LC Paper No. CB(1)1102/98-99
(These minutes have been
seen by the Administration)

Ref : CB1/PL/FA/1

Legislative Council
Panel on Financial Affairs

Minutes of Meeting held on
Monday, 5 October 1998 at 10:45 am
in the Chamber of the Legislative Council Building

Members present :

Hon Ambrose LAU Hon-chuen, JP (Chairman)
Hon Eric LI Ka-cheung, JP (Deputy Chairman)
Hon David CHU Yu-lin
Hon Cyd HO Sau-lan
Hon Albert HO Chun-yan
Hon NG Leung-sing
Hon Margaret NG
Hon Ronald ARCULLI, JP
Hon James TO Kun-sun
Hon CHEUNG Man-kwong
Hon Ambrose CHEUNG Wing-sum, JP
Hon HUI Cheung-ching
Hon SIN Chung-kai
Dr Hon Philip WONG Yu-hong
Hon Jasper TSANG Yok-sing, JP

Member attending :

Hon Martin LEE Chu-ming, SC, JP

Members absent :

Hon Kenneth TING Woo-shou, JP
Hon James TIEN Pei-chun, JP
Dr Hon David LI Kwok-po, JP
Hon Bernard CHAN
Hon Timothy FOK Tsun-ting, JP

Public officers attending :

Item IV

Mr David Carse
Deputy Chief Executive (Banking)
Hong Kong Monetary Authority

Miss Clara TANG
Principal Assistant Secretary for Financial Services
(Banking and Monetary)

Items V and VI

Mrs Rebecca LAI, JP
Acting Secretary for Financial Services

Mr Bryan P K CHAN
Principal Assistant Secretary for Financial Services

Mr Andrew SHENG, SBS
Chairman, Securities and Futures Commission

Mrs Laura CHA, JP
Deputy Chairman, Securities and Futures

Item VI

Mr Norman CHAN
Deputy Chief Executive (Development)
Hong Kong Monetary Authority

Item VII

Mr Martin Glass
Deputy Secretary for the Treasury

Miss Amy TSE
Principal Assistant Secretary for the Treasury

Acting Commissioner of Rating and Valuation

Assistant Commissioner (Rating & Valuation)

Clerk in attendance :

Ms Estella CHAN
Chief Assistant Secretary (1)4

Staff in attendance :

Ms Pauline NG
Assistant Secretary General 1

Mr KAU Kin-wah
Assistant Legal Adviser 6

Ms Connie SZETO
Senior Assistant Secretary (1)1

I Confirmation of minutes and matters arising
(LC Paper No. CB(1)212/98-99)

The minutes of the meeting held on 23 July 1998 were confirmed.

II Information papers issued since last meeting
(LC Paper No. CB(1)268/98-99 - proposals to amend the Business Registration Ordinance)

2. Members noted the captioned information paper issued to members since last meeting. In addition, the Chairman informed the meeting that the Securities and Futures Commission (SFC) had distributed the Consultation Paper on New Investor Compensation Arrangements for Hong Kong to all Council Members on 30 September 1998.

III Items for discussion at the next meeting
(LC Paper No. CB(1)258/98-99(01) - List of outstanding items for discussion)

3. Members agreed to discuss the Consultation Paper on New Investor Compensation Arrangements for Hong Kong at the next meeting scheduled for 2 November 1998 at 10:45 am.

4. On following up the Panel's decision to study the mechanism for defending the linked exchange rate (LER) system, the Chairman invited members' views on the preliminary proposal to schedule four special meetings on Saturday mornings in November 1998 to discuss the subject with academics and market practitioners. The Administration would be invited to respond to the views made in one of the meetings.

5. Members deliberated and agreed to schedule two special meetings for the mornings of 7 and 14 November 1998 for discussion with market practitioners and academics respectively. To facilitate discussion, invited parties would be requested to provide written submissions for circulation to members before the meetings.

