LegCo Paper No. CB(1) 1237/96-97
(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 March 1997, at 8:30 a.m. in Conference Room A of the Legislative Council Building

Members present :

    Dr Hon HUANG Chen-ya, MBE (Chairman)
    Hon Martin LEE, QC, JP
    Hon David K P LI, OBE, LLD (Cantab), JP
    Hon Ronald ARCULLI, OBE, JP
    Hon CHIM Pui-chung
    Dr Hon Philip WONG Yu-hong
    Hon Andrew CHENG Kar-foo
    Hon Paul CHENG Ming-fun
    Hon Ambrose LAU Hon-chuen, JP
    Dr Hon LAW Cheung-kwok
    Hon NGAN Kam-chuen
    Hon SIN Chung-kai

Members absent :

    Hon Eric LI Ka-cheung, OBE, JP (Deputy Chairman)
    Hon James TO Kun-sun
    Hon Mrs Elizabeth WONG, CBE, ISO, JP
Public officers attending :
    Items III

    Mr Martin Glass
    Deputy Secretary for the Treasury
    Miss Amy Y T YIP
    Executive Director
    Reserves Management Department
    Hong Kong Monetory Authority

    Items IV and V

    Mr Rafael S Y HUI, JP
    Secretary for Financial Services
    Mr Michael WU
    Deputy Chairman
    Securities and Futures Commission
    Mr Gabriel CHEUNG
    Senior Director
    Securities and Futures Commission
Clerk in attendance:
    Ms Estella CHAN
    Chief Assistant Secretary (1)4
Staff in attendance :
    Ms YUE Tin-po
    Senior Assistant Secretary (1)6 (Atg)

I Confirmation of minutes

(LegCo Paper No. CB(1) 964/96-97)

1. The minutes of the meeting held on 6 January 1997 were confirmed.

II Items for discussion for the next meeting scheduled for 7 April 1997

2. Members agreed that the following items would be discussed at the next meeting :

  1. computer data failure in the trading system of the Stock Exchange of Hong Kong on 12 December 1996; and

  2. market manipulation.

The Chairman requested members to notify the Panel Clerk of any further items they wished to discuss.

3. Having noted the planned visit to the Hong Kong Federation of Insurers to examine the information collected on its member insurers on the Panel’s list of outstanding items, members agreed that the visit should be arranged within the next few weeks.

(Post-meeting note: The visit to the Hong Kong Federation of Insurers on 17 March 1997 was subsequently postponed, pending a suitable date on which more members could participate.)

III Management of government reserves

(LegCo Paper No.CB (1) 947/96-97(01) - (04))

4. Mr Martin Glass and Miss Amy Y T YIP briefed members on the salient points of the papers on the management of government reserves.

5. Dr David LI Kwok-po declared his interest as a member of both the Land Fund’s Investment Committee and the Exchange Fund Advisory Committee.

Fiscal Reserve

6. In response to members’ enquiries about the investment strategy of the fiscal reserves placed with the Exchange Fund, Miss YIP confirmed that the fiscal reserves were kept in accounts separate from the rest of the Exchange Fund. She also explained that the reserves were placed in a portfolio in which the maturity profiles of the assets and liabilities were perfectly hedged. The Hong Kong Monetary Authority (HKMA) would not run any interest rate risk or currency risk in investing the fiscal reserves. However, the reserves would be hedged in US dollar if the Hong Kong dollar equivalent instrument was not available.

7. Members expressed concern about the low rate of return of the fiscal reserves deposited with the Exchange Fund, which could not even catch up with the rate of inflation. Since the fiscal reserves were in accounts separate from the rest of the Exchange Fund, they queried the reason for the fiscal reserves to adopt the same conservative investment strategy as the Exchange Fund, which had its own mission of supporting the pegged exchange rate with the US dollar. Mr Glass explained that the interest yields of the fiscal reserves were determined with reference to the corresponding yields of the Exchange Fund Bills or the US Treasury Notes. Nevertheless, he undertook to review the investment strategy with HKMA, taking into consideration members’ concerns. Members requested that a written paper would be submitted to the Panel within one or two months regarding the result of the review. Mr Glass also noted Mr Martin LEE’s suggestion that the paper should include a review of the investment strategies for government reserves with an aim to offering appropriate advice to the Hong Kong Special Administrative Region Government (HKSARG).Admin

Exchange Fund

8. Concerning guidelines for management of the Exchange Fund, Miss YIP advised that the investment guidelines as approved by the Exchange Fund Advisory Committee would be strictly adhered to. The guidelines, which were regularly reviewed, included very strict limits on solvency risk, credit risk, currency and individual exposure as well as the liquidity of the securities invested. Furthermore, in response to market fluctuations, stop-loss orders would also be placed and followed prudently.

