The liberalisation of the renminbi remained a hot topic in global quarters during the year. With the market expecting the Mainland Chinese currency to further appreciate, demand for renminbi-denominated investment products also mounted. For nearly two decades, Hong Kong was the major capital-raising centre for Mainland enterprises and its window on the world. It follows that the city has a unique role to play to expand the renminbi’s role in the global economy.

A new priority of our work last year was to support the Government’s initiative – in tandem with the State’s strategic direction – to reinforce Hong Kong as the first renminbi offshore centre. Besides providing input to the Government of a general nature, we promoted the development of renminbi businesses in Hong Kong by exploring renminbi-denominated investment products with local as well as Mainland industry participants.

Authorizing renminbi investment products

Building on the development of the offshore renminbi bond market in Hong Kong, during the year, we authorized the first four retail renminbi-denominated funds investing primarily in renminbi-denominated debt instruments issued outside the Mainland. The funds called for subscription and redemption to be made in renminbi only.

We facilitated the gradual broadening of the spectrum of renminbi investment products by authorizing the first real estate investment trust (REIT) denominated in renminbi for offering to the public in early April 2011. The REIT is the first ever renminbi-denominated product listed and traded outside the Mainland. The REIT is traded on The Stock Exchange of Hong Kong Ltd (SEHK) like a stock but simulates the features of a fixed-income instrument, which is to deliver a source of recurrent income. Initial public offering subscription, trading, clearing and settlement are all denominated in renminbi.

In view of the novelty of the product and to ensure the readiness of the market, its systems and infrastructure, as well as intermediaries and investors, we worked closely with Hong Kong Exchanges and Clearing Ltd (HKEx) and the Hong Kong Monetary Authority (HKMA) and formed a joint working group to look into issues before authorizing this first renminbi REIT.

The launch of these renminbi-denominated investment products marks a significant milestone in Hong Kong’s development into an offshore renminbi centre and the process of renminbi normalisation and underscores the capability of Hong Kong’s market infrastructure to support renminbi investment products for retail.

Preparing for listing of renminbi securities

Collaborating with market operators, we helped prepare the industry and investors for the listing, trading, clearing and settlement of renminbi-denominated securities. We also liaised with relevant authorities and parties to address potential issues, and assisted brokerages in their preparation:

• We held meetings with various broker associations, HKMA and HKEx in August 2010 and March 2011 to discuss operational issues for trading and settlement of listed renminbi-denominated securities. We asked the associations to urge their members to prepare themselves for the listed renminbi business, including testing their systems and procedures with HKEx, setting up renminbi-designated bank accounts at the Central Clearing and Settlement System for clearing purposes, considering the need for establishing relevant credit lines, resolving issues relating to stamp duty collection on renminbi trades, etc.
• Meetings were held with relevant market practitioners, including the share registrar, sponsors, custodians, receiving banks and potential issuers, to explore operational issues related to the listing of such securities.
• In March 2011, we coordinated with HKEx to organise market-wide end-to-end tests so that market participants could determine if their systems, operations and staff could handle listed renminbi securities properly. Names of market participants that successfully completed these tests and declared their readiness for trading such securities were published on HKEx’s website for the public’s easy reference. To help prepare brokerages for the tests, we conducted three briefing sessions with HKEx and issued to brokerages circulars, frequently asked questions and checklists.

Besides the renminbi-related issues, we worked closely with the Mainland to develop the market in other areas during the year.

Capitalising on new CEPA initiatives

We provided extensive support to the Government in formulating specific co-operation measures under the securities sector of Supplement VII to the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA VII), which was entered into in May 2010. We also took part in various discussions with our Mainland counterparts to finalise relevant proposals. Under CEPA VII, exchange-traded funds (ETFs) tracking Hong Kong-listed stocks will be launched on the Mainland at an appropriate time. We also stood ready to support qualified Mainland futures companies to set up subsidiaries in Hong Kong in accordance with the relevant laws.

Other cross-border co-operation

We took part in a number of meetings with senior officials of the Government and relevant Mainland authorities to formulate and push forward Mainland-related policy initiatives that would benefit the Hong Kong market and to secure the support and buy-in from the Central Government. We supported the Government’s cross-border co-operation initiatives in ways by:

• furthering Hong Kong’s ties with Mainland regions and cities, including Beijing, Shanghai, Guangdong and Shenzhen, such as, by attending the second meeting held by the Expert Group on Hong Kong/Guangdong Financial Co-operation to discuss collaborative initiatives under the Framework Agreement on Hong Kong-Guangdong Cooperation, by attending the Beijing-Hong Kong Financial Services Co-operation Symposium, by meeting with Shenzhen officials to explore opportunities for the Hong Kong-Qianhai development of the financial services sector, and by sharing our views with the Government to further Hong Kong’s collaboration with Shanghai and Shenzhen on a broader level;
• participating in or speaking at other meetings, including the First Hong Kong-Shanghai Financial Expert Group Meeting, the Shanghai Expo Finance Forum and the Asian Financial Forum 2011;
• exchanging views with the China Securities Regulatory Commission (CSRC), China Securities Depository and Clearing Corporations as well as stock exchanges on both sides of the border on key market issues and development of cross-border products at the 42nd meeting of the Memorandum of Regulatory Cooperation in Haila’er, Inner Mongolia;
• discussing the development of the Hong Kong and Mainland securities markets and other matters of common interests with the CSRC’s Department of Intermediary Supervision in the 18th memorandum of understanding (MOU) meeting held in October 2010; and
• meeting with representatives from the Hong Kong and Macao Affairs Office, the CSRC, the China Insurance Regulatory Commission, the State Administration of Foreign Exchange and the Development Research Center of the State Council to exchange views and seek their support for initiatives that would strengthen the position of Hong Kong as an offshore renminbi centre and a capital raising centre within China.

