HONG KONG: THE SECURITIES MARKET

In this Section:

- HONG KONG OFFSHORE BUSINESS SECTORS
- HONG KONG BANKING AND FINANCIAL SERVICES
- HONG KONG VENTURE CAPITAL SECTOR
- HONG KONG INVESTMENT FUND MANAGEMENT
- HONG KONG FINANCIAL HOLDING AND INVESTMENT ACTIVITIES
- HONG KONG HEADQUARTERS COMPANIES
- HONG KONG BOOKING CENTRE COMPANIES
- HONG KONG PROFESSIONAL SERVICES
- HONG KONG INSURANCE
- HONG KONG SHIP MANAGEMENT AND MARITIME OPERATIONS

Hong Kong has the world's 10th largest securities market and the second largest in Asia after Tokyo. As of March 2000 the Hong Kong Stock Exchange and the Futures Exchange were merged into Hong Kong Exchanges and Clearing (HKEx). The launch of the Growth Enterprise Market (GEM) in November 1999 for smaller and high growth companies has broadened Hong Kong's stock market, although the timing of GEM's launch was unfortunate, and the 'dotcom' shakeout in 2000 weakened its initial impact.

The influx of Mainland China issuers into Hong Kong, boosted by economic reforms, has accelerated the growth of the Hong Kong market.

Being the most liquid overseas market for mainland enterprises, Hong Kong's capital market will play a key role in funding China's state-owned enterprises reform, as well as its massive infrastructure development program.

Hong Kong Exchanges and Clearing (HKEx) saw a 67% year-on-year income surge in the first half of 2007 to HKD3.16 billion (USD404 million), driven by higher turnover-related income.

Net investment income more than doubled as a result of higher net interest income and a surge in fair value gains of corporate fund investments this year. Moreover, HKEx disposed of its entire interest in Computershare Hong Kong Investor Services, and generated a HKD206-million gain.

According to HKEx's 2007 half-year interim results, the average daily turnover in the period was HKD59.2 billion, up 82% over a year earlier. The average daily number of derivatives contracts traded on the Futures Exchange surged 50% to 145,852, while that for stock options contracts traded on the Stock Exchange doubled to 131,040.

At the end of June, 2007, there were 1,002 and 194 companies listed on the Main Board and Growth Enterprise Market respectively, with a total market capitalisation of about HKD15.85 trillion.

HKEx announced in its third quarter 2008 results that, as at September 30, 2008, 1,078 and 181 companies were listed on the Main Board and the Growth Enterprise Market (GEM) respectively with a total market capitalisation of about HKD12.55 trillion (USD1.6 trillion). Total capital raised during this period, including post-listing funds, reached HKD182.2bn. The average daily turnover in the first nine months of 2008 was about HKD79bn on the Main Board and about HKD262m on the GEM.

In June, 2006, the float of Bank of China raised a total of USD9.725 billion (HKD75.9 billion) at a price of HKD2.95 per share.

The retail tranche, was raised from 5% to 10% of the IPO through a 'clawback' mechanism. The international tranche was also 'very significantly over-subscribed' said the bank.

Several foreign institutions acquired shareholdings in BOC in the run-up to the listing, including a 5% stake by Singaporean government investment company Temasek Holdings, and a 10% stake by a consortium of US banks. There was opposition in Beijing to the Hong Kong 'H'-share flotation from domestic interests who were opposed to what they see as 'selling off the family silver'. Under the terms of its WTO accession, China is due to open up its heavily-restricted domestic banking sector in 2007.

The Hong Kong operations of the Bank of China were regrouped into Bank of China (Hong Kong) in 2001, and a 2002 flotation was successful, with the 90% institutional tranche being over-subscribed 4.3 times, and the 10% retail tranche being over-subscribed 24 times. 35% of the issue was allocated to retail investors, and 65% to the institutions. The 385,000 applicants receiving shares made the bank the second most widely held public company in Hong Kong, after railway operator MTRC, which has more than 400,000 shareholders.

The China Construction Bank, another of the top four mainland banks, raised USD8bn in October, 2005.

