LegCo Paper No. CB(1) 1904/95-96
(These minutes have been seen by the Administration)
Ref : CB1/PL/FA/1
LegCo Panel on Financial Affairs
Minutes of Meeting
held on Monday, 3 June 1996 at 8:30 a.m.
in the Chamber of the Legislative Council Building
Members Present :
Dr Hon HUANG Chen-ya, MBE (Chairman)
Hon Eric LI Ka-cheung, JP (Deputy Chairman)
Hon Ronald ARCULLI, OBE, JP
Hon CHIM Pui-chung
Hon Ambrose LAU Hon-chuen, JP
Hon NGAN Kam-chuen
Hon SIN Chung-kai
Hon Mrs Elizabeth WONG CHIEN Chi-lien, CBE, ISO, JP
Members Absent :
Hon Martin LEE Chu-ming, QC, JP
Dr Hon David LI Kwok-po, OBE, LLD (Cantab), JP
Hon James TO Kun-sun
Dr Hon Philip WONG Yu-hong
Hon Andrew CHENG Kar-foo
Hon Paul CHENG Ming-fun
Dr Hon LAW Cheung-kwok
Public Officers Attending :
- Items III to VI
- Mrs Lessie WE
- Secretary for Financial Services (Acting)
Attendance by Invitation :
- Items III to V
- Securities and Futures Commission
- Mr Anthony NEOH, QC, JP
- Mr Raymond TANG
- Chief Counsel
- Mr Richard YIN
- Senior Manager
- Items III and IV
- Hong Kong Securit1ies Clearing Co Ltd
- Mr John CHAN
- Mr Richard Heckinger
- Chief Executive
- Stock Exchange of Hong Kong
- Mr Alec TSUI
- Deputy Chief Executive
- Item VI
- Hong Kong Monetary Authority
- Mr Joseph YAM
- Chief Executive
- Mr Andrew SHENG
- Deputy Chief Executive
Staff in Attendance :
- Ms Estella CHAN
- Chief Assistant Secretary (1)4
- Miss Anita SIT
- Senior Assistant Secretary (1)6
(LegCo Paper No. CB(1) 1310 & 1460/95-96)
The minutes of the meetings held on 1 April 1996 and 22 April 1996 were confirmed.
2. The Chairman invited members to forward items they wished to discuss at the next meeting to the Panel Clerk.
(LegCo Paper No. CB(1) 1498 & 1523/95-96)
3. The Chairman informed the meeting that a complaint was recently made to the LegCo Secretariat relating to a broker firm, Wei Xin Securities Ltd, being declared by the HK Securities Clearing Company Limited (HKSCC) on 28 March 1996 as a defaulter for failure to settle its outstanding money obligations with the HKSCC. Wei Xins access to the Central Clearing and Settlement System (CCASS) had since been suspended. This had caused grievances to clients of Wei Xin as their paid-up securities and warrants were held up in the companys Stock Clearing Account (SAC) in the CCASS. The complaint case was referred to this Panel for follow-up. In the light of this case and other recent reported cases on default of broker firms, items III and IV were put on the agenda of this meeting.
4. At the invitation of the Chairman, Mr John CHAN said that the design of CCASS was in keeping with the mission of HKSCC to reduce costs and risks and to increase the efficiency of the clearing and settlement processes of securities trading. He explained the mode of operation and the recent development of the CCASS as delineated in the information paper.
5. Regarding the proposal for investor participation in the CCASS, Mr CHAN advised that HKSCC had conducted some research and consulted the market on the subject. At present, the CCASS operated as a wholesale system with about 570 participants. It was estimated that these participants held about 400,000 client accounts in total, of which about 70% being margin accounts that did not involve securities settlement. Thus, if investor participation in the CCASS was to be implemented, the CCASS would have to be expanded in a considerable scale to accommodate about 100,000 investor accounts. A recent development towards the direction of investor participation in CCASS was the introduction in March 1995 of the Stock Segregated Account (SSA) Service (details of which were set out in the information paper). A recent review showed that the utilisation of the service had been rather low. In view of the extensive implications of implementing direct participation of investors in CCASS, HKSCC would need some time to examine the various aspects concerned.
