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

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

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

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

Roles of HKEx Business role Regulator role Public role HKEx will balance its roles in seeking business growth Business role Regulator role Public role

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 Administration SFC Investors Data vendors I-banks & listed companies Brokers Legislators

Stakeholders Relationship between HKEx and stakeholders Add value to HKEx’s basic information and offer a variety of data products to the market Bring new issuers and products HKEx’s ultimate customer Data vendors Investment banks & listed companies Administration SFC Investors Data vendors I-banks & listed companies Brokers Legislators Investors

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

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?

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 China’s 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

International business Liquidity tends to reside in one’s home jurisdiction Apart from a few giant exchanges, most exchanges only succeed with their domestic products

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

Derivatives business Global rankings Current Status 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

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

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

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

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

THANK YOU !