IV Introduction of the Euro Bill
(LC Paper Nos. CB(1)280/98-99(02) and 285/98-99)

6. The Deputy Chief Executive (Banking), Hong Kong Monetary Authority (DCE(B)/HKMA) briefed members on the background to the Introduction of the Euro Bill (the Bill). He said that the Euro would be introduced on 1 January 1999 as the single currency of the eleven participating countries of the European Monetary Unit to replace the existing national currencies being circulated. In Hong Kong, as in other common law jurisdictions, the definition of a contractual obligation governed by Hong Kong law expressed in a foreign currency was determined by the law of the relevant foreign country. However, it was still considered desirable to enact specific legislation to remove any concern that parties to contracts might be able to argue that the advent of the Euro was a fundamental change of circumstances bringing a given legal obligation to an end. The Bill therefore apart from providing for references in any legal obligation to the European Currency Unit (ECU) to be replaced by references to the Euro at the rate of one Euro to one ECU, also provided for continuity of legal obligations arising from the introduction of the Euro.

7. Addressing members' concerns about applicability of the Bill, DCE(B)/HKMA advised that the new legislation, if enacted, would apply to all existing contracts still in force and would carry no retrospective effect. On the other hand, the Administration recognized the need to respect the freedom of contracts. Clauses 3 and 4 of the Bill had been formulated to reflect this intention. The clauses provided that the official definition of the ECU and the continuity of legal obligations should be presumed unless it was expressly agreed or provided otherwise.

8. Responding to a member's enquiry about comparable legislation in other jurisdictions, DCE(B)/HKMA said that apart from European Council (EC) which had passed EC Regulation No. 1103/97 to deal with the problems of ECU/Euro conversion and continuity of contracts, the state of New York had enacted legislation with similar provisions. Singapore was also following suit to legislate on this area. Upon the member's request, the Administration undertook to provide copies of the relevant EC Regulation and New York legislation for members' reference after the meeting.

(Post- meeting note : The information was circulated to members vide LC Paper No. CB(1)325/98-99 on 14 October 1998.)

9. Noting the imminent launch of the Euro on 1 January 1999, a member questioned the reason for not submitting the Bill earlier. In response, DCE(B)/HKMA advised that the Administration had taken some time to examine the need for introducing specific legislation after the issue of continuity of legal obligations in contracts was raised by the market in early 1998. Moreover, final agreement on the introduction of the Euro had only been reached among participating countries in European Monetary Union in mid 1998. Having made efforts to put forward the Bill as soon as possible after the summer recess of the Legislative Council (LegCo), the Administration would introduce the Bill into LegCo on 4 November 1998. As the Bill was relatively simple, the Administration envisaged that there would be sufficient time for Members to study the Bill in detail if a Bills Committee was formed.

V Securities and Futures Commission 1997-98 Annual Report
(The Report issued under LC Paper No. CB(3)128/98-99)

10. Members noted that the Securities and Futures Commission 1997-98 Annual Report was submitted to LegCo in July 1998. Discussion on the Report was originally scheduled for the Panel meeting on 7 September but was deferred to give way to more urgent matters.

11. The Chairman welcomed the public officers attending the meeting, particularly Mr Andrew SHENG, who was attending as Chairman of the Securities and Futures Commission (C/SFC) for the first time.

12 C/SFC thanked members for providing him with the opportunity to speak before the Panel. On SFC's future work, he briefed members that SFC's missions were to promote confidence in Hong Kong's securities and futures markets; to support the continued development of Hong Kong's markets; to strike an appropriate balance between measures that maintained market integrity, provided protection for investors and encouraged market development and innovation; to uphold fairness in its work and to consult the market and the public on major changes to the regulatory regime. SFC's priorities in the coming year would be to strengthen the regulation of the market, increase market transparency and enhance the trust and confidence of local and international investors in the local market. In carrying out the job as a regulator, SFC would closely adhere to four major principles including credibility, integrity, fairness and openness. Furthermore, SFC would report to the Panel half-yearly on its regulatory work and market developments. Other reports would be made to the Panel as and when necessary.