6. As regards Singapores experience, Mr Richard Heckinger advised that Singapore made a decision years ago to implement a system to allow direct investor participation. The system had the following features:
- Investors were required to maintain individual accounts in the central depository;
- If investors wanted to bid at initial public offerings, they must bid through their depository accounts;
- These accounts were connected to the respective investors Central Provident Fund accounts and bank accounts. Positions held in the depository accounts could be used to net positions of the Central Provident Fund accounts, and investors could settle their transactions through their bank accounts; and
- Investors could transact securities without going through a broker; they could place orders directly by using the computerised central trading system.
7. Mr Heckinger remarked that the move towards direct participation of investors in the securities market without intermediaries was an incremental process in Singapore. At present, the number of investors in Singapore was similar to that in Hong Kong, but there were only about 25 to 30 stock brokers and they specialised mainly in international and institutional investments.
8. Members expressed concern about the adequacy of investor protection under the present mode of operation of the CCASS. They enquired if HKSCC had decided to go toward the direction of direct investor participation like Singapore. They also enquired about the focal concerns of the study being undertaken by HKSCC and whether these concerns were related to technical or policy matters. In response to their queries, Mr CHAN and Mr Heckinger made the following points:
- Apart from the technical aspects, the clearing and settlement system involved a legal relationship among three parties: HKSCC, brokers and investors. All along, brokers had acted as custodians of investors securities and acted upon the instructions of investors. They were all authorized entities for securities trading. In the study, HKSCC was looking into the possibility and implications of allowing investors to nominate HKSCC instead of brokers as their agent for the holding of securities in the CCASS. Such a direct interface between investors and HKSCC would entail a new relationship. The duties and rights pertaining to this relationship needed to be clearly defined.
- Developing and operating a direct investor access system involved certain costs and risks. The objective of the CCASS was to provide clearing and settlement services with the lowest risks and costs. HKSCC needed to examine if such a system was warranted in view of the risks and the costs involved, which in turn, were related to the availability and the cost of a corresponding risk management system and the projected utilization of such a system.
- The study being undertaken covered both policy and technical issues. HKSCC would work out the options and then consult the market, with the goal of reaching a conclusion within this year.
9. As regards SFCs stance on the issue, Mr Anthony NEOH said that in principle, SFC supported HKSCCs plan to further develop the CCASS towards direct investor participation. SFCs main concern was whether there would be adequate risk management measures instituted in the system. In fact, SFC had expressed its support to the implementation of the SSA Service last year. Investors were informed of any movement of securities in their accounts one day after through statements sent direct by HKSCC. This enabled early detection of any unauthorised transactions on their securities.
10. Regarding the Administrations stance on the issue, Mrs Lessie WEI said that the Administration was concerned that investors should be served by an efficient system with the best protection and lowest cost. The Administration welcomed HKSCCs study on direct investor participation in the CCASS. She however remarked that while investors might benefit from the convenience provided by such a system, this benefit might be outweighed by the risks entailed.
11. Members were of the view that direct investor participation in the CCASS should generally provide greater protection for investors. Given the advanced technology and the experience of Singapore and Taiwan, they believed that the technicalities involved should not be a significant obstacle to implementing investor participation in CCASS in Hong Kong. They acknowledged that the various aspects pertaining to the relationship among brokers, investors and HKSCC needed to be clearly defined before the implementation of such a system. A member opined that the SSA Service was not adequate for the protection of investors as the SSAs were held by brokers and were only accessible by brokers themselves. Another member opined that if the dilution of brokers interest was a primary consideration on this matter, HKSCC and the Administration should admit and explain it to the public.
12. The Administration and HKSCC took note of a members suggestion that the CCASS be developed to provide two modes of operation for investors to choose, one being accessible and operated by brokers only as in the present CCASS and the other being directly accessible and operated by investors themselves.
13. At the Chairmans request, HKSCC agreed to provide the report of the study on investor participation in CCASS to the Panel when such was available.
14. Regarding the distribution of listed issuers annual reports to shareholders, Mr Heckinger advised that under the present arrangement, investors obtained reports from their brokers or from SEHK where there were spare copies. He informed members that a working group had been formed by SEHK to look into the issues related to distribution of reports of listed issuers and dissemination of market information to investors. The working group would publish a consultation paper shortly. An option being actively considered was that brokers would forward the names and addresses of their clients through the CCASS system to the registrars of companies. The registrars would then request sufficient copies from the issuers for distribution to investors.