According to John Tsang, Hong Kong government Financial Secretary, the Special Administrative Region's (SAR's) growing stake in Hong Kong Exchanges and Clearing (HKEx) relects the government's long-term confidence in the exchange.

Tsang's comments came as the Hong Kong government announced that its shareholding in HKEx for the Exchange Fund account had grown beyond 5% to 5.88%.

"HKEx is one of Hong Kong's principal engines of growth, an important part of our financial infrastructure, and a key agent in the growth of Hong Kong as an international financial centre," Tsang stated.

"This acquisition underlines the government's support for HKEx and enables the government, over the longer term, to contribute as a shareholder to the promotion of HKEx's strategic development," he added.

The government made a voluntary disclosure that it had become a miniorty controller of HKEx on September 10, 2007, after having notified the exchange itself on September 7.

After Chinese Premier Wen Jiabao announced in Singapore, in November 2007, that he did not agree with the cash withdrawal limits placed on Shenzhen banks, they were hastily withdrawn, leaving the underground pipeline that has been sustaining Hong Kong's booming stockmarket in full flood.

"The Shenzhen banks' motives are good but they could employ better methods," said Wen. "We should have taken measures that were more effective and that were acceptable to the public."

The Chinese authorities are of course fully aware of the flow of illegitimate cash to Hong Kong, caused by Chinese exchange controls, and they are under heavy pressure to liberalize the renminbi. It was this that had led to the now-abandoned 'through-train' proposal to allow investment in Hong Kong stocks through defined channels.

Shenzhen banks had set a daily withdrawal limit of Renminbi 30,000 on personal accounts. "If the illegal fund flow is not controlled, it will affect the financial stability in the country, including Hong Kong," Wen said, but it's not clear what action Beijing will now take.

It's not just the official banks that operate the pipeline: the local equivalent of hawali money-exchange networks are involved, and there are many parallel unofficial links between individuals. In fact the border is so porous that it's difficult to see how some form of liberalization can be avoided. Local estimates are that the daily flow of cash between Hong Kong and Shenzhen amounts to several billion renminbi.

Listing

A major element of HKEx’s mission depends on demonstrating the effective discharge of its regulatory responsibilities. The Listing Division has a keen and continuing interest in demonstrating that it is discharging its responsibilities effectively and making itself more effective. HKEx welcomes the steady improvement of corporate governance in Mainland companies listed in Hong Kong and intends to do all it can to ensure that this improvement continues.

Amendments to the Main Board and GEM Listing Rules designed to enhance corporate governance and market quality came into effect on March 31, 2004. They included new provisions on notifiable transactions and connected transactions, revised classifications of notifiable transactions and connected transactions, revised definitions of the terms “reverse takeover”, “connected person” and “associate” of a connected person, revised requirements for refreshment of general mandate and revised requirements on the disclosure of directors’ remuneration in annual reports.

In addition, there have been changes in the initial listing eligibility criteria, listed companies’ continuing obligations and the disclosure requirements at the time of listing.

In September, 2006, the SFC released the Consultation Conclusions on the reform initiatives proposed under a drive to modernise the regime governing the public offering of shares and debentures in the Companies Ordinance.

In August, 2005, the SFC had consulted the public on 21 reform initiatives relating to the CO prospectus regime and received 26 submissions from market practitioners, issuers and professional bodies.

There was broad support for the majority of the initiatives, but certain of the proposals have been revised in light of public comments received.

Brian Ho, the SFC’s Executive Director of Corporate Finance, announced that: “Implementation of the initiatives proposed to be taken forward will more closely align Hong Kong's public offering regime with that of other leading jurisdictions and support Hong Kong's continuing role as an international financial centre."

"Consolidation of all securities laws in a single piece of legislation marks a significant step after the implementation of the Securities and Futures Ordinance in our drive to conform the regulatory philosophy and eliminate opportunities for regulatory arbitrage.”