9. As regards how the benchmark investment portfolios were set, Miss YIP advised that these benchmarks are applied to both internally and externally managed funds. She added that HKMA had employed more than 20 external investment managers who were located in seven financial centres across the world, to take advantage of investment opportunities globally. HKMA had also approached investment consultants on the selection and appointment of external managers.

10. As to how the yield of the Exchange Fund could be safeguarded in view of the rising US dollar, Miss YIP advised that HKMA adopted a prudent approach to secure capital preservation through diversification of investment. There were asset allocation guidelines against various foreign currencies. She pointed out that defensive actions had been taken against the rising US dollar to protect the value of reserves since the fourth quarter of 1996.

11. Concerning the forecast rate of return of the Exchange Fund in 1998, Miss YIP said that it was difficult to predict the total return since the market had been very volatile and the US dollar had been rising quite strongly. Nevertheless, HKMA would try its best to reduce the effect of market volatility and was looking forward to a year of steady returns unless there were dramatic changes in the market.

Land Fund

12. On the arrangements for the handover of the Land Fund after 30 June 1997, Mr Glass advised that the first task would be for the officials, which could be a public officer, body or entity to be lawfully nominated by the HKSARG in accordance with the Deed of Declaration of Trust to takeover the assets of the Land Fund from the trustees. Assets of the Land Fund would be realised and transferred to HKSARG’s General Revenue account in case such a nomination could not be made by 31 March 1998. It was suggested that the existing trustees should be retained to work with future officials so as to ensure a smooth transfer of the Land Fund during the handover. However, the decisions on the matter would rest with HKSARG.

13. As to how the performance of the Land Fund compared with that of the Exchange Fund, Mr Glass advised that despite the fact that no exact figures could be provided for the comparison, the types of investment that could be made by the Funds were different. In the case of the Land Fund, the Investment Committee adopted a prudent principle in maximising the yield through diversified investments such as equities and securities. As for the Exchange Fund, the Advisory Committee had adopted a more conservative approach.

14. Regarding members’ concerns about the limited information provided by the Administration on the Land Fund, Mr Glass explained that the Land Fund was managed by three trustees, who were the Chinese Representatives on the Sino-British Land Commission, authorised by the Chinese Government. Hong Kong Government had no access to detailed information of the Fund. Members requested the Administration to obtain from the Land Fund trustees information on the Land Fund’s performance, investment activities particularly on equities and other marketable securities, rates of returns, guidelines on the liquidation arrangement, and costs of administration. The Chairman added that the above information should be disclosed for public interest so as to ensure that the Land Fund was managed with transparency and accountability. Mr Glass undertook to investigate what further information might be available and report to the Panel in due course.Admin

IV Supervision of stock brokers

(LegCo Paper No. CB(1) 947/96-97(05))

15. Mr Michael WU briefed members on the fit and proper criteria for a person to be registered with the Securities and Futures Commission (SFS) and the system of sanctions employed. He said that SFC had initiated 120 inquiries during the period from 1 April 1996 to 31 January 1997, and had taken 114 disciplinary actions against registrants in cases involving rat trading and inadequacy of internal control.

16. Mr CHIM Pui-chung opined that SFC should give a definite indication as to the implication of a reprimand on an applicant’s/registrant’s fitness to act as an intermediary. In response, Mr WU advised that the legislation only required a person to meet the fit and proper criteria but did not preclude a person who had been sanctioned from acting as an intermediary. As for the role of SFC in elections of directors of the Stock Exchange of Hong Kong (SEHK), Mr WU stressed that SFC mainly provided past records of sanctioned persons to the Council or Committees of SEHK for consideration as to whether they were fit and proper.