15. A member said that he had received complaints from some brokers that HKSCC had frozen their money in their ledger accounts until the delivery of stocks for settlement on T(trade day)+2 as a garantee for the stocks sold on their clients behalf. This had created liquidity problems to brokers. In this regard, the Chairman requested and Mr Heckinger agreed to provide a written explanation on the situation referred to by the member.
(LegCo Paper No. CB(1) 1498 and 1523/95-96)
16. Mr Alec TSUI briefed members on the Stock Exchange of Hong Kong (SEHK)s system for supervision of its members as contained in the information paper.
17. On the way of determining clients ownership of clients securities held by members of the SEHK, Mr TSUI advised that if a member used SSAs in the CCASS to hold clients securities, the ownership would be self-revealing. If a member did not use SSAs, the ownership would be determined based on the books and records kept by the member.
18. The Chairman enquired if there was any mechanism to prevent or detect unauthorised trading of clients securities by brokers. Mr TSUI replied that according to the law, brokers needed to keep segregated accounting records for individual clients. The present regulatory system of SEHK included inspection visits to members offices and compulsory external audit of members books and accounts and their management procedures. By inspecting a sample of clients accounts, the auditors might be able to discern any discrepancies if such were alleged. He added that SEHK had all along emphasised the importance of internal control by broker companies own management and many seminars had been held in this regard. To further safeguard investors against unscrupulous employees of broker companies, a Brokers Fidelity Insurance Scheme was introduced recently which provided insurance cover up to $8 million per member per year for losses on the part of members or their clients due to theft and misdealing by their employees.
19. Referring to the Wei Xin case, a member enquired about the alleged removal of 30,000 The Hongkong and Shanghai Banking Corporation Limited (HSBC) shares in Wei Xins Stock Clearing Account (SCA) in the CCASS during the period from 28 March 1996 (the date on which the company was declared a defaulter by HKSCC) to mid April 1996. Mr TSUI said that according to the records in the CCASS, no transaction had taken place through the SCA of Wei Xin in the said period. Mr Heckinger explained that those HSBC shares might be the unsettled shares which had been allocated to Wei Xins account before 28 March 1996. Pursuant to the rules of the CCASS for handling the default of a broker participant, HKSCC might have sold the unsettled shares to settle the outstanding debts of Wei Xin so as not to affect other brokers operation.
20. A member queried if HKSCC had ascertained the ownership of the shares before selling the shares. In response, Mr Heckinger said that HKSCC would not take securities from SSAs. However, in this case, the shares were held in Wei Xins SCA and HKSCC would not know what portion of securities in the account belonged to the broker and what portion belonged to its clients. The risk management mechanism in this regard was that the CCASS would first net the transactions of each broker on each trading day and settle the balance. Each settlement position established was in principle a position of the broker participant with HKSCC. Brokers were responsible for settlement of that position irrespective of whether the transactions were made for the brokers themselves or for their clients. Against this performance, HKSCC would hold the deposits of brokers to the Garantee Fund to ensure that the settlement took place. If a broker failed to settle the transaction, then HKSCC had the right to liquidate the shares in the brokers SCA, and if the proceeds were insufficient, to claim the brokers deposit held in the Garantee Fund.
21. A member commented that it was possible that the HSBC shares were already paid for by Wei Xins clients, only that Wei Xin did not forward the money for settlement. It was unreasonable that HKSCC had liquidated the shares without ascertaining the situation. He urged SFC to instruct the provisional liquidator to return the paid-up securities to Wei Xins clients first. The credibility of CCASS among investors would be seriously affected if that was not done. He added that in any case, the provisional liquidator should distinguish the assets of Wei Xins clients from those of Wei Xins, and Wei Xins creditors should have a claim only to Wei Xins own assets.
22. The Chairman commented that it appeared that the risk management mechanism of the CCASS only pertained to protecting the system from the impact of a brokers default but no regard was given to protecting the brokers clients. In response, Mr NEOH explained that when a client asked a broker to buy shares on his behalf, the client had to abide by the settlement procedures of the CCASS that HKSCC had the right to liquidate the shares held in a brokers SCA for settlement of his outstanding obligations. Only if shares had been transferred to the SSAs held by a broker on behalf of its clients, HKSCC would not have the right of access to the shares.
