Who We Are and What We Do The Securities and Futures Commission (SFC) is an independent statutory body established by the Securities and Futures Commission Ordinance (SFCO). The SFCO and nine other securities and futures related ordinances were consolidated into the Securities and Futures Ordinance (SFO), which came into operation on 1 April 2003. We are responsible for administering the laws governing the securities and futures markets in Hong Kong and facilitating and encouraging the development of these markets. Our statutory regulatory objectives as set out in the SFO are: >> to maintain and promote the fairness, >> to minimise crime and misconduct in the efficiency, competitiveness, securities and futures industry; transparency and orderliness of the >> to reduce systemic risks in the securities securities and futures industry; and futures industry; and >> to promote understanding by the >> to assist the Financial Secretary in public of the operation and maintaining the financial stability of functioning of the securities and Hong Kong by taking appropriate steps in futures industry; relation to the securities and futures >> to provide protection for members of industry. the public investing in or holding financial products; In carrying out our mission, we aim to ensure Hong Kong’s continued success and development as an international financial centre. The SFC is divided into four operational divisions: Corporate Finance, Intermediaries and Investment Products, Enforcement, and Supervision of Markets. The Commission is supported by the Legal Services Division and Corporate Affairs Division. Each division has distinct responsibilities. Contents >> Corporate Review 2-7 Chairman’s Statement 8 Whom and How We Regulate 9 How We Are Organised 10-11 Directors of the Commission 12-19 Corporate Governance and the SFC 20-21 Achievements and Work in Progress 22-23 Implementation of the Securities and Futures Ordinance 24-25 Three-year Comparisons 26-27 Significant Events 2003-2004 >> Divisional Reports 28-33 Corporate Finance 34-45 Intermediaries and Investment Products 46-55 Enforcement Regulating for Better Markets 15 Years of SFC 56-61 Supervision of Markets There is an old Chinese saying: 10 years to 62-65 Legal Services grow a tree; 100 years to grow a man. An institution is like a tree. This cover of the 66-73 Corporate Affairs Annual Report is the Chinese Banyan 74-77 Cross-Border Regulatory Co-operation (Ficus microcarpa), commonly known as the Small-leaved Banyan, a species that can be easily found in Hong Kong. The tree can grow to a height of 20m, with a >> Financial Statements 30m wide crown spread. The cover photographs show the tree from a 78-95 Securities and Futures Commission seedling, to seven years of age, and then Financial Statements to 15 years. As in the case of the Chinese Banyan, which can easily live to 500 years, 96-106 Investor Compensation Fund 15 years is a short time for an institution Financial Statements like the SFC. 107-119 Unified Exchange Compensation Fund Financial Statements 120-130 Commodity Exchange Compensation Fund Financial Statements 131-139 Committees, Panels and Tribunal 140 Consultations, Codes and Guidelines 141-144 Index (Currency is denominated in Hong Kong dollars unless otherwise stated.) Chairman’s Statement >>How is the SFC going forward after 15 years? In short, we are here to regulate so we have better markets. This Statement Is About >> The market in 2003-2004 >> The Commission’s finances >> 2003-2004 operational review >> 15 years of SFC >> Going forward >> The SFC tree 2 >> Securities and Futures Commission Annual Report 2003-2004 Introduction Last year also saw strong investor interest in H-shares 2003 was a year of major social and economic drama and IPO activities. The H-share index surged 118% and recovery. As part of the community, the Securities during the year, while the average daily turnover of and Futures Commission, with its operations being so H-shares increased to $4.3 billion in March 2004, from closely related to the market and the public, shared the $0.8 billion a year ago. concerns experienced by the Hong Kong people. There were 75 IPOs last year raising $76.4 billion - the In the first half of 2003, the SARS epidemic took away largest amount after the $132 billion in 2000-2001 - of many lives and disrupted many aspects of social and which 61% was for H-share companies. economic activities in Hong Kong and other affected As of the end of March 2004, there were 1,048 places. Fortunately, Commission staff were not affected companies listed on the stock exchange with a total but many recognised how important it was to share as market capitalisation of $5,769.5 billion (US$740.8 a community. Last year, we formed a volunteer service billion), soaring 68% from last year. Hong Kong was team and did our share to care for the community. You the eighth largest market in the world