Status Report on New Product and Market Development Initiatives The following initiatives are subject to market support and regulatory approval so they may not be implemented. HKEx will announce further details of these initiatives as they progress. Initiative Status on 16 October 2006 Status on 15 Review of the derivative warrant market On facilitating further issues, H K E x w i l l w o r k t o w a r d s shortening the period between issuance and listing from the current four days. Work is continuing. 1 Amendments to the Listing Rules to require Main Board issuers to publish short announcements in newspapers instead of full announcements 2 H K E x i s w o r k i n g w i t h t h e S e c u r i t i e s a n d F u t u r e s Commission (SFC) and the industry to assess the current Liquidity Provider provisions in the Listing Rules and to provide documents in more accessible language. HKEx will continue to provide market education on derivative warrants. H K E x i s p r e p a r i n g f o r implementation of this initiative. T h e p r e p a r a t i o n s i n c l u d e systems upgrades, planning of familiarisation and briefings to the market, communication planning, registration procedures for the new electronic submission system, and reviewing internal practices and procedures to bring them in line with the new issuer information dissemination model. Supplemental listing documents and launch announcements are now in more accessible language. B a s e l i s t i n g d o c u m e n t s w i l l be considered next. Liquidity Provider provisions are still under consideration. HKEx will continue to provide market education on derivative warrants. Preparations for implementation of this initiative are well-developed. Amongst other things, registration for the new electronic submission system is underway. Briefings to the market have also commenced. 91
Consider accepting issuers from more overseas jurisdictions 3 Review of the Growth Enterprise Market (GEM) 4 Phase 2 Reductions of Minimum Securities Trading Spreads 5 HKEx is considering accepting issuers from more overseas jurisdictions, in addition to the existing recognised jurisdictions: Bermuda, the Cayman Islands, the Mainland and Hong Kong. The issue has been considered by the Listing Policy Committee and they were supportive in principle of facilitating the listing of foreign companies from other jurisdictions. Some developments are likely over the next few months. HKEx is studying respondents comments. HKEx is mindful of the position of existing GEMl i s t e d c o m p a n i e s a n d w i l l consider their interests carefully when formulating proposals. The proposals will be subject to a separate consultation. The Phase 2A reduction of minimum securities trading spreads was implemented on 24 July. The operation of the market has been smooth since the implementation. HKEx is monitoring the results of the implementation for a six-month period. An interim report will be submitted to the HKEx Board in November and a final report in the first quarter in 2007. HKEx is continuing to consider how it can best facilitate the listing of companies from other jurisdictions. HKEx plans to publish further details soon. HKEx is continuing to explore proposals with the SFC. Once proposals are agreed it plans to consult the market. An interim report on the Phase 2A reduction was submitted to the HKEx Board in November last year and a final report will be submitted to the Board in the first quarter of this year. The final report will cover data for the six months after the Phase 2A implementation. 92
Exploration of new financial products / services and review of existing products / services Callable Bull/Bear Contracts (CBBC) CBBC issuance and turnover have continued to grow. HKEx is considering expanding the number of eligible underlying securities. HKEx expanded the number of eligible underlying Hong Kong stocks from five large-cap, highturnover securities to 28 on 17 November last year. The list will be updated quarterly and posted u n d e r C B B C i n t h e P ro d u c t section of the HKEx website. Derivatives market business concepts T h e D e r i v a t i v e s M a r k e t Consultative Panel (DMCP) was consulted on the market demand for new index futures based on finance-related H-share companies. HKEx continues to monitor the development of this sector in the securities market. HKEx is considering the feasibility of introducing a new index futures contract related to finance-related H-share companies. The DMCP reviewed the product concept of additional expiry months in selected stock option classes and HKEx is working on the details of the proposal and the market making arrangements. HKEx is proposing additional expiry months in selected stock option classes to capture trading business in contracts with longer maturity and will seek clearance from SFC on the proposed rule amendments. H K E x i s c o n s i d e r i n g t h e development of more Mainlandrelated products, particularly Mainland-related derivatives and possibly renminbi-denominated products. HKEx is proposing introduction of futures contracts based on US dollar/renminbi (RMB) and Hong Kong dollar / RMB and is consulting regulatory authorities on this proposal. 6 HKEx is planning to introduce stock options and stock futures c o n t r a c t s b a s e d o n C h i n a Merchants Bank and Industrial and Commercial Bank of China. I n O c t o b e r l a s t y e a r, H K E x introduced stock options and stock futures contracts based on China Merchants Bank and Industrial and Commercial Bank of China. 93