Some of the key initiatives proposed and consulted upon were:

• To consolidate securities laws in a single piece of legislation, the provisions in the CO relating to the public offering of shares and debentures will be moved to the Securities and Futures Ordinance (SFO) as a discrete part separate from the investment advertisement regime in Part IV of the SFO.
• To harmonise the legal and regulatory treatment of investment arrangements and instruments with broadly similar risk and reward exposure, public offers of structured products will be subject to regulation under Part IV of the SFO, whilst plain vanilla share or debenture offers will be governed under the separate prospectus regime. This should reduce regulatory arbitrage.
• The focus of the prospectus regime will be changed from a “document-based” to a “transaction-based” approach by regulating the act of offering rather than any document containing the offer.
• Offerors will be regulated without regard to place of incorporation or their legal form. This will bring the prospectus regime into line with the investment advertisement regime in Part IV of the SFO, which regulates advertisements and invitations issued by any person, whether made in writing or otherwise.
• To attach liability unequivocally to specified persons responsible for the prospectus, prospectus liability will be imposed on (i) the issuer and/or the offeror of the shares or debentures; and (ii) each person who accepts, and is stated in the prospectus as accepting, responsibility for the prospectus. In view of the market response and the new Guidelines for Sponsors and Compliance Advisers issued by the SFC which will come into effect on 1 January 2007, imposition of prospectus liability on sponsors is viewed as premature.
• In order to provide investors with withdrawal rights where materially adverse new developments occur prior to the results of allocation being announced, the issuer of the prospectus will be required to publish a supplemental prospectus and provide successful applicants with a right to withdraw their allocations and be repaid in full. The offer period will not be required to be extended or re-opened – this will allow the scheduled date for refund of surplus application moneys and unsuccessful applications to remain unchanged.

According to the SFC, the following proposals would not be taken forward at that stage:

(i) Proposal 9 – to extend the classes of persons who may claim compensation for a misstatement in a prospectus to subsequent purchasers who buy in the secondary market;

(ii) Proposal 10 – to remove the requirement for claimants to prove that they have actually read and relied on the prospectus when making a claim for compensation;

(iii) Proposal 17 – to extend the 3-day waiting period before allotments of shares or debentures in the case of initial public offers of shares or debentures and the removal of the 3-day waiting period for allotments in the case of public offers of shares or debentures of a class already listed;

(iv) Proposal 18 – to provide that an application form or procedure for shares or debentures may not be distributed or implemented by any person unless it is accompanied by or contained in a prospectus which complies with the prospectus provisions or is exempted from them;

(v) Proposal 20 – to introduce a separate regulatory regime to regulate offers to employees and their dependants, including a requirement for a declaration of solvency and going concern by the directors and auditors of the company; and

(vi) Proposal 21 – to provide that an issue or sale of securities in contravention of the law should be void or voidable.

In September, 2006, it seemed that Chinese 'red chip' listings were threatened by new rules which came into effect to control abuse of the restructuring process needed to transfer assets into offshore control.

A 'red chip' share is formed when a Chinese company transfers its assets into the ownership of an offshore holding company, typically in the Cayman Islands or the British Virgin Islands, prior to a listing in Hong Kong or New York. Historically there has been little control over the process, allowing Chinese owners to sell assets to the offshore companies at artificially low prices, encouraging capital flight.

The new regulations cover the valuation of assets to be transferred, and permission for each issue will have to be given by the Ministry of Commerce. Brokers and issuers fear that if the rules are applied retrospectively, whether to already listed stocks, or to those in the issuance pipeline, there will be delay and confusion in the markets.

The new rules also seek to control the use of the proceeds of a red chip issue by requiring listed companies to repatriate funds obtained through listing and to report on the process to the State Administration of Foreign Exchange.

Measures to improve the registration system for non-Hong Kong companies were put in place from December 14, 2007, the Financial Services and the Treasury Bureau announced.

Under the Companies (Amendment) Ordinance 2004: the registration regime for overseas companies will be modernised; "overseas companies" will be renamed "non-Hong Kong companies" and will be obliged to file a full annual return; a new service of issuing certificates of registration in respect of non-Hong Kong companies will be introduced.