13. Pointing out that the Financial Secretary had indicated that Government would soon disclose details of the securities purchased in the August operations, Mr CHEUNG Man-kwong enquired whether SFC, in fulfilling its regulatory duties, had followed up the matter with the Government and required disclosure of the relevant information before the company to manage the shares was set up.

14 The Deputy Chairman, Securities and Futures Commission (DC/SFC) replied that according to SFC's own legal advice, with which the ex-chairman of SFC also concurred, Government was not bound by the disclosure requirements under the Securities (Disclosure of Interests) Ordinance (SDIO) (Cap 396). As such, SFC did not have the legal authority to compel the Government to disclose the relevant information even if the latter had indicated its intention to forego its right in this respect. Nonetheless, as far as she was aware, the company to be set up by Government for managing the securities procured would be subject to all securities related legislation, and other related rules and regulations.

15. In this connection, the Acting Secretary for Financial Services (SFS(Ag)) supplemented that even though the Government was not bound by the disclosure requirements under securities related legislation, it remained the Administration's intention to make public details on the investments made as soon as possible when market circumstances permitted. She also advised that preparatory work for the management company was at an advanced stage. Full information on securities acquired in the operations would be provided to the company once it was constituted and it would be for the company to decide on the format and details of the information to be disclosed.

16. On the enquiry about the comparison between Hong Kong's regulatory regime and those of other developed financial markets, C/SFC stressed the importance of keeping the local regulatory regime in line with the international standards. Leading financial markets, like those in the United States, had introduced many changes in their regulatory systems in response to rapid developments in their markets. SFC would make reference to international experience in reviewing the adequacy of the local regulatory system and related legislation. Results of the review would be released for public consultation.

17. Mr Albert HO Chun-yan was concerned that the proposal to empower the Chief Executive (CE) of HKSAR to give directions to the exchanges and clearing houses as he saw fit might provide CE with excessive discretionary power and authority over SFC in regulating the markets. Miss Cyd HO Sau-lan opined that SFC should assess the implications of the proposal for the investing public, especially for small investors. Taking note of members' views, C/SFC assured that SFC would study the proposal thoroughly.

18 Concurring with Mr SIN Chung-kai, C/SFC said that the Stock Exchange of Hong Kong (SEHK), being an important financial institution, should become a public body to be subject to provisions of the Prevention of Bribery Ordinance (Cap 201). SFS(Ag) further advised that active discussion was underway between the Independent Commission Against Corruption and SEHK to work out the technical and legal details. The legislative proposal concerned would be put forward within the current legislative session.

19. Regarding the timetable for introducing the Composite Securities and Futures Bill, SFS(Ag) advised that the Administration aimed at introducing the Bill in the 1998-99 legislative year. The purpose of the Bill was to consolidate a number of existing ordinances governing the securities and futures markets.

20. On the criteria for engaging brokers in Government's August operations, SFS(Ag) advised that as she understood from HKMA, the operation had mainly involved relatively large broker firms with good reputation and credibility in the market. Upon request by members, she undertook to provide information on the criteria for selecting broker firms in the operations and clarify whether brokerage fee was a factor of consideration.

(Post-meeting note: The information was circulated to members vide LC Paper No. CB(1)1054/98-99 dated 26 March 1999.)

VI Report on Financial Market Review
(The Report on Financial Market Review (the Report) issued under LC Paper CB(1)261/98-99, an information paper on progress of implementation of recommendations of the Report issued under LC Paper No. CB(1)280/98-99(03) and the Frequently Asked Questions booklet issued under LC Paper No. CB(1) 285/98-99)

21. SFS(Ag) highlighted the salient points of the Report on Financial Market Review (the Report) released in April 1998 and briefed members on the progress of implementation of the recommendations contained therein. She advised that among the 24 recommendations, seven had been completed, 11 were in good progress and plans for following up the remaining six had been devised. On the progress of the 30-point programme announced recently to strengthen the discipline and transparency of the securities and futures markets, SFS(Ag) informed the meeting that eight measures had already been implemented and Government was in discussion with the parties concerned on details of implementing the rest of the measures and preparing the relevant legislative proposals.

