TOWARDS THE ERA OF THE SAR

As this Annual Report is published, we will be very close to the time when China resumes the exercise of its sovereignty over Hong Kong. This historic occasion marks the beginning of a new era in the governance of Hong Kong. It has not therefore been a matter of surprise to me, since I took up my duties as Chairman of this Commission, that the one most frequent question that has been put to me by my regulatory colleagues elsewhere, by the constant stream of visitors to the Commission, and by the many people I come across in my overseas speaking engagements, has been whether the Hong Kong markets will continue to operate as before. My usual instant reply would be on these lines:

"Why, of course, what makes you think that our markets will operate differently?"

This invariably excites a torrent of comments and further questions, all of which belie one commonly shared perception, or as time will demonstrate, a common misconception. This perception is often stated in these terms: that given the best will in the world, the shadow cast by China will be so large that Hong Kong is likely to find itself hard pressed to regulate its markets with the high degree of autonomy that the Basic Law guarantees.
 

There is obvious room for argument as to whether this fist is exhaustive but there can be no argument that this is a fist of requirements which all businessmen would want any good business environment to possess. An economy is only armed with these qualities over time and as these qualities are built up, business begets more business. Hong Kong undeniably possesses these qualities and, in abundance, as the growth of our markets have borne witness and as the appellation, Leading International Financial Centre of Asia, becomes increasingly applied to Hong Kong. The value of cultivating these qualities cannot be lost on any rational government, least of all the Government of China which has seen the country benefit from them.
 

There is clearly no room for complacency for any international financial centre, least of all Hong Kong where there is no constraint whatsoever in the free flow of capital or trade. In a world where markets are no longer confined by geographic boundaries, the markets of Hong Kong are by definition world markets and by circumstance, subject to every competitive challenge that exists in the world today and in the future. That is why the Commission has committed itself to the three-pronged strategy set out in our 1996/1999 Corporate Plan. Our work programme since last year has been devoted to the following three strategic directions:

• Competitive Markets and Competitive Regulation
• Development of the China Dimension
• Development of Market Integrity
   

To ensure that our listed Derivative Warrants continue with added momentum, we approved major changes to the listing rules after an extensive review and market consultation. These new rules require additional attention to be paid to on-going risk management and disclosures. With a total of 296 derivative warrants listed during the year, Hong Kong has become one of the largest derivative warrant markets in the world.

We continued to work on greater transparency and higher efficiency in the markets, working in conjunction with the Stock Exchange and the Hong Kong Monetary Authority. Projects completed in this area include the amendment of the listing rules arising from the HKMA guidelines for further financial disclosure by banks, and projects underway include a comprehensive review of the mechanism for global offering of securities, a review of the Securities (Disclosure of Interests) Ordinance, a further review of the Stock Exchange's Code of Best Practice by directors, and a project for the simplification of prospectuses and announcements by listed companies. In the fund management area, two major initiatives on insurance-linked products came to fruition: the imposition of a cooling-off period of 21 days and the requirement for disclosure of surrender values.

The many rule changes in the Exchanges and clearing houses that we have considered in the past year attest to the seriousness with which our markets attend to the question of competitiveness. We should, however, be particularly mindful to the changes that technology can bring. With this in mind, we published and endorsed the Report of the Working Group on Automated Trading Systems. This Report sets out the potential changes in the horizon and the regulatory responses to these changes.

Any modern regulatory regime for the financial markets must give full recognition to the fact that there is always a community of interest between regulators and market practitioners in ensuring that there is confidence in the markets so that they may grow in size and sophistication. In keeping with this sentiment, the Commission embarked upon two major projects during the year. The first involved the publication of the Draft Securities and Futures Bill and the conduct of subsequent extensive public consultation. Altogether over 1,000 persons attended various seminars organised by the Commission and the Commission received written comments from some fifty persons and institutions. The result of the public consultation, together with the Commission's Response, was presented to the Government. At the time of writing, the Government has provided the Commission with a preliminary response but indicated that it was not possible to introduce a Bill in this legislative session. The Commission is nonetheless grateful to the Government for the efforts they have made in studying the Bill and hopes that the Bill, which vastly improves the efficiency with which the law can be found and introduces much needed modernisation to laws made 23 years ago, wffl be introduced as soon as is practicable.

The other project is the consultation paper on Guidelines for Internal Control. Good internal control in the end means good business as a number of high profile international cases, such as Barings and Sumitomo, have shown. The Commission's many seminars attracted a very considerable number of practitioners. At the time of writing, the finalised Internal Control Guidelines, taking full account of the many helpful public comments, are ready for publication.
 

With the globalisation of the markets there is obvious need for the Commission to take an active part in the formulation of international thinking on regulation. Accordingly, the Commission continued to commit itself fully to participation in the work of the International Organisation of Securities Commissions (IOSCO). During the year, 1 was elected to serve a two year term as Chairman of the Technical Committee of IOSCO. This Committee is responsible for Formulating the regulatory g which spans the 16 most developed markets of the world. I am honoured to have been the first Chairman of an Asian Commission to serve as the Committee's chairman.
 

The number of mainland capitalised intermediaries have also increased and at the end of the year stood at 28, while at the time of writing, this number has increased to 42. Also during the year, the People's Bank and the CSRC continued to make progress in their draft regulations for fund management and sent fact-finding missions to study our experience in the regulation of the fund management industry. In addition to co-ordinating closely with the CSRC in the exercise of our respective functions, we also worked closely with other financial regulators, in particular the People's Bank and the State Administration for Foreign Exchange to ensure that the mainland-capitalised intermediaries are able to continue to comply with both Hong Kong and mainland regulatory requirements.

At the same time, we felt it important to bring the Hong Kong financial markets and their regulatory ethos to the attention of the management of Chinese enterprises and of Government officials involved in the management of the economy. One major event was the "Hong Kong: Towards a New Financial Era" seminar in Beijing jointly organised by the Commission, the Hong Kong Monetary Authority, and the Hong Kong Stock and Futures Exchanges. In addition, we participated actively in seminars in China for prospective listing candidates.
 

While our approach has been remedial, we are determined to bring all breaches we can discover to book. We have thus been working closely with the Exchanges to improve our surveillance and detection ability. This is an area where we are still continuing to apply new techniques in information technology. An example of the inroads we have made in the use of technology may be found in our first successful prosecution of a case involving a breach of the Protection of Investors Ordinance through the Internet as a result of our Internet surveillance. Surveillance has also paid dividends in improved detection of insider trading and market manipulation cases. This year saw the completion of three insider trading cases before the Insider Dealing Tribunal. Four cases are being heard at the time of writing.

Another area where we are determined to protect investors lies in our civil cases. In the Canwell case, we obtained full restitution for all the margin clients of the faded Leveraged Forex Trader. We shall continue to pursue the Mandarin Resources case through the High Court until the minority shareholders are adequately compensated.
 

More than ever before, we hold our future in our own hands.

Anthony Neoh, QC, JP
Chairman