1. CEP Industry Research Hong Kong Financial Regulators Group 6

2. HKMA & SFC

3. Hong Kong Monetary Authority Securities and Futures Commission

4. HKMA

5. Hong Kong Monetary Authority Was established on 1 st April 1993 Merged the Office of the Exchange Fund and the Office of the Commissioner of Banking Aim:To maintain the monetary and banking stability Exchange Fund Ordinance Banking Ordinance

6. HKMA Function Keeping Hong Kong dollar stable Managing the Exchange Fund Promoting safety of Hong Kong’s banking system Enable money to flow smoothly, freely and without obstruction

7. Banking policy and supervision

8. Departments involved in MA Banking Supervision Department handles the day-to-day supervision of authorized institution. Banking Policy Department formulates supervisory policies to promote the safety and soundness of the banking sector. Banking Development Department formulates policies to promote the development of the banking industry.

9. Three-tier Banking System Licensed banks, restricted licensed banks and deposit-taking companies 73 of the largest banks in the world In May 2003, 135 licensed banks, 43 restricted licensed banks and 40 deposit- taking companies 92 Local Representative offices of overseas banks

10. Authorization responsible for authorization, suspension & revocation. conducts periodic reviews introduces amendments to reflect the changing needs of the regulatory environment only fit and proper institutions are entrusted with public deposits.

11. Regulatory Framework The Banking Ordinance section 7(1): principal function of the Monetary Authority "promote the general stability and effective working of the banking system Follow international practices recommended by Basle Committee on Banking Supervision (Basle Committee)

12. Continuous Supervisory Approach On-going monitoring of institutions Aim: To detect any problem at an early stage Activities Involves: on-site examinations off-site reviews and prudential meetings co-operation with internal and external auditors sharing information with other supervisors

13. Risk-based supervision Risk assessment approach and quality assurance programme Evaluation of the quality of risk management practices and internal controls of various types of risks faced by the institutions. Examples of Risks Credit Risk Interest Rate Risk Market Risk Liquidity Risk Operational Risk Reputation Risk Legal Risk Strategic Risk

14. CAMEL Rating Aim: To help identify those institutions whose weaknesses in financial condition, compliance with laws and regulations, and overall operating soundness require special supervisory attention Capital Adequacy Asset Quality Management Earnings Liquidity

15. Capital Adequacy Ratio (CAR) The ratio of an authorized institution's capital base to its risk-weighted credit exposures Third Schedule to the Banking Ordinance Locally incorporated authorized institutions : minimum 8% capital adequacy ratio Maximum: licensed bank (12%), Deposit-taking company or a restricted licensed bank(16%)

16. Supervision of Liquidity Aim To ensure to meet their obligations when they fall due maintain adequate stock of high quality liquid assets Six factor liquidity ratio maturity mismatch profile ability to borrow in the interbank market intra-group transactions loan to deposit ratio diversity and stability of the deposit base

17. Loan Classification System Set up in December 1994 Report on a quarterly basis Classification Pass Special Mention Substandard Doubtful Loss

18. Derivatives and Risk Management A proactive approach in the supervision of 3 C Controls - AIs have adequate internal control systems? Capital - AIs have adequate capital to support possible losses ? Capability - Adequate expertise within the HKMA to develop risk management policies and to supervise AIs' derivatives activities?

19. Financial Disclosure Aim: Relevant, reliable and timely information Frequency of Disclosure Annual & Interim - locally incorporated authorized institutions Half-yearly - overseas incorporated institutions. Financial information to be disclosed: Income statements Balance sheets Cash flow statements Off-balance sheet exposures Maturity profiles & Asset quality Segmental information Foreign currency exposures & Risk management Capital adequacy & Liquidity information.

20. SFC

21. Securities and Futures Commission After market crash of October 1987, Securities Review Committee was appointed by Government to review securities industry SFC was born in May 1989  Licensing and supervision of intermediaries and focus on secondary market  Encourage market development  Protect investors

22. Regulatory structure

23. Roles and functions Regulatory objectives: to maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of the industry to promote understanding by the public about th operation and functioning to provide protection for members of the public investing in or holding financial products to minimize crime and misconduct to reduce systemic risks in the securities industry to assist the Financial Secretary in maintaining the financial stability of Hong Kong

25. Organization Structure Four operating divisions  Corporate finance: regulate takeovers and mergers, administer securities regulation relating to listed companies and supervise listing – related activities of SEHK  Intermediaries and investment products: licensing, supervision of intermediaries and marketing to public of collective investments schemes

26. Organization Structure  Supervision of markets: market oversight to ensure sound functioning and developing of trading, settlement and operational systems; administer two statutory investment compensation funds  Enforcement: undertake enquiries into alleged breaches of relevant Ordinances and Codes

27. Responsibility of SFC Ensure full disclosure Monitor trading of shares and options Conduct periodic inspection visits Handle complaints about misconduct Inspect books and records Regulate for takeovers and merger activity

28. Powers in relations to offences and misconduct 1)Prosecution 2) Court order 3) Revocation Maximum penalties  On summary conviction Fine $100,000 6 months’ imprisonment  On indictment Fine $ 10,000,000 7 years’ imprisonment