Surveillance of trading and market conduct

22. Mr Eric LI Ka-cheung opined that notwithstanding SFC's investigation that there was no evidence of market manipulation during the Asian financial turmoil in the second half of 1997, the surveillance capacities of SFC could have been strengthened and re-inforced to detect more efficiently possible market manipulation in August 1998. As manipulative activities required a few months to plan and take effect, he asked how soon could the proposed cross-market early warning system be put in place such that the market could be alerted of any irregularities and possible Government actions.

23. In response, DC/SFC advised that SFC and the Hong Kong Futures Exchange were working together to develop a cross-market early warning system among the cash and futures markets to provide warning signals to the market and its participants whenever the futures market activity exceeded a certain level vis-…-vis the cash market. The parties concerned were still discussing the details, such as the various parameters for triggering appropriate responses in the system. On members' concern about the urgency of putting in place the response system to counter possible imminent manipulation, C/SFC assured that he would be able to report on the warning system in two to three months' time, drawing reference from relevant international practices and standards.

24. On whether any insider dealing activities were identified by SFC in the August operations, DC/SFC advised that SFC was still conducting investigations into suspected insider dealing activites. She however remarked that such investigations usually took time.

Disclosure of information by listed companies

25 Mr CHEUNG Man-kwong remarked that timely disclosure of information on financial problems of listed companies was crucial in enhancing protection for minority shareholders and opined that SFC should disclose the names of those companies which were facing financial difficulties. In response, C/SFC stressed that as disclosure of market sensitive information on a company might adversely affect the organization, it was necessary to strike a balance between maintaining the interests of investors and those of the companies in the pursuit of market transparency. DC/SFC supplemented that in this respect, SFC was bound by provisions in section 59 of the Securities and Futures Commission Ordinance (Cap 24) to preserve the secrecy of the confidential information on a company obtained during the course of performing its regulatory duties. She further clarified an earlier statement made by former C/SFC on the number of companies facing financial difficulties. Based on SFC's past experience, it was estimated that 40 to 50 listed companies might be facing financial problems. Although a number of companies were under surveillance and SFC might suspend the trading of companies found to have serious financial problems, sensitive information on the company should not be disclosed until completion of the investigation.

Conflict of interests of boards of directors of regulatory bodies

26. Mr Ambrose CHEUNG Wing-sum was concerned about the possible role conflicts of board members of the relevant regulatory bodies, many of whom were both practitioners and regulators in the markets, and the adverse effects on the interests of investors.

27. SFS(Ag) responded that the structure and composition of boards of directors of the regulatory bodies were under constant review to ensure their independence and representativeness. While Government had no intention to introduce changes in this respect at the moment, it would seek to enhance protection for investors through other measures. The Chairman requested the Administration to provide an information paper on how the constitutions of the boards of these bodies could prevent potential conflict of interests and maintain a balance of interests of the industry and the investors.

(Post-meeting note: The information paper was circulated to members vide LC Paper No. CB(1)1054/98-99.)

Issues concerning the monetary and banking systems

28. Mr SIN Chung-kai enquired about the involvement of the Exchange Fund Advisory Committee (EFAC) in maintaining the LER system and monitoring of HKMA's work. Referring to Professor Goodhart's analysis (Annex 3.6 of the Report) that HKMA's notice to banks on 23 October 1997 discouraging them from repeated borrowings from the Liquidity Adjustment Facility (LAF) had intensified the liquidity problem in the banking sector and led to a sharp rise in the interbank interest rate, he asked whether EFAC had been informed of the notice before its issue.

