CEP Industry ResearchGroup 2

Hong Kong Financial Regulation and Supervision

Introduction

Hong Kong financial regulations divided into two parts:

1. Banking (Hong Kong Monetary Authority) 2. Security (Security and Futures

Commission)

Focused on their functions, objectives and policies

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

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

HKMA – Related organizations

1. 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

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

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

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

HKMA banking policy and supervision

1. Supervision Approach Promote the safety and stability Follows international practices

recommended by Basle Committee Based on a policy of continuous

supervision

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

3. Banking Ordinance Legal framework for banking supervision

in Hong Kong Maintain adequate liquidity and capital

adequacy ratios Submit periodic returns to HKMA

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

The Regulators of HK Securities Industry

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

Historical Background

After stock market crashed down between 1973 and 1974

HK government intervened and set up core legislation

Two Commissions administrated the legislationSecurities & commodities trading

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

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;

Regulatory Objectives

To minimize crime and misconduct To reduce systemic risks To assist the Financial Secretary in

maintaining the financial stability of Hong Kong.

Regulatory Structure

S e c u r i t i e s a n d F u t u r e s C o m m i s s i o n

S t o c kE x c h a n g e

o f H o n gK o n g

H o n gK o n g

F u t u r e sE x c h a n g e

• E x c h a n g em e m b e r s

• l i s t i n gm a t t e r s

E x c h a n g em e m b e r s

• f i n a n c i a li n t e r m e d i a r i e s

e x c e p t E x c h a n g em e m b e r s

• r e g u l a t i o n o fi n v e s t m e n t

p r o d u c t s o f f e r s

• t a k e o v e r s a n dm e r g e r s a c t i v i t y

• m a r k e tm a l p r a c t i c e

S E H KO p t i o n s

C l e a r i n gH o u s e

H KS e c u r i t i e s

C l e a r i n gC o m p a n y

H K F EC l e a r i n g

C o r p o r a t i o n

c l e a r i n gp a r t i c i p a n t s

c l e a r i n gp a r t i c i p a n t s

c l e a r i n gp a r t i c i p a n t s

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

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

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.

Responsibilities of SFCSFC 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~