Strategic Challenges Facing HKEx

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Strategic Challenges Facing HKEx

• Paul Chow
• Chief Executive, Hong Kong Exchanges and Clearing
  Limited
• Conference on the Securities and Futures
  Ordinance
• 27 August 2003

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Agenda

• Strategic Challenges
• Roles and Stakeholders
• Key Initiatives
• China Business
• International Business
• Derivatives Business
• Market Operations

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Strategic challenges

• With further opening up of China, how will the
  role of Hong Kong change in global financial
  service industry?
• Should HKEx pursue strategic alliances with
  overseas exchanges?
• Should HKEx extend along its transaction chain?
• How to address their different demands?
• Brokers
• Regulator and government
• Customers
• Shareholders

Role
Interna-tional
Business
Stake-holders
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Agenda

• Strategic Challenges
• Roles and Stakeholders
• Key Initiatives
• China Business
• International Business
• Derivatives Business
• Market Operations

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Roles of HKEx
HKEx will balance its roles in seeking business
growth
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Stakeholders
Relationship between HKEx and stakeholders
Administration

• Set high-level policy direction for HKEx
• Exercise oversight on HKEx, step in if it crosses
  the line and offer necessary support
• Distribute HKEx products to investors

SFC
Brokers
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Stakeholders
Relationship between HKEx and stakeholders

• Add value to HKExs basic information and offer a
  variety of data products to the market
• Bring new issuers and products
• HKExs ultimate customer

Data vendors
Investment banks listed companies
Investors
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Agenda

• Strategic Challenges
• Roles and Stakeholders
• Key Initiatives
• China Business
• International Business
• Derivatives Business
• Market Operations

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China business

• The highest priority of HKEx business
• Nonetheless, questions remain
• What long-term role does HKEx have in servicing
  Mainland in the long run?
• Will the Mainland exchanges eclipse us?

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China business

• Opening of China leads to even greater demand for
  HK products and services
• Potential of Mainland investors who need to
  diversify their investment portfolio for better
  returns
• Hong Kong is well positioned to meet Chinas needs

HKEx must

• Regulate our market to a high standard
• Demonstrate ability to effectively regulate
  issuers
• Service Mainland customers better via Beijing
  Representative Office
• Strengthen our marketing, promotion and services
  in the Mainland

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International business

• Liquidity tends to reside in ones home
  jurisdiction
• Apart from a few giant exchanges, most exchanges
  only succeed with their domestic products

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International business

• International flavour has been and will continue
  to be our strongest competitive edge

• International investors contributed significantly
  to HKEx stock and derivatives markets turnover
• Active participation of international brokers in
  HKEx markets
• Adoption of international best standards and
  practices in HKEx services, market structure and
  regulation

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Derivatives business

• Global rankings
• Ranked 10th in stock market capitalisation
• Ranked 35th in derivatives turnover
• Minimum presence of government bonds
• No production or consumption of commodities on a
  major scale
• Build liquidity for the products meeting the
  needs of our brokers and their clients

Current Status
Limitations
Future Focus
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Market operations
TRADING

• Introduced in late 2000
• Functionality and performance meet the needs of
  market participants
• No need to introduce major change in next two
  years
• Focus on system reliability and stability
• Introduced in April 1999
• A major software upgrade underway which will be
  completed by end of 2003
• Offer better protection, support central order
  size limit and be compatible with DCASS

AMS/3
HKATS
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Market operations
CLEARING/SETTLEMENT

• Trading in HKEx and broker-broker settlement
  within CCASS already fully electronic
• Papers still in use outside CCASS
• Elimination of physical certificates can
• improve operational efficiency
• reduce costs
• avoid risks of fake or loss certificates
• Current usage of IP services is low and inactive
  
• Trading process via IP not very convenient
• IPs are not direct registered members of the
  companies they invest
• Need a safer, more user-friendly and convenient
  IP service which will attract large scale
  participation of investors

Scripless
Enhanced IP service
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Market operations
CLEARING/SETTLEMENT

• Replace the two existing derivatives clearing
  systems
• Handle all HKEx derivatives products via an
  integrated system
• More efficient and flexible
• To be launched by Q1 2004
• A possible next step for clearing infrastructure
  development
• Merge the three separate clearing houses into a
  joint clearing house
• A single guarantee fund for all HKEx participants
• Practical problems, especially in the design of a
  risk management system

DCASS
Clearinghouse consolidation
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The way forward

• A challenging future is awaiting HKEx and the
  local market
• A time to co-operate and work as a team
• Build a strong, quality marketplace which will
  attract business and talents all over the world

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THANK YOU !