International Regulatory Cooperation
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Regulatory Agreements
5.1	The increasingly close relationship of markets around the world, as evidenced by the turmoil in Asian markets, highlights the great importance of international regulatory cooperation. As in previous years, the SFC continued its commitment to cooperate with regulatory authorities of other jurisdictions.
5.2	During the year, the SFC signed Memoranda of Understanding (MOUs) with the Comissao de Valores Mobiliarios of Brazil, the Commissione Nazionale per le Societa e la Borsa of Italy (Consob) and the Bundesaufsichtsamt f? den Wertpapierhandel (BAWe) of Germany. Both Consob and BAWe possess powers to provide investigatory assistance, similar to section 59A of the Securities and Futures Commission Ordinance, which they are willing to exercise on behalf of the SFC.
5.3	In addition, the SFC concluded three Declarations on Cooperation and Supervision of Cross-Border Investment Management Activity with the Comission des Operations de Bourse of France, Central Bank of Ireland and the Bundesaufsichtsamt f? das Kreditwesen of Germany. These Declarations provide for exchange of information to enhance each authority's ability to supervise investment management activities, particularly where a collective investment scheme is marketed in one jurisdiction but managed in another jurisdiction.
5.4	The SFC has also entered into informal exchange of information arrangements with the Swiss Federal Banking Commission (SFBC) after the Stock Exchanges and Securities Trading Act came into effect on 1 February 1997 enabling the SFBC to provide investigatory assistance to its overseas counterparts.
5.5	The SFC has to date entered into 29 cooperative arrangements and 12 informal exchange of information arrangements with overseas regulators.
The International Organisation of Securities Commissions (IOSCO)
5.6	IOSCO, which now has 148 regulatory authority members from 90 jurisdictions representing more than 85% of the world's capital markets, was formed to enable members:
	l	to cooperate to ensure better regulation of the markets, on the domestic as well as international level, in order to maintain just and efficient markets;
	l	to exchange information on their respective experience in order to promote the development of domestic markets;
	l	to unite their efforts to establish standards and an effective surveillance of international securities transactions; and
	l	to provide mutual assistance to ensure the integrity of the markets by a rigorous application of standards and by effective enforcement against offences.
5.7	The SFC is an IOSCO member, and a member of its Technical Committee, which is made up of 16 IOSCO members which regulate some of the larger and more developed securities markets in the world. Its objective is to review major regulatory issues related to international securities transactions and to coordinate practical responses to these concerns. Anthony Neoh, Chairman of the SFC, was appointed Chairman of the Technical Committee in 1996.
5.8	During 1997/98, the SFC continued to participate actively in the work of the Technical Committee, including the work of Working Party 1 on Multinational Disclosure and Accounting, Working Party 2 on Regulation of Secondary Markets, Working Party 3 on Regulation of Market Intermediaries, Working Party 4 on Enforcement and Exchange of Information and Working Party 5 on Investment Management. The main issues dealt with by the Technical Committee and its Working Parties during the year are summarised below.
Multinational Disclosure and Accounting
5.9	Working Party 1 on Multinational Disclosure and Accounting considers accounting and auditing matters. The principal task of the Working Party is to work with the International Accounting Standards Committee (IASC) to complete a core body of accounting standards that can provide a comprehensive financial reporting framework suitable for international equity offerings. The IASC expects to complete the core accounting standards by the end of 1998. The Working Party is preparing a report on the non-accounting disclosures requirements of prospectuses for approval by the Technical Committee in 1988. The Working Party is also discussing the status of International Standards on Auditing with the International Auditing Practices Committee.
Regulation of Secondary Markets
5.10	Working Party 2 on Regulation of Secondary Markets has been involved in a number of initiatives during the year. First, Working Party 2 has undertaken to examine the problems and opportunities associated with the use of the Internet for securities and futures businesses. Taking into account that its use will surely increase and be further developed in the future, members are discussing possible favorable uses of the Internet, particularly in regard to secondary market securities and derivatives transactions. Regulatory implications and other problems emerging from its use are also part of Working Party 2's mandate and are being closely examined.

5.11	A second major initiative involves the Year 2000 computer problem, which presents a serious challenge to the world's financial markets. The Technical Committee of IOSCO has issued a statement that all IOSCO members and market participants should take all necessary and appropriate action to address the problem. Working Party 2 conducted a survey of its members to ascertain what actions are being taken within member jurisdictions. Follow-up surveys will be carried out approximately every six months until 2000 to monitor the progress of remedial action and testing.
5.12	Third, Working Party 2 completed a survey of the methods and scope of Working Party 2 members' supervision of regulated markets and clearing houses. The survey was directed expressly at identifying the practical measures IOSCO members use to ensure the integrity and appropriate infrastructure of secondary markets. The results of the survey also identified some common areas of difficulty which would benefit from further discussion and collaboration by members. It is believed that the results of the survey can be used to develop some practical guidance for benchmarking regulators' supervision techniques.
