Hong Kong Stockbrokers Association. Luncheon Speech. 2 August By Andrew Sheng Chairman of the Securities and Futures Commission

Transcription

1 Hong Kong Stockbrokers Association Luncheon Speech 2 August 2005 By Andrew Sheng Chairman of the Securities and Futures Commission 1. I shall be stepping down as Chairman of the SFC in less than two months. After nearly seven years working with the stockbroking community, I would like to look back on what we (the stockbroking community and the SFC) have achieved in the last seven years and look a little bit forward on the following issues: Our changing market landscape Creating a modernized regulatory environment Facilitating market development Managing down the industry s financial risks I. Our Changing Market Landscape 2. Many members may have forgotten that in October 1998, our industry was in crisis. We have witnessed several ups and downs during the last few years, but I am particularly pleased to see that all sectors of our financial markets have grown very substantially since 1998 as illustrated by: Increase in market cap from HK$2,661.7 billion to HK$6,958.7 billion in June 2005; Increase in average daily turnover of securities market from HK$7.4 billion in October 1998 to HK$16 billion in 2004 and HK$17.2 billion in June 2005; Increase in daily turnover of HSI futures and options contracts by 56% to around 12.1 million contracts in 2004; and Increase in net asset value of authorised funds by 201% to US$551 billion in In 1998, the failure of CA Pacific and Peregrine signaled the need for the stockbroking industry to restructure their business models. Both failures indicated significant weaknesses in risk management, one in margin finance

2 and the other in debt markets. Volatility in markets, particularly with the arrival of derivatives, hedge funds and structured products meant that the old game of pure agency and proprietary trading was no longer sufficient. 4. I still remember two key messages when I met your community leaders both of which I took to heart. The first was the impression that the SFC and the brokers were on opposing sides and the second that we should focus on corporate misconduct, which was much the source of problems with the brokers. 5. Thanks to support from the brokerage associations, we managed to get two of the major reforms done the demutualization of the exchanges and also the SFO, the latter being the most comprehensive reform of the securities law in over 10 years. The demutualization provided exchange members with HKEx shares, which could be utilized by members to re-invest into their business if they wanted to. Until recently, trading in HKEx shares accounted for a significant proportion of the small brokers proprietary trading. 6. On March 2000, SFC took over the remaining regulatory functions over the brokers from the Stock Exchange. Although comprehensive numbers on the brokerage industry began only after March 2001, it is clear that despite the Asian financial crisis and structural competition, the industry has begun its consolidation, but its financial soundness was strengthened since In December 1998, the number of Cat C brokers was 497. The number has declined to 360 at the end of June 2005 and their market share fell from 30% (Average daily turnover of $2.1 billion) in 1998 to 13% (Average daily turnover of $2.3 billion) in the first half of Since March 2001, when comprehensive data became available, their average shareholders' fund per firm has increased by 18% from $37.7 million to $44.4 million. Cat C brokers were also able to generate a total of $875 million of profit in 2004, as compared to $162 million of loss in In the first half of 2005, Cat C brokers profits still amounted to $208 million, despite the fact that their share of turnover continued to fall. These show that they are very resilient and that the increase in turnover must also have helped.

3 SEHK Category C brokers Note % change No. of firms (1) % Average daily turnover of Category C brokers ($'mn) 1,943 2, % Annual profit / (loss) ($ mn) (162) 875 N/A Shareholders' fund per firm ($ mn) (1) % (1) Data for year 2001 represented figures at the beginning of year 2001 while data for year 2004 represented figures at the end of II. Creating a modernized regulatory environment 8. Our regulatory framework forms the cornerstone of Hong Kong as a premier international financial centre. With your continued help and support, the Commission has managed to completely modernize our regulatory framework. The Securities and Futures Ordinance (SFO) has combined 10 sets of different ordinances and provides a more flexible regulatory framework to respond to the fast changing financial market. There are a number of initiatives, such as a single licensing regime and the new investor compensation arrangement, that are designed to facilitate business development and enhance investor protection. Thanks to strong co-operation, the industry has smoothly migrated to the new regime and I am happy to report that around 96% and 99% respectively of licensed firms and individuals have sought to migrate to the new regime. Establishment of ICC 9. The SFO has also revamped the investor compensation scheme. Brokers no longer have to contribute to the scheme and an independent investment compensation company was established to handle investors claims and the maximum pay-off to investors increased to $150,000 per client. Since 2001, the market levy of 0.002% has brought the compensation fund to an accumulated level of $1.5 billion (as of end June 2005) and we have proposed that the levy be suspended when the net asset value reaches $1.4 billion. A more flexible mechanism has been introduced so that no market levy will be charged until the compensation fund falls below the predetermined trigger level. III. Facilitating market development Continuous communications with the industry 10. The biggest help you have given me as a regulator is to reinforce my strong belief that we (the industry and the regulator) are in the same boat. Our job is

