Provisional Legislative Council

PLC Paper No. CB(1)406
(These minutes have been
seen by the Administration)

Ref : CB1/PL/FA/1

Panel on Financial Affairs

Minutes of Meeting held on Monday, 6 October 1997 at 4:30 p.m. in Conference Room B of the Legislative Council Building

Members present :

Hon Paul CHENG Ming-fun, JP (Chairman)
Hon NG Leung-sing
Hon Eric LI Ka-cheung, JP
Dr Hon David LI Kwok-po, JP
Hon Henry WU
Hon CHAN Choi-hi
Hon CHIM Pui-chung

Members absent :

Hon NGAN Kam-chuen (Deputy Chairman)
Hon Ronald ARCULLI, JP
Dr Hon Philip WONG Yu-hong
Dr Hon LAW Cheung-kwok

Public officers attending :

Mr Rafael S Y HUI
Secretary for Financial Services

For Agenda Item III

Acting Deputy Chief Executive
Hong Kong Monetary Authority

For Agenda Item IV

Mr David J White
Executive Director (Supervision of Markets)
Securities and Futures Commission

Mr Steve CHAN
Chief Operating Officer
Hong Kong Futures Exchange Ltd

For Agenda Item V

Mrs Laura CHA, JP
Executive Director
Securities and Futures Commission

Clerk in attendance :

Ms Estella CHAN
Chief Assistant Secretary (1)4

Staff in attendance :

Mr Daniel HUI
Senior Assistant Secretary (1)5

I.Information paper issued since last meeting
(PLC Paper No. CB(1)250)

Members noted the information paper issued since the last meeting.

II.Items for discussion for the next meeting scheduled for 3 November 1997

2.Members agreed to discuss the following items at the next regular Panel meeting scheduled for 3 November 1997 :

  1. Review of Financial Secretary's authority in using the Exchange Fund;

  2. Report on the 1997 World Bank Group/International Monetary Fund annual meetings; and

  3. Report on the current status of the " Life Boat Loan " set up after the 1987 stock market crash.

(Post-meeting note: At the request of the Administration and with the concurrence of the Chairman, an item on closure of the Electrical and Mechanical Services Department Suspense Account and Workshop Services Suspense Account has been added to the agenda.)

III.Financial positions and future monitoring of banks in Hong Kong after the recent currency crisis in Asia
(PLC Paper No. CB(1)286(01))

3.Referring to paragraph 2 of the information paper, members enquired about details of Hong Kong Monetary Authority (HKMA)'s intervention to fend off speculators and the profit or loss made as a result of the intervention. The Secretary for Financial Services (SFS) replied that in order to avoid disclosure of market sensitive information the Administration would request HKMA to provide information on the modus operandi of its intervention rather than details of its market activities. Since intervention for protecting the Hong Kong dollar would be an on-going exercise, it would not be meaningful to look at the profit or loss arising from each intervention. Information on the increase or decrease of the Exchange Fund was disclosed in the annual report of HKMA.

4.Mr David LI Kwok-po congratulated the Administration's success in maintaining the stability of Hong Kong's financial markets during the recent currency crisis in Asia and enquired about regulatory measures adopted by HKMA during the recent crisis. SFS responded that the stability of Hong Kong's financial markets was due to many factors including HKMA's persistent efforts in regulating risk exposure of banks, the Government's prudent fiscal policy, a high level of exchange reserve, the Government's beliefs in non-intervention policy and regional co-operation. In addition, HKMA also intervened as necessary in the market to maintain the Hong Kong dollar exchange rate. The Acting Deputy Chief Executive/HKMA (DCE/HKMA(Atg)) added that HKMA adopted an open, transparent and consultative approach in its monitoring of banks. Full consultation with banks was carried out before implementation of regulatory measures.

5.As regards the usefulness of the Land Fund in defending the Hong Kong dollar, SFS remarked that the Land Fund handed over to the Special Administrative Region Government on 1 July 1997 had substantially increased Hong Kong's financial reserve which had played a useful role in defending the Hong Kong dollar.

