Annual Review : Achievements and New Initiatives Paul Chow Chief Executive, Hong Kong Exchanges and Clearing Limited 13 January 2006

2 Agenda  New Records Set In 2005  2005 Major Achievements  2006 Major Initiatives  Conclusion

3 New Records Set in 2005 New Records in the Securities Market Market Capitalisation # HK$ $8,260.3 bil $4,520.4 bil $953.3 bil $856.6 bil $165.7 bil $137.4 bil $71.6 bil 1, (up to year-end) Pre-2005 Record Total Market Turnover Securities Achieved Highest Turnover Record Trading Turnover of H shares Trading Turnover of Derivative Warrants New Funds Raised Records by Initial Public Offers IPO equity capital raised ^ -IPO equity capital raised by H shares -Largest single IPO by a listed company $6,695.9 bil $3,974.1 bil $941.1 bil $524.5 bil $132.1 bil $52.4 bil $43.6 bil 1,259 (31 Dec 2004) (Year 2004) (Year 2000) (Year 2004) Number of Newly Listed Derivative Warrants * # The figures represent the total market capitalisation of all equity securities listed on the Main Board and Growth Enterprise Market (GEM) and exclude other listed securities such as REITs and government bonds. Trading only stocks under pilot programmes are also excluded. ^ IPO equity capital raised exceeded post-IPO capital raised for the first time. * The figure excludes funds raised by REITs, which are classified as Unit Trusts. Total IPO funds raised by the Link REIT (0823), Prosperity REIT (0808) and GZI REIT (0405) was $25.8 billion. HK$Previous Record 2005 (up to year-end) (21 Dec 2005)

4 New Records in the Derivatives Market Total Futures and Options Previous All-time-high (Contracts) Number of Contracts in 2005 (Up to year-end) Volume Total Futures Total Options Stock Options Hang Seng Index Futures 25,523,007 13,433,386 12,089,621 9,910,565 8,722,393 19,629,692 11,884,152 7,745,540 8,601,559 5,611,832 (Year 2004)

5 HKEx strategic plan for 2004 – 2006 Consolidation Building a quality market Becoming a Mainland partner Cost rationalisation Prioritise projects & streamline internal processes Upgrade obsolete systems Improve operational efficiency Strengthen staff team Strengthen risk management Strengthen regulatory regime Foster Corporate Governance culture Improve market infrastructure Increase market liquidity Raise customer satisfaction & investors’ confidence Improve investor education & information dissemination Expand Mainland China offerings Strengthen co- operation with Mainland entities Time Building a Quality Market

Achievements – Building a Quality Market Listing Regulation  Enhanced regulation of sponsors & IFAs (Jan)  Revised Corporate Governance Best Practices (Jan)  Solicited public views on new structure for Listing decision-making (Feb-May)  Support establishment of statutory listing requirements (submission made in Mar)

Achievements – Building a Quality Market Listing Regulation  Published second Listing Committee Annual Report (Jun)  Set out future model for dissemination of regulatory information by Main Board issuers (Nov)  First phase of Listing Committee structure rule amendments approved by the Exchange (Dec)  Prepared for a major review of GEM (H2 2005)  Implemented case database for Listing Division

Achievements – Building a Quality Market Trading  Commenced Trading Hall renovation (Jul)  Reduced minimum trading spreads for shares above $30 – phase 1, and changed AMS/3 parameters to complement spread reductions (Jul)  Exempted placing or fund-raising activities by Exchange Participants from current prohibition of dealings in suspended securities under trading rules (Sep)  Increased maximum number of outstanding orders per price queue from 2,000 to 4,000 orders in AMS/3 (Nov)  Increased Exchange Participants’ Open Gateway trading capacity via sale of total 271 standard throttles

Achievements – Building a Quality Market Product and Market Development  Enhanced measures for stock options (Feb)  Introduced new products, including FTSE/Xinhua China 25 Index Futures and Options, and six additional classes for stock options & futures (May, Jul, Nov & Dec)  Obtained SFC’s agreement to increase position limits for stock options  Reviewed derivative warrant market (HKEx’s views published in Oct)  Enhanced market-making arrangement for Exchange Traded Funds (ETFs)  Introduced Real Estate Investment Trusts and more ETFs  Explored the introduction of Callable Bull/Bear Contracts  Provided continuous education and training for 7,200 employees of Exchange Participants

