Provisional Legislative Council

PLC Panel of Financial Affairs
Meeting on 17 November 1997

Item V :Current status of the "Life Boat Loan" set up after the 1987 stock market crash.

Following the market crash in 1987, a " Lifeboat " loan was established and provided to the Hong Kong Futures Guarantee Corporation Ltd. (HKFGC) to enable it to finance the settlement of HSI futures contracts. The amount of loan drawn was slightly below $2 billion with $1 billion coming from the Lifeboat lenders (including major participants in the futures market and shareholders of HKFGC) and the rest from the Government.

2.Repayment of the Lifeboat loan came from two sources, namely the Special Levy and recoveries from futures market defaulters.

3.The Special Levy was imposed via the Exchanges (Special Levy) Ordinance, in which provision was made for a levy at the Futures Exchange and the Stock Exchange, to be applied towards repayment of the Lifeboat loan.

4.All other arrangements in respect of the Lifeboat loan were embodied in agreements entered into by the Government, HKFGC, and the Lifeboat lenders. The arrangements provided for HKFGC to pursue legal actions against futures market defaulters and pay net recoveries to the Lifeboat lenders. The arrangements as restructured in 1989 also provided that after full repayment of the Lifeboat, the right to claim and receive recoveries from defaulters shall thereupon be assigned to HKFE Clearing Corporation.

5.In early 1993, there were indications that the Lifeboat loan would likely be repaid in a foreseeable future. Legislative amendments were made to enable the suspension of the Special Levy in August 1993, and as part of that exercise, amendments were made to section 5(2) of the Special Levy Ordinance which provided that any surplus Special Levy in the Special Levy fund would be paid to the investor compensation funds or for any other purposes that the Secretary for Financial Services (SFS) may, on the recommendation of the Securities and Futures Commission, deem appropriate having regard to the interest of the investing public.

6.When the Special Levy was suspended in August 1993, the Lifeboat loans were not fully repaid but it was thought that projected recoveries would be sufficient to repay the loans. In actual fact, levy income prior to August 1993 and recoveries from defaulters had exceeded the earlier forecast. By June 1995, the Lifeboat loans were fully repaid with interest, with three separate surpluses resulted thereafter. The current status of these surpluses are as follows -

  1. A HK$2 million surplus is held in the Special Levy fund as a contingency against any claims for refunds of overpayments of Special Levy. It will be available for application under section 5(2) of the Special Levy Ordinance.

  2. A HK$11 million surplus as at the time when the Lifeboat loan was fully repaid. This surplus is currently being held by HKFGC. The parties concerned will consider the disposal of this surplus.

  3. A HK$71 million surplus representing excess recoveries after the full repayment of the Lifeboat loan received by the HKFE Clearing Corporation has been applied to the company's Reserve Fund.

Securities & Futures Commission/Financial Services Bureau
14 November 1997