23. In respect of the complaint made by Wei Xins clients that in this incident, SEHK had not been able to provide relevant information to the clients and to make the broker company answerable to its clients, Mr TSUI explained that since 28 March 1996, the managing director of Wei Xin had been missing while the majority shareholder advised SEHK that he was not familiar with the operation of the company. The companys staff had also left the company after the disappearance of the managing director. The only thing SEHK could do was to ask the majority shareholder of Wei Xin to appoint an auditor to tidy up the companys books and records which was essential for determining the ownership of assets held by Wei Xin. Unfortunately, half-way through the process, the shareholder found himself unable to afford further auditor fees. SEHK thus appointed another auditor to continue the work. The auditor completed a financial assessment in three weeks and asked the clients to come forward to reconcile the records.
24. Mr NEOH briefed members on the sequence of events in the Wei Xin Case since the case was taken up by SFC on 15 April 1996. He advised that Wei Xin did not hold SSAs for its clients and the securities held in Wei Xins SCA were not in congruence with the claims of Wei Xins clients. On 1 May 1996, the auditor appointed by SEHK completed a financial assessment report on Wei Xin. However the report was heavily qualified and gave no clear indication of the rights of various classes of Wei Xins clients. According to the legal advice sought by SFC, the appropriate action was to appoint a provisional liquidator to ascertain the financial position of Wei Xin first, and then to reconcile the clients claims with the records kept by Wei Xin and with Wei Xins actual assets. Subsequently, the provisional liquidator would need to obtain the courts approval for payouts to the clients and the contributors. As regards the warrants held in Wei Xins SCA, the provisional liquidator had obtained the courts approval to sell the warrants that were due to expire shortly to realise the value. Some of the warrants had been sold under that situation. He assured that SFC would provide all possible support to the provisional liquidator. While it was SFCs view that any securities subsequently proved to be owned by the respective clients should be regarded as the clients assets, not Wei Xins, it was a judgement to be made by the provisional liquidator which had to be endorsed by the court.
(LegCo Paper No. CB(1) 1498/95-96)
25. Mr NEOH briefed members on the progress of the case of Canwell Forex International Ltd. as contained in the information paper. He advised members of the latest development that the Administrator was negotiating with the Silver Bound Capital Limited, the claimant in the litigation against Canwell for an unsettled debt amounted to $32 million, with a view to arriving at an agreement outside the court. The baseline of the Administrator was that the clients of Canwell should be returned their assets in full and the costs incurred for the defence should be fully recovered. So far, the negotiation was in good progress. If an agreement outside the court was arrived at, the Administrator would proceed with the negotiation with other creditors of Canwell. In the case that an agreement could not be reached, SFC would continue the defence for the clients in accordance with the legal advice obtained.
26. In reply to a member, Mr NEOH advised that the costs incurred for the defence so far amounted to about $2 million.
27. On the allegation that SFCs decision to defend against Silver Bounds claim was inappropriate on the grounds that the costs incurred for the defence had already exceeded the money owed to Canwells clients which was about $1.6 million, Mr NEOH stressed that the case was concerned with Canwell deceiving SFC in its licence application. Canwell had borrowed from Silver Bound to meet SFCs licensing requirement on paid-up capital. The legality of the loan was also in question. It was in consideration of the consequence that Canwell would not have any assets left if the claim made by Silver Board was successful and the specific nature of Silver Bounds loan to Canwell that SFC decided to defend against the claim. He added that from hindsight, he did not see SFC could have done better in this case.
28. Mr NEOH further advised that if the defence by the Administrator was not successful, SFC might resort to litigation against the shareholders of Canwell regarding the companys culpable report to SFC about its paid-up capital.
(HKMA Annual Report 1995 tabled at the LegCo sitting on 15 May 1996.)
29. On whether HKMA had a policy on the optimal level of the Exchange Fund, Mr YAM advised that since the main function of the Exchange Fund was to stabilise the Hong Kong dollar and Hong Kong was undergoing a transitional period, for the time being it was considered that the greater the amount of the Exchange Fund, the better the Fund could perform its main function.