Review of market maker model for derivatives market 7 Expansion and improvement of CCASS Investor Participant (IP) account and Stock Segregated Account with Statement (SSA) services 8 The SFC has approved the relevant rule changes. HKEx plans to introduce a new market maker model for its Hong Kong Futures Exchange products and revised trading fee discounts for market makers' trading in stock index futures or options, with the changes scheduled to take effect in February 2007. HKEx is seeking to improve the IP account and SSA services in CCASS. The HKEx Board has approved enhancements to the SSA by early 2007 in order to give investors whose brokers use the SSA electronic access to their account details and movements via the CCASS Internet System and CCASS Phone System. Investors also will be able to sign up through their brokers for SMS alerts on any debit movement in the SSA as a result of the enhancements. F u r t h e r e n h a n c e m e n t s a re planned for implementation in phases in 2007. The transition has been smooth. All Exchange Participants with R e g i s t e re d Tr a d e r s, e x c e p t those who chose to discontinue making markets, have submitted applications under the new model. The rule changes will take effect in February as scheduled. HKEx introduced new features to the SSA service on 2 January. Investors who have opened SSAs through their brokers/custodians can now check their account balances and movements through the CCASS Internet System and C C A S S P h o n e S y s t e m, a n d they can view and download statements through the CCASS Internet System. They can also choose to receive email or SMS messages from CCASS on any account movement. Further enhancements to the SSA service are planned for implementation in the middle of this year, including electronic voting service, affirmation of share movement and money settlement v i a C C A S S. H K E x w i l l a l s o increase the maximum number of SSAs it allows each broker or custodian to maintain. 94
Harmonisation of collateral policies for the three clearing houses 9 Introduction of Third Party Clearing (TPC) in the securities market 10 Network consolidation for major market systems on a new network (SDNet) 11 HKEx is finalising the draft amendments to the rules and procedures of the respective clearing houses in relation to the admission of the new types of non-cash collateral for approval in the fourth quarter of this year. Not included in this issue. HKEx is implementing the last phase (Phase 3) of the network consolidation. Migration of the MDF network and the AMS/3 network is scheduled to be completed in the fourth quarter of this year and the middle of 2007 respectively. HKEx is currently assessing the legal implications of adding a n d a c c e p t i n g m o re f o re i g n government debt securities as non-cash collateral and will finalise the draft amendments to the rules and procedures of the respective clearing houses in relation to the admission of all the new types of non-cash collateral for approval in due course. HKEx plans to introduce TPC this year to strengthen the securities m a r k e t i n f r a s t r u c t u r e a n d better support the participants businesses. Like the settlement agent service offered to CCASS Participants, TPC is another clearing option for Exchange Participants (EPs) to outsource their back office clearing and settlement operations. Since the 2002 consultation on a proposed T P C m o d e l, H K E x h a s b e e n working with market participants to assess the potential business impact of TPC on EPs, especially i n a d d re s s i n g t h e i r a re a s o f concerns. The proposed TPC model is now being finalised for implementation. The migration of the MDF circuits t o S D N e t w a s s u c c e s s f u l l y completed in December last year. MDF information vendors started paying around 40 per cent less in line rental charges on 1 January. AMS/3 line installation for SDNet is in progress and HKEx plans to complete it in the middle of this year. 95
AMS/3 Enhancements Not included in this issue. With a view towards improving EPs efficiency and the order input capacity in AMS/3, HKEx has tentative plans to expand in February the maximum number of outstanding orders per price queue from 10,000 orders in the pre-opening session and 8,000 orders in the continuous trading sessions to 20,000 for all sessions. In addition, the maximum outstanding orders per broker ID, now set at 4,000, will be abolished. HKEx is also planning to increase the maximum board lots per order, now set at 600, in March and details will be announced in due course. To give EPs an additional control measure to prevent erroneous order inputs, HKEx invited EPs in late December last year to review and determine their own Order Consideration Limit. This limit will be set at firm level and will apply to all orders and reported trades of the EP entered into AMS/3 irrespective of the trading channel. Separately, HKEx will increase the AMS/3 market data broadcast rate in February to accelerate updating of the trading screen and devices in view of increased market activities. 12 Market rehearsals are tentatively set to be arranged by mid-february prior to implementation of the above changes. 96
AMS/3 Open Gateway (OG) / Multi-Workstation System (MWS) upgrade 13 Speedier Dissemination of Closing Prices 14 HKEx is upgrading AMS/3 OG and MWS hardware and system software due to technology obsolescence and to cater for additional OG processing capacity. The upgrade is being conducted in batches until the second quarter of 2007. Not included in this issue. All obsolete OG/MWS hardware has been successfully replaced and upgraded to address the hardware obsolescence and to prepare for the future AMS/3 system capacity expansion. The software upgrade will start in January. In view of increased market a c t i v i t i e s, t h e c l o s i n g p r i c e calculation software has been enhanced to shorten the time r e q u i r e d f o r c l o s i n g p r i c e calculations and the modified software has been implemented. Note: AMS/3, the Third Generation Automatic Order Matching and Execution System, is the trading system for the securities market. CCASS/3, the Latest Generation Central Clearing and Settlement System, and the Market Data Feed, or MDF, are the other major market systems supporting the securities market. HKATS, the Hong Kong Futures Automated Trading System, is the trading system for the derivatives market. DCASS, the Derivatives Clearing and Settlement System, and PRS, the Price Reporting System, are the other major market systems for the derivatives market. 97