1. CEP Industry Research Group 2 Hong Kong Financial Regulation and Supervision

2. Introduction  Hong Kong financial regulations divided into two parts: 1. Banking (Hong Kong Monetary Authority) 2. Security (Security and Futures Commission)  Focused on their functions, objectives and policies

3. Hong Kong Monetary Authority (HKMA)  Was established on 1 st April 1993  Merged the Office of the Exchange Fund and the Office of the Commissioner of Banking  Main responsibility: maintain the monetary and banking stability  Governed by the Exchange Fund Ordinance and the Banking Ordinance

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

5. HKMA – Related organizations 1. Exchange Fund Investment Limited (EFIL)  Established in October 1998  A privated limited company  Manage the Hang Seng Index stocks acquired for the account of the Exchange Fund in August 1998  Manages the portfolio of Hong Kong equities

6. 2. Hong Kong Institute for Monetary Research (HKIMR)  Formed in August 1999  Conduct the research of the monetary policy, banking and finance  On the issue about the monetary and financial developments in Hong Kong and the region

7. 3. Hong Kong Mortgage Corporation Limited (HKMC)  A public limited company  Develop the secondary mortgage market  Purchase of the mortgage loans for its own portfolio  Securitises mortgage into the Mortgage Backed Securities

8. 4. Hong Kong Note Printing Limited (HKNPL)  Prints all the banknotes of the Hong Kong’s currency for the three note-issuing banks  HKSAR mainly owns the company  Prints about 320 million banknotes every year

9. HKMA banking policy and supervision 1. Supervision Approach  Promote the safety and stability  Follows international practices recommended by Basle Committee  Based on a policy of continuous supervision

10. 2. Authorization of Authorized Institutions  Ensure only fit and proper institutions are entrusted with public deposits  HKMA – authorization, suspension and revocation of three types of authorized institutions  Overseas – a restricted license bank or deposit-taking company

11. 3. Banking Ordinance  Legal framework for banking supervision in Hong Kong  Maintain adequate liquidity and capital adequacy ratios  Submit periodic returns to HKMA

12. 4. Three-tier Banking System  Licensed banks, restricted licensed banks and deposit-taking companies  Highest concentrations of banking institutions  75 of the largest banks in the world  April 2002, 141 licensed banks, 48 restricted licensed banks and 48 deposit- taking companies

13. The Regulators of HK Securities Industry

14. Securities and Future Commission (SFC)  Established 1989  An independent statutory body  Consists of five executive directors and five non- executive directors appointed by government  Responsible for setting up the laws  facilitate and encourage the markets development

15. Historical Background  After stock market crashed down between 1973 and 1974  HK government intervened and set up core legislation  Two Commissions administrated the legislation  Securities & commodities trading

16. Historical Background  The stock crisis in 1987 revealed the deficiencies of the regulatory structure.  Securities Review Committee was formed  A single statutory body must be formed  Have powers to govern the markets

17. Regulatory Objectives  To maintain and promote the fairness, efficiency and transparency of the markets  To promote understanding by the public about the operation and functioning  To provide protection for members of the public investing in or holding financial products;

18. Regulatory Objectives  To minimize crime and misconduct  To reduce systemic risks  To assist the Financial Secretary in maintaining the financial stability of Hong Kong.

19. Regulatory Structure

20. Corporate Governance of SFC  regulatory reports to the Financial Secretary and Legislative Council Panel  Submits its annual estimates of income and expenditure to the Chief Executive  Monitored by the Process Review Panel (PRP)  PRP determines if the Commission is fair in handling investigations and making decisions

21. Responsibilities of SFC  Set up licensing requirements and approve licenses  Supervise licensed persons  Issues codes and guidelines  Handle complaints of misconduct of registered person  Investigate and take action against the misconduct

22. Responsibilities of SFC  Regulates the performance of HKEx  Approve the new market creation, changes of its rules and regulations  Monitor  HKEx ’ s compliance with the Listing rules  trading of shares and options futures on the markets  Ensure functioning and developing of trading, settlement and operational systems.

23. Responsibilities of SFC SFC regulates the listed companies in HK  Approve the changes of Listing rules  Monitor share dealings  Inspecting listed companies  Supervise listing-related activities of Stock Exchange of Hong Kong  All the participants need to be regulated --> prevent unusual market movements ~END~