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Supervision of Markets Securities and Futures Commission Annual Report 2004-2005 Supervision of Markets Our mission is to ensure that the regulation and the development of Hong Kong’s securities and futures markets meet international standards. [ Achievements ] [ This Chapter Is About ] Authorised three Automated Trading Facilitating market development Services providers • Encouraging product innovation and Completed the comprehensive review of enhancement HKEx’s fees and charges • Authorisation of Automated Trading Services Monitored the development and launch of • Review of HKEx’s fees and charges advanced market infrastructure under • Review of the disclosure of interests SCEFI recommendations including the regime DCASS and Investor Participant Account service Strengthening financial infrastructure Consulted the public on the level and the • Rollout of DCASS funding of the Investor Compensation • HKEx’s network consolidation project Fund and the operation of the investor • Implementation of SCEFI initiatives compensation arrangements (scripless market, IP Account, Consulted the public on the disclosure of Settlement Instruction matching) interests regime Market contingency planning Facilitated the launch of H-shares Index Investor compensation Options and the enhancement of the stock options market • Managing compensation funds and processing claims Revised the SFC Market Contingency Plan • Review of the Investor Compensation and assisted in the set up of the backup Fund levy and claim limit site for the SFC Participated in a successful market Market research contingency rehearsal co-ordinated by the Government Commenced legislative drafting for enabling a scripless market Housewife Ms Mr David Xia De Mr Chong Kin Investors Susana Wong Liang surfs the Wah, a says she only Internet often to secondary First invests in unit obtain financial school teacher, trusts and and investment holds stocks for mutual funds. information. long term investment. 66 Securities and Futures Commission Annual Report 2004-2005 What We Do makers to fulfil their obligations by providing continuous quotations, and the reduction of the Facilitate the development of and standard trading tariff of Tier 1 stock options encourage participation in the Hong Kong contracts. markets; • In response to the market, in August 2004 HKEx Strengthen market infrastructure; published a consultation paper on the reduction of minimum trading spreads by two phases. Supervise and monitor activities of the HKEx’s view is that a reduction of minimum exchange controller, exchanges and trading spreads would increase stock market clearing houses; competitiveness, improve market efficiency and Regulate approved share registrars; enhance market liquidity. Based on the results of Regulate authorised ATS; the consultation, HKEx is planning to implement Phase 1 in 2005. Under Phase 1, about 20 Supervise and monitor activities of the stocks with share price over $30 will have their independent Investor Compensation minimum trading spreads reduced. The SFC is Company Limited; and considering HKEx’s proposal. Manage Hong Kong’s investor • To cope with the recent growth of the market, compensation funds. HKEx discussed with the SFC on the possibility of raising the prescribed position limit for HSI What We Did Futures and Options contracts, unchanged since August 1999. HKEx also proposed to increase the prescribed position limits for Stock Options Facilitating Market Development contracts and H-shares Index Futures and Options contracts. The SFC will continue to Encouraging Product Innovation and work with HKEx to review the prescribed limits. Enhancement • In November 2004, Hong Kong Securities The SFC assisted HKEx in widening its product Clearing Company Limited (HKSCC) introduced a range, enhancing its markets and streamlining the settlement agent model. Under this model, a regulatory requirements for various products: Settlement Agent may operate a CCASS • Following the successful launch of the Hang Participant’s CCASS terminal in the Settlement Seng China Enterprises Index (H-shares Index) Agent’s offices. The SFC worked closely with Futures contract in December 2003, the HKFE HKEx to ensure that the infrastructure and introduced the H-shares Index Options contract procedures were in place, and approved the in June 2004. Six market makers were HKSCC rule amendments. appointed by HKFE to provide liquidity for the contract. The open interest of H-shares Index Authorisation of Automated Trading Options contract quickly exceeded 10,000 Services (ATS) contracts in just a few months. During the year, we authorised three ATS providers, bringing the total number of authorised • The SFC is working with HKEx on the proposed ATS to eight – seven overseas exchanges and launch of callable