6.Referring to paragraph 2 of the information paper, Mr CHIM Pui-chung enquired about the rationale for HKMA's high profile in its intervention against speculators and whether HKMA's market intervention had violated the Government's positive non-intervention policy. SFS responded that Hong Kong had a completely open financial market and HKMA's intervention was only related to the protection of the Hong Kong dollar exchange rate. The positive non-intervention policy was not tantamount to inaction on the part of the Government under all circumstances. If the situation so warranted, the Government would intervene and protection of the Hong Kong dollar was considered a justified cause for intervention.

7.Members enquired about the possible impacts on Hong Kong's economy as a result of the devaluation of currencies in neighbouring countries. SFS replied that the consequences of currency devaluation were mixed depending on an economy's Gross Domestic Product composition. As there were not much direct competition between Hong Kong and countries affected by the currency crisis, there would not be significant adverse impact on Hong Kong's economy. However, it was likely that Hong Kong's tourist industry might face some adverse effects and the Economic Services Bureau was considering necessary actions. The impact on import and export trade should not be significant as Hong Kong now was largely a service economy and a lot of goods involved in domestic exports and re-exports were not in direct competition with goods exported by Southeast Asian countries.

8.Members expressed concern about the possibilities of bad debts arising from loans made to clients in countries affected by the currency crisis and enquired about the extent of loans made by Hong Kong's banks to these countries. DCE/HKMA(Atg) responded that HKMA had asked banks in Hong Kong to report their loan position to the affected countries and found that the banks' exposure in this regard was very low. Moreover, most of the loans made were secured loans.

IV.Red Chip Index Futures trading prospect and safeguards for investors
(PLC Paper No. CB(1)286(02))

9.Members expressed concern about whether there was adequate consultation before the Red Chip Index Futures (RCIF) were introduced and enquired about the evidence in support of the claim that index futures were used for hedging rather than speculation. The Executive Director (Supervision of Markets)/Securities and Futures Commission (ED(SM)/SFC) responded that product development was Hong Kong Futures Exchange (HKFE)'s responsibility. In view of the continuing growth in trading of stocks of China affiliated enterprises, the so-called red chip stocks, HKFE saw a need to provide a way for investors to hedge their investments in red chip stocks and the RCIF was considered an appropriate derivatives product. Moreover, it was important for Hong Kong as a major financial centre to develop a full range of financial products. SFC's role was to ensure adoption of proper risk management measures by brokers and dealers as well as existence of safeguards for investors. According to academic research, the availability of index futures would eventually lead to reduced volatility in that index. This had been proven in overseas market such as Japan. It would be difficult to differentiate trading in index futures by investment objectives, including hedging, arbitrage and speculation. Extensive academic studies showed that all the three types of trading in futures contracts were important to the market. Fund managers, stock brokers and individual investors had different reasons to trade in index futures. To safeguard investors, the Government had restructured the futures exchange and the clearing mechanism on the basis of the investigation report released after the stock market crash in 1987. Currently, Hong Kong's clearing mechanism was one of best in the world.

10.Mr CHIM Pui-chung enquired about the possibilities of requesting HKFE to disclose the profit or loss situation of small investors who had traded in index futures. SFS replied that requirement to disclose such information would bring serious adverse consequence to Hong Kong as a major financial centre. No financial market in the world had such a requirement. To protect small investors, more educational information should be provided on the risks involved in trading derivative products. As regards monitoring authorities, their role was to ensure a regulated and smooth market operation. If there was any suspected case of false market, SFC would conduct investigations. Hong Kong had to introduce new financial products to promote overall activity in the market. ED(SM)/SFC added that SFC had issued a number of information booklets for enhancement of investment education.