30. In response to a members enquiry on whether there was growing acceptance of Renminbi in Hong Kong for payment of goods and services and if so, how this phenomenon would affect the management of the Exchange Fund, Mr YAM advised that it was true that some shops in Hong Kong accepted Renminbi for business considerations. There was no legal obstacle to the use and acceptance of foreign currencies in Hong Kong, while Hong Kong dollars being the legal tender must be accepted. He advised that at present even the circulation of US dollars in Hong Kong did not affect the monetary policy objectives pursued by the Exchange Fund. Therefore, the much smaller circulation of Renminbi would have almost no impact at all on the management of the Fund.
31. On the proportion of the Exchange Fund being managed by private investment managers, Mr YAM explained the three main components of the Fund that were subject to different management strategies as follows:
- the hedging portfolio - funds raised through the issuance of Exchange Fund debt securities and fiscal reserves placed with the Fund. Interests were to be paid out on these funds regularly;
- the liquidity portfolio - funds to be maintained with high liquidity to meet requirements arising from the need to ensure currency stability; and
- the investment portfolio - funds apportioned for long-term investments.
The first two components of the Fund were managed by HKMA exclusively while a portion of the third component was managed by designated private investment managers, and that portion accounted for about 25% of the total amount of the Exchange Fund.
32. In reply to members enquiry, Mr YAM said that the performance of private investment managers and that of HKMA in managing the Exchange Fund could not be readily compared as different objectives were pursued. He confirmed that there were criteria for making investments, such as the currencies to be invested in; the types of bonds (in terms of maturity and credit rating) to be bought; and the limit on the value of bonds to be bought from a single issuer etc. He also confirmed that there had been past incidents where certain private investment managers were dismissed on account of poor performance.
33. On the financial records of the Exchange Fund, Mr YAM said that the full accounts of the Fund were set out in the 1995 Annual Report of HKMA. There was however no information on the amount of the second component of the Fund, i.e. the highly liquid portion of the Fund, as disclosure of the information would jeopardise the proper performance of the Funds functions.
34. A member remarked that the HKMA should be very cautious about the possibility of role conflicts between its role as a regulator of the banking industry and the role as the manager of the Exchange Fund. In managing the Exchange Fund, HKMA might be inclined to engage in activities that were in competition with banks directly or indirectly. HKMAs recent proposal for a mortgage corporation to be financed by the Exchange Fund might become a precedent in this regard.
35. Regarding the planned issuance of the 1997 commemorative coins by HKMA, Mr YAM said that as in the case of the issuance of other commemorative coins, profits generated by the sale of the coins would be credited to the Special Coins Suspense Account of the General Revenue and would be used to fund selected projects for the benefit of the local community.
36. In respect of the 1997 International Monetary Fund/World Bank Meeting, Mr YAM advised that the Meeting would be inaugurated on 23 September 1997. HKMA had received a number of suggestions of inviting local artists to participate in the cultural events to mark the occasion and these suggestions were being actively considered.
37. Regarding the financing of the recent seminar held in Beijing which was jointly organised by HKMA, SFC, SEHK and the Hong Kong Futures Exchange, Mr YAM advised that funds required for HKMAs activities and projects to promote Hong Kongs status as an international financial centre were included in its annual budget which required the approval of the Financial Secretary and the endorsement of the Exchange Fund Advisory Committee. The seminar in Beijing was organised on a cost-recovery basis. The subsequent accounts revealed a small deficit of less than $1 million.
38. On the reason for the Financial Services Branch (FSB) not having participated in the seminar, Mrs WEI said that FSB had considered participating in the seminar. However, due to the need to meet the heavy work programme of the Branch during the period, the Branch could not spare its staff to join the seminar. She remarked that so long as the objective of the seminar could be achieved, it did not matter if FSB had played a part in the seminar.
39. Regarding the development of the local debt securities market as compared to those of Singapore and Malaysia, Mr YAM said that in terms of market size, Singapore and Malaysia had much bigger debt securities markets and this was mainly due to the presence of Central Provident Fund Systems in these countries and a longer history of their markets. However, Hong Kongs debt securities market was much more active. The debt securities issued by HKMA were much more liquid than those issued by the Singaporean and Malaysian authorities. He believed that the local market had a very good prospect for future development.
40. There being no other business, the meeting ended at 10:45 am.
25 July 1996
Last Updated on 18 Aug, 1998