The financial crisis has brought about unprecedented regulatory reforms on a global scale. These reforms have gone beyond the traditional boundaries of regulation, with new emphasis on systemic risk, macro-prudential regulation along with international co-operation, and more intrusive micro-prudential and conduct regulation. Similar to other major financial markets, financial reforms in Hong Kong are carried out under extreme timescale pressure.

As part of the post-crisis policy to improve risk transparency in the financial system, to monitor cross-border risk transfer and keep track of systemic risk, we recently took part in an IOSCO initiative to collect systemic risk data on large hedge fund portfolios managed in Hong Kong. Looking ahead, we will continue to participate actively in the work of IOSCO and FSB, to keep pace with the scope and speed of regulatory changes at the global level. Locally, we will pursue cautiously legislative changes based on domestic imperatives and circumstances.

Most relevant to our upcoming work are these items on the international reform agenda: oversight of credit rating agencies (CRAs), over-the-counter (OTC) derivatives and short selling.

• Regulation of CRAs: The Group of twenty (G-20) recommended that CRAs that issue ratings be subject to regulatory oversight, including registration. Locally, we are adding licensing of CRAs as a new type of regulated activity under the existing regime in the first half of 2011 to ensure that credit rating activities are conducted according to the principle of integrity, transparency, responsibility and good governance.
• Clearing and trade reporting regime for OTC derivatives: To reduce counterparty risk and improve transparency, the G-20 members have reached a consensus that OTC derivatives should be standardised, traded on exchanges or electronic platforms and cleared through central counterparty clearing houses by the end of 2012.
  The SFC is working with the Hong Kong Monetary Authority (HKMA) and Hong Kong Exchanges and Clearing Ltd (HKEx) to establish an appropriate regime for the implementation of mandatory clearing and trade reporting requirements for OTC derivatives.
• Short-position reporting regime: Having gathered public comments towards the end of 2009, we shall introduce a short-position reporting regime in Hong Kong to enhance market supervision and risk monitoring, especially at times of high market volatility. As the next step forward, we shall consult the public on the draft subsidiary legislation within 2011.

Hong Kong is an offshore centre to pilot the development of renminbi investment products. The rapid emergence of renminbi products and Mainland entities, however, will inevitably introduce to Hong Kong additional product risks and entity risks. While facilitating the development of renminbi business, we are committed to protecting the interests of the investing public.

In view of the increase in the number of Mainland financial institutions in Hong Kong, we will strive to promote best practices and a good compliance culture among the new entities, and seek to provide a fertile ground in Hong Kong for intermediaries to grow in size, strength and competitiveness, in line with international standards.

Furthermore, given the non-convertibility of renminbi and the restricted nature of the Mainland’s stock and bond markets, we will work closely with the relevant local regulators and Mainland authorities to ensure that interests of the investing public are protected sufficiently as renminbi products gain popularity. to that end, extensive investor education campaigns will be launched.

To develop Hong Kong as a pilot offshore centre for renminbi products, we will support Government initiatives to augment the relevant infrastructure to facilitate expansion of the universe of renminbi-denominated instruments and financial transactions available to investors. In addition, we will continue to promote co-operation between the securities markets on the Mainland and in Hong Kong and maintain Hong Kong’s position as the capital-raising centre for Mainland enterprises.

Despite the instability seen in the global markets, the local securities market continues to grow in strength, attracting issuers from new jurisdictions to have their securities listed and traded here. Amidst rapid market development, regulatory oversight on foreign companies and ensuring the quality of listing candidates become key to maintaining Hong Kong’s reputation as an international financial centre, upholding market confidence, and safeguarding investor interests.

Since regulatory oversight of listed companies domiciled overseas is likely to be more cumbersome and resource-intensive, we are set to take various measures to enhance the quality of our securities market in terms of compliance, sponsor due diligence, disclosure of price sensitive information, etc.

• Listing matters: The SFC will work closely with the Stock Exchange of Hong Kong Ltd (SEHK) to enhance the Listing Rules and attract quality companies from around the world to raise capital here. While supporting market growth on one hand, we are mindful of our regulatory role to maintain high standards.
  We conducted a thematic review of listing sponsors and issued a report on the findings in March 2011. We may review shortly the responsibilities relating to a sponsor’s work.
• Disclosure of price-sensitive information: To raise the quality of our securities market, we will continue to assist the Government in preparing the relevant legislation to impose on listed corporations a statutory obligation to disclose price-sensitive information. The bill is expected to be gazetted and introduced to the Legislative Council in 2010/11 legislative session.
• Scripless securities market: To achieve paperless securities trading in the long run, we shall work on introducing legislative amendments to implement the scripless regime. We target to do a pilot run in late 2013.

The collapse of the Lehman Brothers group has brought to light the risks of complex structured investment products. Yet the post-crisis environment of high liquidity and low interest rates continues to fuel demand for higher-yield investment products.

To ensure that intermediaries explain the complexity of investment products, last year, we modernised the disclosure requirements for investment products offered to the public and fine-tuned the conduct requirements of intermediaries regarding the sales process. We continue to work closely with the industry to implement the new measures and to facilitate a smooth transition into the new regime.

One of our major priorities is to enhance the compliance culture of the industry and improve standards, particularly in relation to discharge of suitability obligations. We recently issued a report on the findings specific to the securities sector based on a mystery shopping exercise conducted simultaneously with HKMA earlier this year. Going forward, we shall continue to raise the compliance standards of the industry and to share information on sale of investment products with HKMA.

We are responsible for authorizing offering documents and marketing materials for the sale of investment-linked assurance schemes (ILASs). To clarify common misunderstanding of ILASs, we shall continue to help investors understand the features of ILASs and the associated risks. As ILASs are essentially a type of insurance, we also will work closely with the office of the Commissioner of Insurance who oversees the business conduct of insurance companies and agents regarding the sale of ILASs.

The emergence of sophisticated trading technology and practices changes the way markets and their participants interact, For instance, investors nowadays have direct access to the markets. While improving trading efficiency, however, new technology also increases the risk of market disruptions due to erroneous trading. Although Hong Kong has not experienced a major failure in this regard, the US flash crash in May 2010 was a stark reminder that inter-connected trading platforms could be vulnerable.

On the other hand, alternative trading avenues outside traditional exchanges, such as dark pools, have enabled niche players to execute trades to their best advantages.

The rapid development of off-exchange transactions worldwide – albeit at an infant stage locally – has captured our attention as to what implications they have on the existing regulatory regime.

At this stage, we continue to monitor closely the growth and evaluate the potential risks and issues arising from technology-driven trading activities and alternative trading avenues, with a view to developing appropriate regulatory policies.

To effectively discharge our statutory objectives and stated vision, it remains our priority to attract and retain the best talent.

We will enhance further our performance management framework by linking corporate priorities to individual performance, remuneration and rewards. As part of our corporate culture programme under the theme of “Living our Values” launched last year, we will continue to organise a series of initiatives to promote our core values, cultivate better internal communications, create a good working environment and address needs and concerns of our staff at the SFC.

Apart from fulfilling our statutory obligations to foster orderly growth in the securities and futures markets, we will also strive to adopt policies and practices that benefit the community as a whole and raise our staff’s awareness in terms of our corporate social responsibility.