The Registrar of Companies has also appointed the same date to implement the Companies Ordinance (Amendment of Eighth Schedule) Order 2007, giving effect to the amended statutory fees for non-Hong Kong firms.

The Order replaces the existing filing fees concerning non-Hong Kong companies with a single filing fee, and introduces a new fee for the issue of registration certificates.

Escalating fees for the late filing of annual returns by non-Hong Kong firms are also being introduced, to encourage compliance with the filing requirements under the Companies Ordinance and the timely disclosure of corporate information.

As regards the new single filing fee, it is set on the basis of the "revenue neutral" principle. However, according to the announcement, non-Hong Kong companies, on average, would not pay more when compared with the fees payable at present as long as their annual returns are filed within the deadline prescribed in the Companies Ordinance, that is, within 42 days after the anniversary date of registration.

The Hong Kong Stock Exchange has adopted measures to enhance the stock trading suspension mechanism's transparency, Secretary for Financial Services and the Treasury Professor KC Chan announced in October, 2007.

The measures include publishing the conditions imposed for resumption, asking the suspended issuer to publish a regular update, and automatically invoking the delisting procedure if a security has been suspended for a prolonged period of time without the issuer taking steps to achieve resumption.

Professor Chan told lawmakers on Wednesday that as of October 16, 29 Main Board and 16 Growth Enterprise Market listed companies were regarded by the exchange to be long-suspended. Thirty-eight of these companies had been suspended from trading for a period of more than one year.

Professor Chan explained that: "For these companies there are a variety of reasons why trading has yet to resume after such a period. Resumption of trading will depend on the circumstances of each company and its efforts to address the circumstances pertaining to the on-going suspension. Most of these companies are experiencing financial difficulties or lack sufficient operations to maintain their listing status."

According to Chan, the Hong Kong government has stated that a lack of co-operation or responsiveness from listed issuers was the main cause for the prolonged suspension of a number of them, in addition to the lack of transparency in the process. The majority of such suspended listed issuers either delayed the provision of relevant information, or provided incomplete and piecemeal information regarding the problem that led to the suspension.

Without the full co-operation of the listed issuers, the Exchange will be denied the information necessary to form a complete picture of the extent of the problems faced by a listed issuer, he added.

In May 2008, HKEx published its Growth Enterprise Market Consultation Conclusions. They include details on the proposed development of GEM as a second board and as a stepping stone to the Main Board.

Listing Rules amendments will be introduced to reflect the new role of the market but GEM will largely retain its existing structure. The key changes are:

• Under new quantitative admission requirements, applicants will need to have achieved positive cash flow of not less than $20 million in aggregate for two preceding financial years;
• The power to approve the admission of new issuers to GEM will be delegated from the GEM Listing Committee to the Listing Division, and the GEM Listing Committee will retain monitoring, appeal and policy responsibilities;
• Continuing obligations of GEM listed issuers will be brought closer to the requirements applicable to the Main Board requirements;
• Existing GEM issuers will be required to comply with the new rules from their effective date, except that in the case of the public float requirement they will be given a three-year grace period; and
• The process for transferring listing from GEM to the Main Board will be streamlined and there will be a 50% cut in the Main Board initial listing fee for all transfer applicants from GEM.

Also in 2008, an independent strategic review of the HKEx listing regime was commissioned, and this is likely to lead to new proposals in 2009.

In October, 2009, Jersey companies were approved for listing on the Hong Kong Stock Exchange. The move is a significant development for Jersey’s finance industry, which is seeking to increase business flows from the Asia Pacific region.

The formal inclusion of Jersey companies on the Hong Kong Exchange’s approved list is the result of more than a year’s negotiation, research and document preparation involving government officials in Jersey, representatives from Jersey Finance, and the finance industry.

Robert Kirkby, Technical Director of Jersey Finance, commented: “Gaining access to a major capital market such as Hong Kong is further excellent news for Jersey and is a step forward in our ability to attract new business from the region. The move by the Exchange authorities adds weight to Jersey’s reputation as a rigorously supervised, highly regarded jurisdiction and also demonstrates how the market in Asia views the quality and robustness of Jersey company law. Moreover it gives further impetus to the formal opening of our second overseas office in Hong Kong later this month and is very welcome news.”

