Until the mid-1970s, stock and commodities markets in Hong Kong were largely unregulated. After the stock market crash of 1973-1974, the Government intervened and the core legislation governing the securities and futures industry was enacted.

The legislation was administered by two part-time Commissions - one for securities and the other for commodities trading - and their executive arm, the Commissioner for Securities and Commodities Trading, who headed the Office of the Commissioner for Securities and Commodities Trading, which was established as part of the Government. This structure remained largely unchanged for over a decade, during which time there was rapid change in the securities and futures markets, both internationally and in Hong Kong.

Inevitably, the existing regulatory structure fell behind. In 1987, the deficiencies in the structure were made all too apparent by the October crash, which resulted in the closure of both the Hong Kong stock and stock index futures markets for four days. In the aftermath of the crash, a six-member committee, the Securities Review Committee, chaired by Ian Hay Davison, was created to examine Hong Kong's regulatory structure and regime and how they could be improved, to minimise the chances of a repeat of the disruption and chaos of October 1987.

In May 1988, the Committee released its report*, which concluded that the Office of the Commissioner for Securities and Commodities Trading had insufficient resources properly to regulate the rapidly growing and changing Hong Kong market.

The Committee found that too much effort had been spent on ineffective routine vetting, instead of active surveillance and monitoring of markets and intermediaries. The two commissions were not regulating effectively because they lacked strong direction and had become passive and reactive, instead of being active and proactive.

The Committee recommended that the then existing structure should be replaced with a single statutory body outside the civil service, headed and staffed by full-time professional regulators and funded primarily by the market. In their view, such a body should have broad investigative and disciplinary powers to enable it to perform its regulatory functions effectively.

Thus, in May 1989, following the enactment of the Securities and Futures Commission Ordinance, the SFC was born.

* Davison Report extracted from Part II of The Securities Regulation of Hong Kong .