11.The Chairman enquired about the frequency of inspection visits made by HKFE to its members since the introduction of the RCIF. The Chief Operating Officer/HKFE (COO/HKFE) responded that there were regular inspection visits to its members, but such visits were to ensure compliance with HKFE's rules and regulations and not confined to monitoring of RCIF trading. Each member would be visited once per annum but members on the alert list would be visited more frequently. At present, less than 10% of HKFE's members were on the alert list.

12.Members enquired about the impact on the RCI if trading of too many RCI stocks was suspended at the same time. ED(SM)/SFC replied that 32 stocks were included for calculation of the RCI and there was no one stock dominating the index. The Hang Seng Index Service Limited, which was responsible for calculating the RCI, had a set of procedures to ensure proper calculation of the index in case trading in some RCI stocks was suspended. The price of suspended stocks would be adjusted according to the index movement as a whole for the purpose of calculating the index. As regards the respective numbers of suspension cases due to the companies' own requests and requests by the SFC, ED(SM)/SFC would provide the information in writing.

13.In response to members' request, SFS agreed to prepare an information paper reporting on the current status of the " Life Boat Loan " set up after the 1987 stock market crash. Members agreed that the subject would be included as an agenda item for the meeting scheduled for 3 November 1997.

V.Briefing on background and objective of the code of Conduct for Fund Managers prepared by the Securities and Futures Commission
(PLC Paper No. CB(1)286(03))

14.A booklet entitled " A consultation paper on Fund Manager Code of Conduct " was tabled at the meeting. (Post meeting note : The booklet has been circulated to members vide PLC Paper No. CB(1)310 dated 7 October 1997.)

15.The Executive Director/SFC(ED/SFC) briefed members on the background and objective of the Code of Conduct for Fund Managers as set out in the information paper.

16.The Chairman enquired about deterrent actions available in case of violation of provisions in the Code. ED/SFC advised that the Code would not have the force of law and enforcement would be based on self discipline of fund managers. However, SFC would take into account complaints against a fund manager's breach of the Code before issuance or renewal of a licence to the fund manager.

17.Members enquired whether there was any intention to replace the Code with legislation. ED/SFC responded that there was no plan for legislation on the Code but members' views on the issue would be forwarded to SFC for consideration.

18.Members pointed out that the implementation of the Mandatory Provident Fund Scheme (MPFS) next year would churned out a large number of fund managers and enquired about SFC's plans for increased monitoring work arising from a sudden increase in the number of fund managers and the resources required to discharge the additional responsibilities. SFS indicated that SFC would continue to be the regulatory authority on fund managers. There could be some additional responsibilities, specifically related to MPF requirements. The Administration would consult the SFC as to whether SFC alone should bear the additional costs involved. He pointed out also in passing that as a substantial amount of MPF funds could be invested in the Hong Kong stock market, the SFC could therefore also receive additional revenue from the additional volume of transaction. It could hence be argued that SFC should bear the additional costs of regulation.

19.Members enquired whether sales persons for unit trust funds were covered by the Code. ED/SFC confirmed that the Code covered only fund managers and sales persons of unit trust funds were excluded.

20.As to whether disciplinary actions taken on fund mangers would be made known to the public, ED/SFC advised that this would depend on the seriousness of the misconduct. For less serious cases, disciplinary action taken would not be publicly announced, but such disciplinary action would be recorded on the personal file of the fund manager concerned. For serious offences, the displinary action taken on a fund manager would be made public.

21.In response to members' request, ED/SFC agreed to provide information on the number of complaint cases against fund managers received by SFC since last year.

VI.Any other business

22.Members noted that a special meeting had been scheduled for 11 October 1997 at 9:00 am to receive briefings by the Secretary for the Treasury and the Secretary for Financial Services respectively on the Chief Executive's Policy Address.

23.Members agreed that regular meetings would continue to be held at 4:30 pm on the first Monday of each month from January to March 1998.

24.The meeting ended at 6:25 pm.

Provisional Legislative Council
28 October 1997