Technology

Hong Kong Exchanges and Clearing (HKEx) introduced AMS/3, a third generation automatic order matching and execution system, in late 2000. In February 2001 it added an Order Routing System (ORS). ORS is an open system that enables investors to place stock market orders through the Internet, mobile phones and other electronic channels, which may be developed by HKEx or vendors. After an order is placed through an electronic channel connected to ORS, the system automatically sends the order to a Stock Exchange Participant for approval and submission to the market for matching and execution.

More than 100 Stock Exchange Participants have so far connected to ORS, and are able to offer their clients Internet trading. All Stock Exchange Participants, including those who have connected to the HKEx channel, will also be able to offer their clients electronic trading services, including Internet and mobile trading, through Proprietary Network System (PNS) channels provided by vendors.

CCASS provides settlement services under which securities are credited or debited to participants' CCASS stock accounts and funds are recorded in the participants' money ledgers on settlement day.

Details of all Exchange trades, including trade data and trade amendments, are electronically and automatically transmitted to CCASS by the Stock Exchange on each trading (T) day. There is no need for broker participants to input or further confirm their trade details in CCASS. Broker participants receive Provisional Clearing Statements of their stock and money positions through their CCASS terminals shortly after 1800 hours on each T day for reconciliation. Final Clearing Statements are available to broker participants shortly after 1400 hours on T+1 day for confirmation purposes.

Portware LLC, a leading independent provider of global, broker-neutral, multi-asset trading and strategy systems, announced in August 2007, the opening of its Hong Kong office to support its growing client base in the Asia-Pacific region.

Damian Bierman, formerly head of FIX Product Services at trading solutions provider NYFIX, in Hong Kong, has been appointed to head up the Portware Hong Kong office and oversee day-to-day operations. The office will focus on implementation management and support, and is staffed by regional specialists and experienced project managers from Portware’s US headquarters.

Portware has seen a rapid growth in demand from buy- and sell-side firms for its easily deployed multi-asset trading and strategy systems. Portware’s flexible framework offers a full range of components from ready-to-trade systems through to customizable enterprise solutions, enabling financial institutions to quickly integrate execution management tools and manage complex trading strategies and risk in one place. Through a combination of Portware’s open Application Programming Interface (API), plug-and-play architecture and regional development support, Portware’s Asia-Pacific customers are able to achieve a high degree of localization, tailored specifically to the varied needs of the Asia-Pacific markets.

Bank Negara Malaysia and the Hong Kong Monetary Authority (HKMA) announced, in October 2007, the implementation of a cross-border delivery-versus-payment (DvP) link between Hong Kong’s US dollar real time gross settlement (RTGS) system.

The DvP link will help eliminate settlement risk for US dollar bonds issued and traded in Malaysia, by ensuring simultaneous delivery of US dollars in Hong Kong and US dollar bonds in Malaysia.

The DvP settlement services provide the necessary settlement infrastructure to support potential issuance of US dollar bonds in Malaysia, as part of the initiatives to promote Malaysia as an Islamic financial centre and Hong Kong as an international financial centre.

The new link builds on the success of the payment-versus-payment (PvP) link between Hong Kong's US dollar RTGS system and Malaysia's Ringgit RTGS system that was established in November 2006.

The Hong Kong Monetary Authority (HKMA) has announced the launch of the electronic trading platform (ETP) for Exchange Fund Bills and Notes (EFBNs), which commenced operation on 11 December 2007.

The ETP is designed to enhance price transparency among the market players, and streamlines the trading process. With the launch of the ETP, market players can identify their trade counterparties and conclude deals more efficiently. The ETP is designed to be flexible enough to allow it to be set up according to the specific requirements of individual market players.

"The launch of the ETP is an endeavour by the HKMA and the Treasury Markets Association (TMA) to encourage electronic bond trading, a practice which has increasingly been adopted by more advanced bond markets in the world," commented Eddie Yue, Deputy Chief Executive of the HKMA, and Chairman of the Executive Board of the TMA.