5.13	Amongst its other initiatives, a joint working group has been formed with the G-10 Central Bank Committee on Payment and Settlement Systems (CPSS) to study the worldwide development of securities lending and its implications for securities regulators and central banks, in particular its implications for securities clearance and settlement systems. Towards that end, a survey of securities lending activity will be conducted of firms active in each major segment of the global securities market.
Supervision of Market Intermediaries
Disclosure about Trading and Derivatives Activities of Banks and Securities Firms 1996
5.14	The 1996 annual survey of Disclosure about Trading and Derivatives Activities of Banks and Securities Firms by the Basle Committee Information sub-group and Working Party 3 of the IOSCO Technical Committee has been completed and was published on 3 November 1997.
5.15	The results of this survey show enhanced disclosure of value-at-risk data and assumptions underlying value-at-risk models. In addition, institutions expanded their discussion of operating and legal risks and provided more information about the valuation techniques for trading and derivatives activities and the accounting treatment for derivatives credit losses.
Client Asset Protection Self-Evaluation Questionnaire
5.16	In conjunction with the published report on Client Asset Protection, a self-evaluation questionnaire has been compiled to assess where all IOSCO members stand in the use of the standards and practices described in the report. The questionnaire was distributed to all IOSCO members in December 1997 and is intended to encourage and assist authorities to assess the extent to which the regimes they administer for the protection of client assets held by investment firms conform to the recommendations in the report.
Joint Forum Papers in consultation
5.17	The following Joint Forum papers were issued for consultation to the industry and the supervisory community in each sector: Capital Adequacy Principles; Fit and Proper Principles; Framework for Supervisory Information Sharing; and Principles for Supervisory Information Sharing.
5.18	As the Working Party responsible for intermediaries, Working Party 3 reviewed the report and offered comments and suggestions to the IOSCO Technical Committee for feedback to the Joint Forum.
Revising the joint 1995 Basle Committee/lOSCO Supervisory Information Framework for Derivatives
5.19	As part of the continuing effort by the Basle Committee and by IOSCO to monitor the trading and derivatives activities of banks and securities firms, Working Party 3 together with the IOSCO Information sub-group have been actively revising the draft in order to enhance the supervisory information framework. Work is continuing in this area.
Risk Management and Control Guidance for Securities Firms and their Supervisors
5.20	The Technical Committee has approved for publication a Working Party 3 report on "Risk Management and Control Guidance for Securities Firms and their Supervisors" in March 1998.
5.21	The purpose of the report is to provide guidance to and encourage discussion among supervisors concerning risk management policies and internal control systems for regulated and unregulated securities intermediaries and end-users in order to develop a strong domestic and international risk management structure.

Enforcement and Exchange of Information
5.22	Pursuant to the 1994 IOSCO resolution on "Commitment to Basic IOSCO Principles of High Regulatory Standards and Mutual Cooperation and Assistance", Working Party 4 commenced a self-evaluation exercise covering IOSCO members' capabilities in respect of international cooperation. During the year, the SFC was actively involved in this self-evaluation exercise and in the assessment of responses submitted by members from the Asia Pacific region.
5.23	The self-evaluation exercise resulted in a November 1997 "Resolution on Principles in the Area of Record Keeping, Collection of Information, Enforcement Powers and Mutual Cooperation with a View to Improving the Enforcement of Securities and Futures Laws by the Technical Committee" and the publication of a report on the self-evaluation exercise itself. This report, based on responses received from 79 out of 87 member jurisdictions, provides a useful reference document for IOSCO members on matters relating to international cooperation and exchange of information.
5.24	During the year the Internet Task Force of Working Party 4 completed work on its mandate on "Issues raised by the increasing use of public electronic networks in the securities and futures field". Its report on enforcement issues in this area has been adopted by the Technical Committee.
5.25	There is also a growing relationship between Working Party 4 and the Emerging Markets Committee Working Group 4. In May 1997, the results from a survey on price manipulation of shares prices on securities markets conducted by Working Group 4 was discussed in a joint meeting of both groups. It was recognized that the sanctions available to combat price manipulation vary from jurisdiction to jurisdiction and that there is a need for international cooperation to counter such activities. At the same meeting, the SFC recommended devising a regional enforcement training program. This recommendation has since been developed into a wider securities regulators training program with the World Bank, Asian Development Bank and the APEC Securities Regulators Training Consultative Group also participating. It is hoped that the first program will be conducted in the forthcoming year.
Investment Management
First Globally Co-ordinated Inspection
5.26	The international co-operation arrangements on supervision of cross-border investment management activity have facilitated and resulted in the first global coordinated inspection, jointly organised with the Investment Management Regulatory Organisation (IMRO) in the UK and the US Securities and Exchange Commission (US SEC). Intended as a pilot scheme, the review focused on global supervisory functions and cross-border activities of an international fund management group with world-wide operations, areas which might not have been examined during routine local inspections carried out in the respective jurisdictions.