17. Regarding the concern about the retrospective effect of the Code and Regulations promulgated by SEHK in November 1993 and February 1994 respectively, the Secretary for Financial Services (SFS) pointed out that the Administration had already answered a similar question at a recent LegCo Sitting and was about to answer yet another one at a further coming Sitting. He re-iterated that the best practice requirements for registrants, as stipulated in the Code and Regulations, were the precursors of the fit and proper criteria introduced in 1990 by SFC. These requirements had, in fact, existed in the days of the Securities Commission established in 1974. Compliance with the Code and Regulations, whether before or after the date of publication, would indicate satisfaction of the relevant requirements under the fit and proper criteria and therefore the question of retrospectivity did not arise.

18. Concerning the progress of the consultation on internal control guidelines, Mr WU advised that the consultation on management, supervision and internal control guidelines for persons registered with or licensed by the SFC had just been completed. Following the consultation, clear guidelines for front-line controllers and supervisors on the management of brokers would be drafted.

19. Mr WU also elaborated on SFC’s existing regulatory mechanism in monitoring the internal control of registrants’ businesses. This included regular audit inspections of registrants’ procedures, annual returns, accounts, books and records. Regular audits of individual registrants would be arranged on a triennial basis. In a normal case, a "management letter" would be forwarded to the registrant regarding the result of the audit inspection. The registrant would be asked to rectify the situation if technical mistakes were found during the inspection. Ad-hoc audits arising from public’s complaints and observable abnormal behaviour of particular companies would also be arranged. Once irregularities or misbehaviour of such companies were identified, SFC would refer the matter to its investigation section for follow-up action. In-depth inquiries into behaviours of registrants would follow and disciplinary actions against registrants who were in breach of the Code or Regulations would be taken. However, decisions of SFC were subject to review by the Securities and Futures Appeals Panel or judicial review by the court.

20. On handling of public complaints, Mr WU advised that SFC received an average of 400-500 complaints per annum. Most of these complaints did not require any follow-up as they were essentially enquiries on the provisions of relevant legislation, and the operation of a particular company. Occasionally, SFC might request explanations from the company under complaint when dispute arose. It would also conduct conciliation meetings for parties concerned to resolve the matter if necessary.

21. As regards members’ concern about market manipulation by large-scale brokers, Mr WU advised that SFC applied stringent controls over activities of brokers regardless of their scales. He undertook to provide an information paper on investigations by SFC regarding activities of listed brokers for the past three years, with breakdown of the percentages and actual numbers of broker firms of different sizes. At members’ request, he also agreed to include penalties imposed and the reasons for identifying these cases for investigation in the paper.

22. At the suggestion of the Chairman, members agreed to follow up the issue of market manipulation in the next meeting.


V The Securities and Futures Commission (SFC)’s budget for 1997/98


23. Having noted SFC’s deficit budget for 1997/98, Mr SIN Chung-kai enquired about the contingency arrangement to overcome the problem if all of SFC’s reserves were depleted in future. Mr WU responded that the income of SFC came from fees and charges as well as levies on securities transactions and futures contracts. In case of insufficient income, SFC would control the expenditure and increase the fees and charges in order to recover the cost if necessary.

24. Mr WU also pointed out that the 146% increase in the expenditure of Professional & Others was mainly due to additional requirements for legal fees for pending litigations. He expected that an additional provision of $20 million would be required for the purpose for the coming year. The expenditure for General Office and Insurance was also increased by 83% due to fitting-out expenses to be incurred in early 1997 for the newly-leased premises.

25. Concerning the possibility of abolition of transaction levies, Mr WU advised that the levies had been agreed by Government since merger of the four Exchanges in 1987. The levies were necessary to cover the costs of operation of SEHK. He noted Mr CHIM Pui-chung’s view that the levies should be reduced and added that the levy would be reviewed by SFC, SEHK and the Administration and a report on the review would be forwarded to the Panel once available.SFC

26. As to the increase in Personnel Expenses, Mr WU explained that the proposed increase was due to annual salary adjustment and projected staff increase to meet increasing workload. The review on staff salary was made by an independent consultant and the annual salary adjustment was determined by a committee comprising the Chairman and two Non-Executive Directors of SFC.

27. In response to a question related to any recent development of the disagreement between SFC and SEHK early last year regarding their respective roles in market development, SFS advised that it was no longer necessary for the Administration to mediate as the division of labour in this respect had been more clearly defined. In fulfilling its role in market development and public relations, it was appropriate for SFC to budget for overseas travelling and entertainment expenses and the Administration would not interfere with the arrangement.

28. The meeting ended at 10:50 am.

Legislative Council Secretariat
8 April 1997

Last Updated on 18 August 1998