by market will read more of this later in the chapter on Corporate capitalisation, advancing three places when compared Affairs. to a year ago. The Market in 2003-2004 In 2003-2004, the average daily turnover on the Hong Kong market more than doubled the previous year’s to After more than three years of retreat from the $13.8 billion. About 11% was contributed by derivative technology bubble of March 2000, the outbreak of warrants. Hong Kong was the second most active SARS added pressure to the securities and futures derivative warrants market in the world last year by markets in Hong Kong. The Hang Seng Index reached a turnover. Trading of futures and options was also 54-month low of 8,409 on 25 April 2003; market robust, with a total of 16.2 million contracts traded, turnover shrank to as low as $5.4 billion on 22 April. 37% higher than the year before. However, as the summer months approached and the epidemic receded, market confidence recovered rapidly. The Commission’s Finances In addition, the local economy received a boost on the After two years of deficit result, we turned in a surplus signing of the Closer Economic Partnership for 2003-2004. Improved stock market turnover, hence Arrangement (CEPA) between the Mainland and Hong levy income which is our major source of revenue, lifted Kong. The relaxation of Mainland travel rules also total revenue to $551 million. This was an increase of benefited the retail, hotel and other tourism related 63% or $213 million from the previous year. sectors. The Hong Kong market essentially recovered Nevertheless, we have not slackened in cost controls. with global markets as they benefited from historically Total operating expenditure after depreciation edged up low interest rates. by 7% to $426 million, mainly because of one-off office The HSI rose to an intra-year high of 13,928 on 18 relocation expenditure and additional staff costs for February 2004. At the financial year-end, the HSI closed new functions. Excluding these expenditures, the at 12,682, rising 47% during the year. Average daily increase was 2% or $7.4 million. market turnover increased to $17.1 billion in March The surplus contrasted with an original projected deficit 2004, from $7.3 billion in April 2003. of $93 million. Reserves at the end of March 2004 stood at $691 million. Securities and Futures Commission Annual Report 2003-2004 >> 3 Chairman’s Statement We have forecast an operating surplus of $4 million for Move to strengthen regulation of sponsors and 2004-2005. This reverses a 10-year string of budgeted independent financial advisers; deficits. There are more financial details in the chapter Mutual recognition with our Mainland counterpart of on Corporate Affairs. industry qualifications under CEPA; 2003-2004 Operational Review Consultation on analysts conflicts of interest; The single most important event that shaped the work A new Code on Real Estate Investment Trusts and of the Commission last year was the commencement of authorisation guidelines for index-tracking exchange the Securities and Futures Ordinance (SFO) on 1 April traded funds; 2003. Completion of working group discussions on I am pleased to report that the primary law and the measures to address the risk of pooling and re- comprehensive body of subsidiary legislation pledging of client securities by securities margin underpinning it have been implemented successfully. financiers; and The key achievements are set out in a special chapter in this Annual Report. Agreement with HKEx on the way forward for both scripless and investor participation account Last year, we promised to strengthen enforcement and enhancements, including oversight of successful combat corporate misconduct as a matter of priority. launch of new stock and derivatives clearing systems We had 60% more successful prosecutions of various (CCASS/3 and DCASS) that significantly improved offences, and started 10 new investigations into listed Hong Kong’s market infrastructure. companies under extended powers of the SFO. Our efforts will continue with increasing emphasis on back- 15 Years of SFC end enforcement in regulation of listing. On 1 May 2004, the Commission would have Moreover, the rising market and trading volume on the celebrated its 15th anniversary of establishment. There stock exchange improved the bottom line of is a Chinese saying that it takes 10 years to grow a tree, intermediaries. Net profit for the 12 months to end- but 100 years to grow a man. Fifteen years are 2003 for securities dealers and securities margin therefore a short history for an institution that was born financiers jumped 3.6 times to $6,788 million from the out of a financial crisis. It has grown from strength to previous year. Total shareholders’ funds rose by 23%, strength through broadly three five-year stages. with return on shareholders’ fund as of 31 December 2003 increasing to 10.7% from 3.6% in 2002.