5.27	Given the increasingly globalised nature of investment management businesses, the success of the co-ordinated inspection demonstrates the importance of co-operation amongst international regulators in enhancing the supervision of cross-border investment management activities. It is envisaged that such co-ordinated efforts will persist in the coming year and cross-border supervision will continue to evolve to ensure effective monitoring of global investment management activities.
IOSCO Working Party No 5 on Investment Management
5.28	Hong Kong continues to be an active member of Working Party 5 on Investment Management. In 1996, Working Party 5 took on a new mandate to review issues relating to the supervision of fund managers A discussion paper on "Principles for the Supervision of Operators of Collective Investment Schemes" was finalised during the year. The paper aims to assist IOSCO members in reaching a common approach in effective supervision of operators of collective investment schemes. It is also anticipated that the Principles will better enhance cooperation among IOSCO members in supervision of the increasingly global investment management industry.
5.29	Working Party 5 also undertook to review issues in relation to the supervision of offers of collective investments on the Internet. With rapid advancements in technology, this is a typical area for which international co-operation amongst different regulators and the setting of common standards is much desired. Various Internet issues are being discussed with a view to preparing a report to the IOSCO Internet Task Force (ITF) which incorporates Working Party 5's views on these issues. The objective of the ITF is to facilitate industry developments by only developing principles at a very broad general level, thereby leaving the industry a greater degree of flexibility to use new technologies within broader parameters set by regulators.

The IOSCO Asia Pacific Region Committee
5.30	In addition to the SFC's participation in the work of the IOSCO Technical Committee, it is also an active member of the IOSCO Asia Pacific Region Committee (APRC). The APRC has to date 17 members from the region. APRC members and their enforcement heads meet regularly to discuss policy and operational issues.
5.31	At the APRC meeting held in Mumbai, India between 11-13 February 1998, members and their enforcement heads discussed a wide range of topics arising from the turbulent market conditions seen in the Asia Pacific since mid 1997. In view of the greater need for cooperation amongst regulators, a resolution was passed at that meeting calling upon members to use their best endeavours to provide mutual assistance to each other in order to achieve more effective regulation of market intermediaries.
Ongoing Regulatory Cooperation
5.32	During the year, the SFC received and processed 42 enforcement-related requests for information of which 17 were for non-public information. The SFC also received 199 licensing-related requests for non-public information from overseas regulatory bodies. The SFC itself made 996 requests to overseas regulatory bodies for non-public licensing-related information and 8 requests for enforcement-related information.
5.33	In addition, the SFC received 11 requests from overseas regulatory authorities for investigatory assistance and itself made 15 requests to overseas regulatory authorities for investigatory assistance. The SFC exercised its powers under section 59A of the Securities and Futures Commission Ordinance and section 63A of the Leveraged Foreign Exchange Trading Ordinance in response to a request from Australian Securities Commission (ASC) and one from US Commodity Futures Trading Commission (US CFTC) respectively. The assistance provided in these cases included obtaining affidavits, witness' statements, non-public records and documents to assist overseas regulators, in accordance with the MOUs with these commissions. The SFC also provided assistance to the US CFTC in serving notices of hearing before an administrative judge to two Chinese males in Hong Kong.
5.34	Between 1996 and 1997, the SFC provided investigatory assistance to the US SEC in an insider dealing case whereby the alleged tipper and tippee resided in Hong Kong. With the assistance of the SFC, the US SEC was able to authorise an emergency lawsuit charging the tippee with illegal insider trading, resulting in the cancellation of the trades. Subsequently, the US SEC filed an insider dealing lawsuit in Federal District Court against the tippee on 26 June 1997. The tippee later consented, without admitting or denying the allegations, to be enjoined from violating the antifraud provisions of the Federal securities laws and to pay US$2 million in civil penalties.
5.35	Since 1996, the SFC has also been providing investigatory assistance to assist the US SEC in a market manipulation case which involved the transfer of trading profits to nominee bank accounts in Hong Kong. The US SEC's investigation resulted in the commencement of legal proceedings against two businessmen in February 1998, seeking to compel them to pay back their trading profits and to have them banned from holding company directorships in the US in the future.
5.36	Another case arising out of international regulatory cooperation is the case of Nomura (as mentioned in paragraphs 3.58 to 3.60, the conduct subject of the SFC disciplinary proceedings and ASC litigation took place in 1996). This case raises serious issues regarding the difficulties and problems regulators encounter in regulating entities that operate in multiple jurisdictions, and the need for coordination for effective enforcement of securities and futures laws.
5.37	During the year, the SFC obtained assistance from the China Securities Regulatory Commission, Australian Stock Exchange, US SEC, Commission des Operations de Bourse of France and Swiss Federal Banking Commission in obtaining non-public records and documents for its investigations.