines the framework for case
referral, and establishes principal contact
points to ensure efficient and effective communication.
The
council's Chief Executive Officer MT Shum added
that he is confident that the two parties will
work together to enhance the financial reporting
integrity of listed entities in Hong Kong.
The
Financial Reporting Council is a statutory organisation
which launched in July, 2007. Its main functions
are to investigate - with respect to listed
entities - auditing and reporting irregularities,
enquire into non-compliance with financial reporting
requirements, and to require listed entities
to address any non-compliance identified.
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