4 to facilitate a strong market, whereby your success is our success. We have now regular discussions with the broker associations and staff union, and we consult you informally and formally before we launch any regulatory initiative. We now release quarterly financial data with a performance analysis of different categories of brokers so that individual firms can benchmark their performance with their peers. More than ever before, we involve and engage you all in our work, with greater transparency of our work. 11. Increasingly, we all need to appreciate that it is the small minority who infringe the law. The majority of brokers are honest and law-abiding. But the small minority harms the investors and harm the reputation of the majority. Hence, we must all work together to improve the reputation and the quality of our market. This is a continuing effort. Helping the industry to benefit from CEPA 12. All of us recognize that the strength of the Hong Kong market depends on the continued success and growth of the Mainland economy. Thanks to CEPA, we managed to reach an agreement with the CSRC to mutually recognize market practitioners' professional qualifications. We are now working with the HKSI and the HKEx to see how further benefits can be achieved under CEPA and also we can encourage more exchange of HK and Mainland professionals. In other words, qualified HK professionals having passed relevant industry qualifications in Mainland will be given opportunities to work in the Mainland and Mainland professionals who gain Hong Kong qualifications will be given opportunities to work in Hong Kong. Lowering operating costs for the industry 13. Our priority remains in lowering the industry s operating costs. Under the new licensing regime, we lowered annual licensing fees by 3% and assisted in arranging a more cost effective fidelity insurance scheme for the Exchange Participants. We also worked with the HKEx to rationalize their fee structure and the industry is expected to reduce the cost by $48 million annually under the new arrangement. In addition, the single license regime promotes more effective utilization of regulatory capital when brokers could carry out several regulated activities in one legal entity.

5 Initiatives to accommodate industry needs 14. Our performance pledges for processing of license applications are 8-10 weeks for individuals and 15 weeks for firms. In last year, more than 80% of the cases we processed met our performance pledge. We also approved specialized courses to facilitate the re-entry by the former practitioners who had left the industry for three to eight years. To help brokers meet FRR requirements, between April March 2005, 105 subordinated loans totally amounting to $13.5 billion and 91 modifications were granted. IV. Managing down the industry s financial risks 15. Thanks to great support from the industry, we have been able to nurse many higher financial risk firms back to health. After we became the front line regulator of stockbrokers in 2000, we adopted different strategies to manage down the exposures of higher risk firms. Even though 6 firms, including CA Pacific, have failed since 1998, there have been no systemic risks involved. 16. Over the past few years, the number of actively monitored higher financial risk firms was reduced from 39 to less than 10. We must remember that there is no such thing as zero failure in any industry. What is important is that those excessively risky or badly managed firms need to exit the industry in an orderly manner that does not affect systemic stability. This is very important to the health and market stability and reputation of the brokerage industry. One of my disappointments is that during my term, I cannot finalize the statutory changes to the FRR amendments. However, I hope that the industry will support the final FRR consultation in order to further enhance the financial stability of the broking industry. V. The Future of Stockbroking 17. I leave at a time when I am much more relaxed about the future of Hong Kong than when I took up this job in the middle of the Asian crisis. Turnover and market capitalization are already higher than the 1997 peak. With continued strong growth in the Mainland, there is no reason to doubt that the future of the capital markets in Hong Kong, in facilitating Mainland reforms, will not be bright. There is a stake in that bright future for all. 18. This does not mean that although on average the industry will do well, that every single broker will be successful. Success in the future will depend on the ability of each and every broker to find his or her own market niche. To me, the future of the broking industry depends on the secret of Hong Kong s

6 success to struggle without help from anyone except through one s own blood, sweat and tears. 19. The industry needs to recognize that globalization, demographics, technology and competition are inevitable. Time and tide waits for no-one, however successful in the past and in the present. What the West did not want to do, the Japanese took up manufacturing. When Japan went up the value curve, Hong Kong and the other Asian dragons took up the manufacturing. But we moved to logistics and financial services, as Southeast Asia tigers, and today India and China, became manufacturing and outsourcing giants. However painful it is, we have to make that adjustment. 20. The traditional stockbroking industry is aging, just as I am aging. Some Cat C firm owners who previously operated as sole proprietors and are still in the business are in their 70s (The oldest one is 81). Yet many of their younger generation may not want to take over the business. At the same time, your client group is also aging. The younger clients are turning to banks and other electronic media to provide these services. We have to change our service quality and our range of services to make this transition. 21. Some of you may feel that I have not done enough, but I assure you that the transition of the Cat C brokers is upper-most in the minds of the SFC and myself. You are important liquidity providers in the market, but as technology, derivative products and hedge funds emerge, their share of trading will inevitably increase. In many more mature markets, smaller stockbrokers have either consolidated or changed their business to become financial planners, selling a wider range of financial products. These are important strategic decisions that only you yourself and the market can decide, not the regulator. I assure you that there is no policy intent to discriminate against small brokers. Large brokers all emerged from small brokers. Your interests are considered carefully before any regulatory change. The free market depends on plurality of participants. 22. No one likes to be a regulator, because when things go well, no one remembers that the regulator is around. When things go wrong, the regulator is there to be blamed. By definition, the regulator cannot be smarter than market participants, so it is wrong to ask the regulator to design strategies for the future of the industry. We can support your change, ensuring that change is done in an orderly and stable manner, so that no one exploits that change by cheating someone else. 23. I want to thank you all for your strong support, your kindness and your understanding. I have always believed that the spirit of Hong Kong is its sense

7 of fairness [ 義 氣 ] I have admired your resilience, your strength and your sense of fair play. I hope you will show the same co-operation and understanding with my successor and my colleagues, as you have shown me. 24. Thank you.