Provisional Legislative Council
PLC Paper No. CB(1)878
(These minutes have been
seen by the Administration)
Ref : CB1/BC/3/97
Bills Committee on
Provident Fund Schemes
Legislation (Amendment) Bill 1997
Minutes of the meeting held on
Thursday, 8 January 1998, at 11:30 am
in Chamber of the Legislative Council Building
Members present :
Hon Ronald ARCULLI, JP (Chairman)
Dr Hon LAW Cheung-kwok (Deputy Chairman)
Hon WONG Siu-yee
Hon LEE Kai-ming
Hon Mrs Peggy LAM, JP
Hon MA Fung-kwok
Hon CHAN Yuen-han
Hon CHAN Kam-lam
Dr Hon TANG Siu-tong, JP
Hon NGAN Kam-chuen
Members absent :
Hon James TIEN Pei-chun, JP
Hon HO Sai-chu, JP
Hon Henry WU
Dr Hon Mrs TSO WONG Man-yin
Hon YEUNG Yiu-chung
Hon Ambrose LAU Hon-chuen, JP
Hon Paul CHENG Ming-fun, JP
Hon CHOY So-yuk
Public officers attending :
Clerk in attendance:
- Mrs Pamela TAN
- Mandatory Provident Fund Office
- Ms Maisie CHENG
- Assistant Director
- Scheme Operations
- Mr Raymond TAM
- Assistant Director
- Regulatory Standards
- Mr Duncan BERRY
- Senior Assistant Law Draftsman
- Department of Justice
- Miss Shandy LIU
- Government Counsel
- Law Drafting Division
- Department of Justice
- Miss Polly YEUNG
- Chief Assistant Secretary (1)3
Staff in attendance :
- Miss Connie FUNG
- Assistant Legal Adviser 3
- Mr Daniel HUI
- Senior Assistant Secretary (1)5
I. Meeting with the Administration
1.Members continued scrutiny of the draft Mandatory Provident Fund Schemes (General) Regulation (the draft Regulation) and deliberated on the following proposed sections.
Proposed section 44
| 2.In reply to members enquiry, the Assistant Director/Regulatory Standards (AD/RS) confirmed that the expression "disposal of an asset" in proposed section 44(2) was intended to cover lending of securities held by the scheme in accordance with the provisions in proposed sections 47 and 48. The Administration would check whether the wordings of the proposed section had adequately reflected the policy intent.
| 3.The Chairman questioned the rationale for restricting disposal of scheme assets to relevant persons for a consideration not greater than the prevailing market price under proposed section 44(2). In response, the Administration agreed to amend the proposed section to the effect that disposal of scheme assets to relevant persons should be at a consideration not less than the prevailing market price and that a higher consideration which would be in the interest of the scheme would be permitted. An example would be the selling of shares at a higher than market price.
Proposed sections 47 and 48
4.AD/RS informed members that the repurchase agreements and securities lending agreements under proposed sections 47 and 48 respectively were instruments which would allow the custodian of a MPF scheme to lend scheme securities, including bonds and stocks to a borrower. He made the following elaborations:
- income received from repurchase agreements and securities lending would either be transferred to scheme funds which would benefit scheme members directly or such income would be used to offset part of the custodian fees;
- to limit risks, proposed section 47(3)(b) required that not more than 10% of the total assets of the scheme could be the subject of repurchase agreements at any one time while proposed section 47(3)(c) required that no more than 50% of the securities of the same issue held in respect of the fund could be the subject of a repurchase agreement;
- similar restrictions would also apply to securities lending agreements as proposed in sections 48(3)(b) and (c); and
- borrowers of the securities would be required to provide 100% collateral security for the value of the securities borrowed with adequate margin. Either cash or short term bills issued by the Hong Kong Special Administrative Region Government or governments with AAAcredit ratings, such as the United States Treasury Bill, would be accepted as collateral security and which would be marked to market value on a daily basis.
5.In reply to members, AD/RS supplemented that securities lending arrangements were allowed in overseas retirement schemes and as an international financial centre, Hong Kong should provide similar arrangements subject to sufficient safeguard measures.
|6.Some members doubted whether the small additional income from securities lending would justify the perceived risks involved in such activities. At the request of the Deputy Chairman and members, the Administration would provide further information on:
- the fee-charging practice of custodians with or without authority to enter into repurchase agreements and securities lending agreements;
- the impact of securities lending on retirement funds in recent market turmoils; and
- information on the Orange County incident which occurred in the USA in 1995.
|7. As requested by the Chairman, the Administration would consider whether the expression "of the same kind" in proposed section 47(3)(c) should be deleted as such category of securities should have been subsumed under the expression "securities of the same issue" in the proposed section.
|8.The Chairman pointed out that proposed section 47(5)(a) and (b) appears inconsistent as a custodian which repurchased the securities previously sold to another party might be under a reverse repurchase agreement which was not permitted under proposed section 47(4). The Administration would clarify whether the present drafting of proposed section 47(5)(a) and (b) would give arise to incongruence.
|In reply to members concerns about the mechanism in ensuring adequate collateral security to be provided by the borrower under the securities lending arrangements, AD/RS confirmed that the MPFA would issue guidelines to service providers on the procedures to follow in respect of collateral security.
II.Any other business
10. The Chairman reminded members that the next meeting of the Committee would be held at 2:30 pm on the same day.
11. The meeting ended at 12:45 pm.
Provisional Legislative Council Secretariat
9 February 1998