bull/bear contracts. entities and one local subsidiary of an international • HKEx implemented a number of measures to information provider. Particulars of the authorised enhance the competitiveness of the stock entities and their authorisation conditions are listed options market. These included the reduction of on the Register of ATS on the SFC website. the strike price intervals, allowing market 67 Securities and Futures Commission Annual Report 2004-2005 Supervision of Markets As at the year-end, the SFC was processing one Review of the Disclosure of Interests application from a local company and considering Regime submissions from an entity as to whether it needs When the SFO commenced in 2003, the to be authorised to provide ATS in Hong Kong. Government and the SFC committed to review the Review of HKEx’s Fees and Charges Part XV disclosure of interests regime at an appropriate time. We began the review last year Fees charged by HKEx in its capacity as a after the SFO had been implemented for one year. recognised exchange controller, by SEHK and The SFC first asked selected market participants if HKFE in their capacities as recognised exchange Part XV met its policy objectives. We also companies and by the clearing houses in their consulted on any need to update the law in light of capacities as recognised clearing houses must be market demands and developments. As a result, specified in their respective rules and approved by we identified some principal issues for public the SFC. consultation. On 20 January 2005, the SFC issued In March 2005, a comprehensive fees review was a Consultation Paper on the Review of the completed. HKEx proposed a number of changes Disclosure of Interests Regime under Part XV of to its fee structure. These include the elimination the SFO. of HKSCC’s scrip fee in two phases, a reduction in Principal areas of the consultation include HKSCC’s minimum stock settlement fees for disclosure forms and codes; disclosure of security exchange trades and settlement instructions (SI) interests; simplification of the de minimis transactions, the elimination of HKSCC’s SI input exception; situations which should be caught as a fee, a reduction of the SEHK Options Clearing change in nature of interests; and proposed House Limited’s and HKFE Clearing Corporation changes in certain specialist areas. The Limited’s accommodation charges for utilised non- consultation paper also contains proposed cash collateral, abolition of HKCC and SEOCH’s technical changes to address business practices or interest retention rates on margin deposits and the for more consistent applications of the law. rebate of interest to participants at the prevailing bank savings deposit rate on cash margin deposits, The consultation ended in February and 24 the introduction of a new deposit fee by HKSCC submissions were received. The SFC is preparing and replacement of HKSCC’s custody fee, the conclusions and will continue to work with the dividend and debt securities interest collection Government to draft amendments to Part XV. service fee and corporate action service fee with a single custody fee. Strengthening Financial Infrastructure Some of the changes will be implemented Rollout of DCASS forthwith while others will be implemented with the scripless market proposals. The SFC will The Derivatives Clearing and Settlement System consider the requisite HKEx rule amendments. (DCASS) was successfully launched in April 2004. It provides enhanced clearing and settlement Even during the review, many fees had been functions for index futures and options, stock reduced or abolished: abolishing the requirements options and other derivatives market products. It and charges for registration of SEHK participants; integrates with the derivatives trading system abolishing processing fees for certain HKFE HKATS (Hong Kong Futures Automated Trading applications; and a reduction of the derivative System) under a common network infrastructure. warrant listing fees. In January 2005, the SFC also approved fee reductions for network charges to With DCASS, exchange participants can clear their AMS/3 users as a result of HKEx’s network derivatives transactions with their counterparts in a more reliable, robust and seamless electronic consolidation project, and the abolition of the DCASS Standard Instruction Input/Processing Fee. 68 Securities and Futures Commission Annual Report 2004-2005 platform. The system allows greater flexibility for • Dematerialisation will be optional. Investors may exchange participants to connect with their back continue to hold certificates, or may hold shares office systems to achieve clearing automation, in uncertificated form on the register of improve operational efficiency and facilitate members. This means the register will
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