The launch of the ETP is one of the recommendations arising from the Review of Debt Market Development completed by the HKMA in late 2006. The ETP provides the necessary infrastructure to support electronic trading of other bonds in addition to EFBNs, and can be extended to cover other financial instruments available in the market. Besides market players in Hong Kong, overseas market players are also encouraged to use this platform when trading bonds and other financial instruments issued in Hong Kong.

The ETP is developed and operated by Bloomberg LP, with advice on functional design and testing provided by a User Group established by the Treasury Markets Association (TMA).

HKEx has announced a three-year plan to revamp AMS/3 (end of 2009) and develop the next generation trading system with enhanced functionality and capacity (2012).

Regulatory Structure

The Stock Exchange of Hong Kong (SEHK) operates as a private entity. Thus when the stock market crashed in 1987, the Securities Commission had no legal authority to intervene in the affairs of the SEHK. The regulatory infrastructure for the securities industry has since been revamped and, in 1989, the Securities and Futures Commission Ordinance was enacted. The Ordinance provides the legal basis for the SFC to supervise and regulate the securities industry. The SFC now has the authority to take actions necessary to protect the safety of the securities market and to prosecute individuals who breach securities market ordinances and codes.

After the stock market crash of 1987, the SFC was charged with overhauling the regulations that govern securities market participants. Applicants for a license to deal in securities or operate as an investment adviser are now required to meet the "fit and proper person" criterion. Applicants seeking a dealer’s license must also have minimum net capital of HKD5 million. Although there is no deposit insurance for bank customers, there is a compensating fund for individuals whose brokers default on funds owed.

In 1991 the Securities (Insider Dealing) Ordinance was amended, resulting in higher penalties for insider trading. Fraud and misrepresentation are also punishable by the SFC. Another ordinance enacted in 1991 calls on a company’s directors and executives, as well as those who acquire more than 10 percent of a company’s voting shares, to publicly disclose their dealings. Firms seeking to list on the SEHK must make a prospectus publicly available. The SFC has the authority to determine which clearinghouses are permitted to settle accounts and their rules of operation in order to ensure a sound clearinghouse system.

In November 2000 the Hong Kong Government introduced the Composite Securities and Futures Bill which combines and replaces all ten existing pieces of securities and futures legislation. The new law gives the Securities and Futures Commission (SFC) the power to regulate Internet trading. In addition the SFC will also be able to seize the working papers of market professionals during investigations. The Bill became law in 2001. An independent non-statutory body, known as the Process Review Panel, has been established to ensure that the SFC's internal operations, including its investigative and disciplinary procedures, are fair and consistent. Despite the Securities and Futures Ordinance, the Government would like to see further integration of financial regulation, modelled on the UK's Financial Services Authority (FSA). The government has, for some time now, been keen to address the perceived conflict of interest created by the fact that the current stock market regulator, Hong Kong Exchanges and Clearing (HKEx) is also itself a profit-making listed firm.

In March, 2004, it became clear that the SFC is to be the sole regulator for listing sponsors. SFC chairman, Andrew Sheng explained that: "In line with the wishes of the market, there will be a single regulatory regime for sponsors, and both the HKEx and Commission agree that we will enforce that regime."

He went on to add that that although investment banks sponsoring companies hoping to list on the stock exchange would not be expected to assume issuer liability: "They have to be liable for their own standards of conduct and their role in due diligence."

"We are pleased to note that there is overwhelming support for giving statutory backing to certain fundamental listing requirements and expanding the dual filing system," announced the Secretary for Financial Services and the Treasury, Mr Frederick Ma.

He continued: "The proposed improvement measures set out in the Consultation Conclusions will contribute towards a quality market. They will further strengthen our position as the premier capital formation centre for the Mainland and a major international financial centre in the region."

"We will work closely with the Securities and Futures Commission (SFC), the Hong Kong Exchanges and Clearing Limited (HKEx) and all market users towards this common goal," Mr Ma said.