Achievements – Building a Quality Market Clearing  Upgraded Clearing Service Call Centre and Interactive Voice Recording System (Jan)  Waived monthly stock custody fee for delisted securities and securities in prolonged suspension (Feb)  Abolished DCASS standard instruction input/processing fee for performing external trade transfer (Mar)  Improved CCASS Nominee Services by extending CCASS deadline for Participants to submit voting instructions and corporate action instructions (Apr and Aug)  Implemented Derivatives Market Clearing Houses fee changes on interest retention rate and accommodation charge (Jun)

Achievements – Building a Quality Market Clearing  Introduced further fee concessions for Investor Participants Account Services in CCASS (Jul)  Enhanced CCASS money settlement (Aug)  Harmonised capital requirements of different categories of clearing participants of the three clearing houses (Oct)  Announced elimination of scrip fee on deemed book close dates (Nov)

Achievements – Building a Quality Market Market & Related Systems  Upgraded the operating systems of the HKATS, DCASS and CCASS/3 (Jun)  Commenced consolidation of four existing market system networks into SDNet; phase 1 migration of the HKATS/DCASS/PRS network completed (Oct)  Upgraded HKEx website capacity and substantially enhanced disaster recovery arrangements (Sep - Nov)

Achievements – Building a Quality Market Market & Related Systems  Migrated AMS/3 Order Routing System to an integrated technology platform (Nov)  Upgraded system capacity of AMS/3 (Dec)  Replaced all (over 400) AMS/3 off-floor terminals installed since 1998 and upgraded the corresponding security solution (Oct - Dec)  Consolidated AMS/3 satellite systems (Dec)

Achievements – Building a Quality Market Information Services  Introduced new service for redistribution of historical data products and signed the first vendor in September  Extended special offer for Mainland users of real-time market data (Nov) Business Development  Continued to organise conferences to promote the Hong Kong market  Provided training programmes

15 1.Financial Reporting – Hong Kong Management Association: Bronze prize for Best Annual Reports Awards Corporate Governance – Hong Kong Institute of Certified Public Accountants: Best Corporate Governance Disclosure Awards in 2003, 2004 and 2005; and Significant Improvement Award in 2004 (Non-Hang Seng Index Constituent category) – The Hong Kong Institute of Directors: Director of the Year Awards 2005 (Listed Companies: Main Board – Constituents of Hang Seng Indices group) – CLSA and Asian Corporate Governance Association: CG Star in Investor Relations – A member of the FTSE4Good Index Series since September Achievements – Business & Corporate Citizenship Recognition

16 4.Cash Market Infrastructure Systems – Hong Kong Computer Society’s IT Excellence Award : Won the Gold Award in the Applications Category for securities trading system (AMS/3) in 2004 and for securities clearing and settlement system (CCASS/3) in Charity Donation – Total donations of about $40 million in 2005 and over $130 million since 2000 to The Community Chest via Stock Code Balloting for Charity Scheme 2005 Achievements – Business & Corporate Citizenship Recognition

Major Initiatives Listing Regulation  Implement abolition of paid announcements and enhance issuer information content on HKEx website  Continue work towards the establishment of statutory listing requirements  Revamp listing decision-making structure: 2nd phase  Study on introducing a comprehensive Listing case management and information system  Further refinement of IPO vetting process  Continue review of GEM  Further enhance corporate governance  Support establishment of Financial Reporting Council  Establish China Affairs Team

Major Initiatives Trading  Complete Trading Hall renovation (Trading Hall and media booth open on 16 Jan; Public Gallery opens in Apr)  Consider reducing minimum trading spreads of shares traded below $30 (phase 2)  Launch and develop Callable Bull/Bear Contracts market  Strengthen derivative warrant market, including web-based resource centre  Establish more favourable position limit regime for derivatives trading  Review market-maker model for derivatives market  Review possible introduction of tailor-made Combo orders in derivatives market

Major initiatives Clearing  Further enhance CCASS nominee services  Harmonise collateral policies of the three clearing houses  Study expanding admission of Investor Participants to CCASS  Explore Third Party Clearing

Major initiatives Market Systems  Upgrade the capacity of HKATS, DCASS and PRS (Jan – Feb)  Upgrade software of HKATS Network Gateways (Q2-Q3)  Implement phase 2 of network consolidation with migration of CCASS network to SDNet (Q2)  Replace hardware and software of AMS/3 Open Gateway and Multi-Work Station (Q2/2006 – Q1/2007)  Feasibility study and prepare for migration of AMS/3 for a higher version of server technology (Q3 – Q4)

Major Initiatives Business Development  Continue to organise listing promotion events to attract potential issuers from the Mainland, including the Mainland operations of companies from Taiwan and Japan  Continue to provide training programmes for issuers

22 Thank you