29. In response, the Deputy Chief Executive (Development), Hong Kong Monetary Authority (DCE(D)/HKMA) said that EFAC held regular meetings to discuss matters relating to monetary policy and measures, including the operation of the mechanism for defending the linked exchange rate system. The Committee had also examined and endorsed the Report. He further advised that the Sub-Committee on Currency Board Operations was recently established under EFAC with a view to strengthening the currency board arrangements. The main functions of the sub-committee were to advise EFAC on measures to enhance the robustness and effectiveness of the currency board arrangements and to ensure a high degree of transparency in the operation of the arrangements. As regards the notice issued on 23 October 1997, DCE(D)/HKMA clarified that it had always been HKMA's policy that banks should manage their Hong Kong dollar liquidity prudently and not be overly dependent upon LAF for last resort liquidity support. In view of the substantial short selling of Hong Kong dollars on 21 and 22 October 1997 and the anticipated liquidity shortage in the banking system, HKMA issued the circular on 23 October 1997 to remind banks about this policy and the rules of using the LAF.

30 Miss Cyd HO Sau-lan opined that with the implementation of the seven technical measures for strengthening the currency board arrangements, HKMA had increasingly been performing the functions of a central bank. She asked whether HKMA's mixed role would cause confusion and misunderstanding and affect its credibility in the international financial community.

31. In response, SFS(Ag) advised that as provided for under the Banking Ordinance (Cap 155) and the Exchange Fund Ordinance (Cap 66), HKMA was responsible for maintaining the integrity of the local banking system and the stability of the Hong Kong currency. There was no role conflict for HKMA to discharge its duties in banking supervision and currency board operations simultaneously. She also disagreed that it would give rise to confusion and misunderstanding on HKMA's role in the international financial community. As regards the need for clear and comprehensive delineation of the powers and duties of HKMA, she advised that it was the Administration's intention to propose legislative amendments in this regard. As the matter was complex and required detailed and careful study, the Administration would have to work out the way forward at an appropriate time.

32. As to the scope of the consultancy study on the banking sector mentioned in paragraph 3.108 of the Report, DCE(D)/HKMA advised that rather than a topical research focusing on features of the local banking industry, the study aimed at evaluating the strategic outlook for the banking sector for the next five years. In the course of the study, issues identified in the Report would be touched on. The study was commissioned in early 1998 and expected to be completed by the end of 1998. In response to a member, he confirmed that the study would also include issues of deposit insurance and interest rate agreement within the context of the overall development of the banking sector.

33. In view of the time constraint, members agreed to continue the discussion on the Report at the next meeting scheduled for 2 November 1998. The Chairman requested members to advise the Clerk of the aspects of the Report which they would like to focus on at the next meeting.

VII Exemption from rates of unoccupied properties
(LC Paper No. CB(1)280/98-99(04) - paper provided by the Administration)

34. Mr David CHU Yu-lin, proposer of the agenda item, expressed support to the rates rebate introduced by the Government, which had relieved the financial burden on property owners during the present period of economic downturn. He urged the Administration to further consider the possibility of exempting the rates of unoccupied properties so as to provide further relief to the general public, especially to those owners who derived their income mainly from rentals but their properties had become vacant due to the recent property market slump.

35. In response, the Deputy Secretary for the Treasury explained that the Administration was not supportive of the proposal to exempt rates on unoccupied premises as it was inequitable, would have significant revenue implications and would be costly to administer. Moreover, it would not relieve the burden of the public in general since rates only formed an insignificant proportion of household expenditure and business operating costs. As regards the problem faced by owners of vacant premises, the Acting Commissioner of Rating and Valuation (C/R&V(Ag)) said that keeping their properties vacant was largely a commercial decision of the property owners concerned since a property could normally be rented out more readily at a reduced rent. Experience revealed that owners did not keep their properties idle for long and indeed the majority of vacant premises in the market were pending sales or letting.

36. In reply to a member, C/R&V(Ag) confirmed that the Administration had not received any request from concern groups for refund of rates of unoccupied premises.

VIII Any other business

37. There being no other business, the meeting ended at 12:45 pm.

Legislative Council Secretariat
8 April 1999