The Consultation Conclusions recommend codifying in the statute the more important listing requirements, i.e. financial reporting and other periodic disclosure, disclosure of price-sensitive information and shareholders' approval for notifiable transactions. This will be achieved by subsidiary legislation to be made by the SFC under s.36 of the Securities and Futures Ordinance (SFO).

In parallel, the government will introduce a Securities and Futures (Amendment) Bill into the Legislative Council to the effect that breaches of statutory listing requirements will become a new type of market misconduct. Any persons who breach the statutory listing requirements can either be subject to civil sanctions imposed by the Market Misconduct Tribunal under Part XIII of the SFO, or criminal sanctions under Part XIV of the SFO following prosecution.

Mr Ma added: "Any breach of statutory listing requirements would not only hurt our investors, but also tarnish the reputation of our equity market. By bringing the regulatory regime for listing in line with that for other types of market misconduct, such as insider dealing and stock market manipulation, we hope to demonstrate to the local and international investors our commitment to enhancing market quality."

To address market calls for swift action to be taken by the SFC, the government will also amend the SFO to allow the SFC to impose direct civil sanctions, namely reprimands and disqualification orders, on specific, well-defined "primary targets" for breaches of the statutory listing requirements. It is the consensual view among the regulators that these "primary targets" should be the issuers, directors and corporate officers, who are primarily accountable for corporate disclosure and other corporate activities under the listing regime.

"We shall continue to rely on the regulatory framework under the SFO, in particular the licensing regime, for the SFC to regulate IPO sponsors. We note the efforts being made by the SFC and HKEx to upgrade the regulation of sponsors," Mr Ma observed. "We recommend that they should expedite action on this front."

The Securities and Futures (Amendment) Bill was introduced in 2005.

In September, 2006, the SFC announced that investors suffering losses due to defaults by licensed or registered intermediaries, securities margin financiers and banks could now claim up to $150,000 through the Investor Compensation Fund Company.

The SFC described "default" as meaning any situation in which an intermediary, its employee or its associated person is in bankruptcy, wound up or insolvent or has committed breach of trust, defalcation, fraud or misfeasance.

The maximum claim is capped at $150,000 for both securities and futures products traded on the Stock Exchange of Hong Kong and the Hong Kong Futures Exchange. Both margin clients and cash clients are entitled to compensation if their intermediaries default.

The commission explained that investors lodging claims need documents such as the client agreement, their latest account statements, contract notes, proof of payment, and deposit receipts for securities. The more evidence a claimant can provide, the easier it will be to deal with the claim.

Hong Kong's Securities and Futures Commission and the Financial Reporting Council signed a memorandum of understanding, to enhance co-ordination and exchange of information between the two parties, in November, 2007.

According to a government statement, the pact outlines the working arrangements between the two bodies in areas of potential authority overlap and matters of common interest, so that they can discharge their functions effectively and enhance investor protection.

The agreement also outlines the framework for case referral, and establishes principal contact points to ensure efficient and effective communication.

The council's Chief Executive Officer MT Shum added that he is confident that the two parties will work together to enhance the financial reporting integrity of listed entities in Hong Kong.

The Financial Reporting Council is a statutory organisation which launched in July. Its main functions are to investigate - with respect to listed entities - auditing and reporting irregularities, enquire into non-compliance with financial reporting requirements, and to require listed entities to address any non-compliance identified.

The Mainland

In its bilateral agreement with the United States over WTO accession, China made concessions on foreign investment in the mainland's securities market. Foreign securities firms can establish joint ventures (with foreign ownership less than 1/3) to engage (without Chinese intermediary) in underwriting A-shares, and in underwriting and trading B- and H-shares, as well as government and corporate debt within 3 years of accession.

Moreover, as greater foreign ownership is allowed in telecommunications, banking, insurance and other sectors, more mainland firms will seek a listing in Hong Kong to tap overseas funds. Restructuring among China's enterprises (mergers and acquisitions) should increase in preparation for intensified foreign competition. Restructured mainland companies will rely more on equity finance for expansion as part of the regional trend, bringing more business to Hong Kong.

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