Report on the Enhancement of the Financial Infrastructure in Hong Kong

12 Oct 1999



The Securities and Futures Commission (SFC) today releases the Report on the Enhancement of the Financial Infrastructure in Hong Kong (the Report). The Report has been submitted to the Financial Secretary.

“The Report recommends that in order to enhance the competitiveness of Hong Kong as an international financial centre in terms of risk mitigation, increased efficiency and cost reduction Hong Kong should put together an ‘eFrastructure’,” said Mr Andrew Sheng, the Chairman of the SFC, who chairs the Steering Committee on the Enhancement of the Financial Infrastructure in Hong Kong (SCEFI), at a press briefing.

Mr Sheng added that the eFrastructure is a web-friendly technology infrastructure for the securities and derivatives industry that allows local and global market participants to access the full spectrum of financial products and services on an open, robust, secure, scalable, and high performance network.

With implementation of the eFrastructure, Hong Kong can aspire to become one of the leading centres for liquidity, clearing, settlement and risk management in Asia and the portal for strategic links with global markets in the region.

“HK already has the best telecommunications infrastructure to enable the development of e-commerce and e-trading,” remarked Mr Sheng.

The eFrastructure will facilitate the development of e-trading in securities and derivatives in Hong Kong and the Asia region.

The eFrastructure includes the components of a single clearing arrangement for better risk management; end-to-end straight through processing (STP) for improved cost-effectiveness; a scripless securities market for enhanced efficiency and legal certainty; and an open, robust, current, and scalable technology structure for local and remote connectivity and high performance.

Through single clearing arrangement, STP and scripless securities market, the eFrastructure would improve risk management, enhanced settlement and transparency and fund management efficiency and reduce costs for all market participants. This would improve Hong Kong’s quality of services and competitiveness in the New Millenium.

The Report has proposed to the Financial Secretary an array of measures to facilitate and accelerate the implementation of the eFrastructure.

The establishment of SCEFI is one of the three-pronged strategy announced by the Financial Secretary in his 1999 – 2000 Budget Speech to reform the Hong Kong financial markets. SCEFI was appointed by the Financial Secretary to examine and recommend ways to enhance Hong Kong’s financial technology structure.

The key members of SCEFI included Mrs Rebecca Lai (Financial Services Bureau), Mr Peter Pang (Hong Kong Monetary Authority), Mr Alan Siu (Information of Technology and Broadcasting Bureau), Mr Anthony Au (Hong Kong Information Technology Federation Ltd.) and the Chief Executives of the Exchanges and Clearing Houses.

SCEFI drew extensively on input from two working groups – the User Working Group and the Technology Working Group – which provided technical and professional expertise from the markets. It also consulted extensively experts from international and local institutions and professional associations on global and regional trends and the evolution of standards and best practices.


 



Press Briefing (Attachment)

On the SCEFI Report

1. The Financial Secretary announced in his 1999-2000 Budget Speech a three-pronged strategy for strengthening the competitiveness of Hong Kong’s financial markets, which included, inter alia, the establishment of the Steering Committee on the Enhancement of the Financial Infrastructure in Hong Kong (the SCEFI) to examine and recommend ways to enhance Hong Kong’s financial technology structure. (The others being the demutualization and merger of the exchanges and the consolidation and rationalization of the various securities and commodities legislation.) The Financial Secretary appointed Mr. Andrew Sheng, Chairman of the Securities and Futures Commission, to chair SCEFI. Members of SCEFI, included Mrs. Rebecca Lai, draw inputs from the market, through two working groups – the User Working Group (the UWG) and the Technology Working Group (the TWG).
2. With the objective of enhancing the competitiveness of Hong Kong as an international financial center in terms of risk mitigation, increased efficiency and cost reduction, SCEFI examined issues in respect of:

  • The setting up of a single clearing arrangement for stocks, futures, options and other exchange-traded transactions;
  • The enhancement of the financial technology infrastructure to facilitate straight through processing (STP); and
  • The move towards a secure, scripless securities market.

3. SCEFI has worked closely with its working groups and experts in the financial industry for the period of March to September 1999. As of 30 September 1999, SCEFI has held a total of 12 meetings, UWG a total of 7 meetings and TWG a total of 13 meetings, to examine, discuss and define the target financial infrastructure for Hong Kong. The SCEFI Report has been submitted to the Financial Secretary.
4. The SCEFI Report envisages that eTrading in Hong Kong can be accelerated through a technology infrastructure (the “eFrastructure”) that will allow local and global market participants to access through Hong Kong the full spectrum of domestic and global financial products and services.
5. The eFrastructure includes the components of a single clearing arrangement for better risk management; end-to-end STP for improved cost-effectiveness; a scripless securities market for enhanced efficiency and legal certainty; and an open, robust, current, and scalable technology structure for local and remote connectivity and high performance.
6. In defining the eFrastructure for Hong Kong, SCEFI has observed the following guiding principles:

  • To achieve risk management excellence,
  • To maximize the possibility of STP,
  • To ensure instantaneous finality and legal certainty of transactions,
  • To comply with international standards and suitable best practices,
  • To seek strategic partnerships with leading financial centers, and
  • To embrace open and state-of-art technology for global connectivity and continuous innovation.

7. The SCEFI Report considers that a single clearing arrangement will provide Hong Kong the benefits of improving risk management for market participants, exchanges, clearinghouses, and regulatory authorities; improving efficiency and reducing settlement and liquidity risks of money settlement; and allowing more efficient use of capital. The SCEFI Report recommends the following building blocks for a single clearing arrangement:

  • A consolidated clearing account structure,
  • Real-time position creation and management,
  • Unified money settlement through inter-bank RTGS,
  • Portfolio-based risk management and collateralization, and
  • Synchronized processing of the consolidated clearing operations.

8. To enable STP, the SCEFI Report recommends the following building blocks:

  • An open Transactions Flow Manager,
  • An online Transactions Routing System,
  • A uniform Electronic Transaction Interface,
  • Clearinghouse direct participation in the inter-bank RTGS payment system,
  • A Common Banking Interface, and
  • CSD-to-CSD bridges.

9. Moreover, the SCEFI Report recommends that Hong Kong migrate in phases to full dematerialization by dematerializing new issues, immobilizing existing issues, adopting Global Certificates for issues of companies domiciled overseas where physical scrip is mandatory under law, and adopting electronic contract notes in trading. The SCEFI Report identifies the following building blocks for achieving a scripless securities market:

  • Electronic and instantaneous share registration,
  • CSD-to-registrars electronic links,
  • Investor participation in the CSD for direct settlement,
  • CSD/ registrars’ infrastructure upgrade, and
  • Fine-tuning of the current legal and regulatory framework.

10. In relation to the building of a robust technology structure, the SCEFI Report identifies the following building blocks:

  • Unified, open and global access through various channels that comply to best international standards;
  • Secure, high performance and resilient community network that is scalable, flexible and interoperable;
  • Reliable gateway for message-based/ interactive connections; and
  • Integrated global leading league’s services for alliance readiness.

11. In addition, the SCEFI Report also recommends that the legal and regulatory framework be fine-tuned to provide support for the implementation of the above recommendations.




Page last updated 12 Oct 1999