1. Three-tier Financial Structure Not less than 3 months 24 Hours Call Not restricted Maturity of each deposit Not less than HK$100,000 Not less than HK$500,000 Not restricted Amount of each deposit HK$25 Million HK$100 Million HK$150 Million Paid-up Share Capital Deposit- Taking Company Restricted License Bank Licensed Bank Authorized Institution

2. Merchant Banking in Hong Kong In Hong Kong most merchant banks are registered as restricted license banks or deposit-taking companies under the Banking Ordinance.

3. Merchant Banking in the past “ Merchant Bankers ” is a term of English origin. In its earliest form, it was “ Merchants and Bankers. ” It meant that a firm that began as merchant or trader extended its activities by offering credit to its clients. Thereafter, some firms gave up acting as goods merchants and concentrated on trade finance, securities, investment management and venture capital.

4. Categories of Merchant Banks Bulge-bracket firms: blue-chip houses that distinguish themselves by reputation, size, market power and clientele. Examples are Morgan Stanley, Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, etc.

5. Categories of Merchant Banks Major bracket firms: Large full-line (all- rounded) firms that do not have the same merchant banking status as the bulge-bracket firms. Examples are Lehman Brothers, Prudential-Bache, SSB

6. Categories of Merchant Banks Specialized firms: Small firms which are strong in only a few areas. Research firms: Finance houses that make their reputation on the quality of their securities analysts. Naturally, their merchant banking business is an extension of their research capabilities.

7. Organization of a merchant bank 1.Capital Markets (the largest of the four areas) – include: Corporate Finance Corporate Finance Securities underwriting Securities underwriting Mergers & Acquisitions (M&A) Mergers & Acquisitions (M&A) Venture capital Venture capital Private placements Private placements

8. Organization of a merchant bank 2. Consumer Markets  Securities trading  Private banking 3. Research 4. Miscellaneous Products  Commodity trading, insurance, etc. Financial Disintermediation

9. Merchant Banks’ Customers and Fees Major customers of merchant banks are governments, public utilities, corporations and wealthy individuals. The following fees charged for their services are the main sources of income: Retainer fee Retainer fee Success fee Success fee Expenses Expenses Engagement fee Engagement fee Incentive fee Incentive fee

10. Retainer fee To cover professional timeTo cover professional time Usually a monthly payment and fixed in amountUsually a monthly payment and fixed in amount Not refundable, but often creditable against success feeNot refundable, but often creditable against success fee

11. Success fee Usually a percentage of the amount of the deal Usually a percentage of the amount of the deal Debt raising: range in 1-2% Debt raising: range in 1-2% Equity (private placement): range in 2-5% Equity (private placement): range in 2-5% Equity (Floatation): range in 2-3% (HK) or 5-8% (U.S.) Equity (Floatation): range in 2-3% (HK) or 5-8% (U.S.) M&A: fees are negotiable, but usually capped by a maximum amount for a benchmark price of the deal. M&A: fees are negotiable, but usually capped by a maximum amount for a benchmark price of the deal.

12. Expenses All reasonable out-of-pocket expenses reimbursed periodically against documented claimAll reasonable out-of-pocket expenses reimbursed periodically against documented claim Usually invoiced monthly or quarterlyUsually invoiced monthly or quarterly

13. Engagement fee Used when the probability of success of the deal is low or the early expenses are high, or both Used when the probability of success of the deal is low or the early expenses are high, or both Usually a one-time, up-front payment, creditable against success fee Usually a one-time, up-front payment, creditable against success fee

14. Incentive fee On top of the success fee, as reward for the exceptional pricing achievement beyond a benchmark price, or in the event the merchant bank is able to earn an extraordinary benefit for the client On top of the success fee, as reward for the exceptional pricing achievement beyond a benchmark price, or in the event the merchant bank is able to earn an extraordinary benefit for the client Usually a percentage of the “ extraordinary benefit ” Usually a percentage of the “ extraordinary benefit ”

15. Merchant Banks ’ Underwriting and Advisory Roles in Hong Kong Merchant banks may act as both brokers and dealers in a wide variety of securities. Income is earned on the spread between the purchase price and the sale price. Merchant banks may act as both brokers and dealers in a wide variety of securities. Income is earned on the spread between the purchase price and the sale price. They provide research services and give consultancy services on all varieties of management problems that are caused by financial concerns. They provide research services and give consultancy services on all varieties of management problems that are caused by financial concerns.

16. The segregation of duties in a commercial bank Banking Operation Division Banking Operation Division gives support to the Risk Management & Marketing Division through the following back-up services : The Accounting Department is the planner and controller of the bank ’ s budgets, provides management information and keep track records of the financial status of the bank. The Accounting Department is the planner and controller of the bank ’ s budgets, provides management information and keep track records of the financial status of the bank. The Remittance Department deals with the process of transferring funds to and from customers ’ accounts, either instructed by the customers or by other banks. The Remittance Department deals with the process of transferring funds to and from customers ’ accounts, either instructed by the customers or by other banks.

17. The segregation of duties in a commercial bank Treasury Division The Treasury Division buys funds to cover the bank ’ s exposure in lending and sell the surplus funds to earn interests. The funds can be Hong Kong currency and foreign currencies.

18. The segregation of duties in a commercial bank Administration Division The Administration Division looks after the bank ’ s premises, maintains supplies of stationery and equipment, and provides other services like printing, messengers, security, etc.

19. The segregation of duties in a commercial bank Human Resource Division The Human Resource Division is responsible for recruiting and allocating the bank ’ s manpower, administration of salary and fringe benefits, and staff training.

20. The segregation of duties in a commercial bank Credit and Marketing Division Credit and Marketing Division is the front line to contact, liaise, negotiate and serve the customers. It is responsible for retail marketing and wholesale marketing.

21. The segregation of duties in a commercial bank Marketing Division The target customers of wholesale marketing group are composed of corporate customers with a constant need of bank financing. By making use of the funds absorbed by the retail marketing group, the wholesale marketing group earns interest income through successfully selling the products like letter of credit, bills collection, foreign exchange, overdraft, etc.

22. The segregation of duties in a commercial bank Risk Management Division It performs the credit review and monitoring duties. It ensures the risk of the advances granted by the Credit and Marketing Division is of acceptable level. As a result, the credit risk will not be high and asset quality is good.

23. The segregation of duties in a commercial bank Internal Audit Division The Internal audit Division inspects the operations from checking of accounting records and counting cash in vaults to interviewing of staff to discuss management problems. It ensures that the bank is operating in accordance with the government ’ s regulations and management ’ s objectives and policies.

24. The segregation of duties in a commercial bank Investment Services Division Bank offers a full spectrum of investment products and services to both private and corporate investors. The funds cover different asset classes including global equities, bonds, money markets and foreign exchange markets. Banks also provide asset management services for retirement schemes, institutional investors and charitable organisations.

25. The segregation of duties in a commercial bank The Information and Technology Division But now it deploys the latest technologies to meet changing customer needs and enhance bank ’ s leading edge. It develops customer-oriented systems to ensuring that customers can enjoy a sophisticated range of banking products in the most efficient and convenient way. Innovative e- banking services such as Internet Banking and other wireless financial services allow customers to manage their wealth with ease any time around the world.

26. The segregation of duties in a commercial bank Compliance Division There are many laws and regulations governing the operation of banks. The Compliance Division ensures that the regulations set by the supervisory institution (e.g. HKMA and HKAB) have been adhered.

27. Personal Banking Services Deposit Accounts Deposit Accounts Current Accounts Current Accounts Time Deposits Time Deposits Deposit linked with investment of share or foreign currency Deposit linked with investment of share or foreign currency Personal loans Personal loans Debit Card and Payment Services Debit Card and Payment Services Hire purchase Hire purchase Credit Cards Credit Cards Foreign currency exchange Foreign currency exchange

28. Banking Services for Business Customers Deposit Accounts Deposit Accounts Payroll Services Payroll Services Overdraft Overdraft Loans and advances Loans and advances Global cash management Global cash management Financial Advice Financial Advice