To keep abreast of latest regulatory developments on the Mainland, we continued to dialogue with the Mainland to bring forward policy initiatives that would further help enhance Hong Kong as an international financial centre and as a testing ground for the financial reform and liberalisation of the Mainland market. In our meetings, we reaffirmed that Hong Kong is ready and able to assist the Mainland as it plays a greater role on the international stage.

Last year, we continued to facilitate market growth and product innovation without compromising investor protection.

Exchange-traded funds

According to market research, Hong Kong is the second largest ETF market in Asia in terms of turnover and market capitalisation. We authorized 11 ETFs during the year, bringing the total number of SFC-authorized ETFs to 72 as at 31 March 2011. Total market capitalisation reached US$88.6 billion at year end, up 38% from the year-ago level of US$64.3 billion. The total turnover for Hong Kong-listed ETFs in the year ended 31 March 2011 amounted to US$83.9 billion, up 29% from the year-ago level of US$64.8 billion.

China A shares continued to be most popular among investors in Hong Kong. As at 31 March 2011, 24 ETFs in Hong Kong tracked the performance of A-share indices with their average daily turnover representing about 67% of the total ETF turnover based on market data.

Featured below are the breakthroughs in our ETF market during the year:

• For the first time, we authorized an ETF managed by the Hong Kong asset management subsidiary of a Mainland insurance group and another ETF managed by that of a Mainland fund management company in May 2010 and July 2010 respectively.
• We authorized the first ETF managed by a Hong Kong asset management subsidiary of a Korean investment and securities group in December 2010.
• In December 2010, we authorized the first gold ETF managed by a Hong Kong-based asset management company with the physical gold vault located locally.
• We facilitated the cross-listing of the fourth Hong Kong ETF on the Taiwan Stock Exchange in December 2010.

Other retail investment products

To maintain the competitiveness of our market, we also worked on facilitating the offer of investment products to retail investors. During the year:

• we authorized 209 collective investment schemes (CISs), raising the total number of such schemes to 2,594 as at 31 March 2011;
• we authorized the issue of 84 offering documents and advertisements for unlisted structured products offered to the public; and
• we approved HKEx’s proposal to launch dividend point index futures contracts on the Hang Seng Index and Hang Seng China Enterprises Index. Apart from helping investors hedge dividend risks, these products encourage market participants to trade dividend derivatives on the exchange instead of over the counter (OTC), thus enhancing the transparency of those trades. HKEx launched the dividend point index futures contracts on 1 November 2010.

Measures to encourage market growth

Public consultation on the proposed operational model for implementing a scripless securities market was completed and the conclusions were announced in September 2010. The proposal won general support from the market. We are working with HKEx and the Federation of Share Registrars Ltd on details of the operational model, and the Government on necessary legislative amendments.

During the year, HKEx recognised six additional overseas jurisdictions for listings on SEHK, namely, France, Italy, Brazil, Isle of Man, Japan and the State of California in the United States. The additions brought the number of overseas jurisdictions recognised by the Listing Rules to 16 (in addition to Mainland China, Bermuda and Cayman Islands, which were recognised much earlier as acceptable jurisdictions under the Listing Rules). This paved the way for the secondary listing of a Brazilian incorporated company, the first from that jurisdiction and also the first-ever listing by way of Hong Kong Depositary Receipts.

In the meantime, we also proposed legislative amendments to add certain exchanges based in Brazil, India and the Mainland to the lists of specified stock and futures exchanges so as to expand the scope of tax exemptions available to offshore funds engaged in futures trading.

This year saw a number of listings by way of introduction. We worked with HKEx and market participants to enhance liquidity arrangement during the initial listing period and to facilitate dissemination of related information on HKEx’s website to avoid significant price fluctuation noted in some previous listings.

We approved HKEx’s proposal to extend the trading hours of the securities and derivatives markets in two phases in March 2011 and March 2012 respectively. The new arrangement was meant to improve the price discovery function for Mainland-related securities by increasing the overlap of trading hours with the Mainland exchanges. The changes also would strengthen HKEx’s competitiveness by narrowing the gaps between its trading hours and those of its regional competitors. We have been monitoring the market closely for the two-phased implementation.

During the year, we also approved various amendments to the Listing Rules, including:

• launching a framework to allow Mainland issuers to prepare financial statements using Mainland accounting standards, and Mainland audit firms to service these issuers using Mainland auditing standards;
• publishing new rules and guidance on information to be provided to investors and shareholders by listing applicants and listed issuers participating in the natural resources industry; and
• amending rules regarding connected transactions and streamlining requirements for issuers’ circulars and listing documents.

We approved four automated trading services (ATS) applications from overseas exchanges, bringing the total number of ATS authorizations to 23 by end of March 2011. Further, we reduced levies payable for trading in securities, futures or options contracts by 25% with effect from 1 October 2010, making it cheaper to trade.

We closely monitor risks associated with the securities and futures markets. To ensure that we are well prepared for contingency events, we have put in place a market contingency plan setting out procedures for dealing with emergency situations that may affect our markets.

Other priorities on our task list included streamlining regulatory requirements and removing dispensable constraints or obligations.

SFC Online Portal

We continued to expand the scope, and enhance the functionality, of the SFC Online Portal so that licensees could more effectively communicate with us electronically. During the year, we introduced the functions of making annual fee payments and retrieving payment-related information on line. As at 31 March 2011, about 95% of licensed corporations and registered institutions, and about 90% of licensed individuals, had activated their portal accounts. Further enhancements, which are expected to be launched in the third quarter of 2011, will facilitate the online submission of licensing applications.

Market facilitation

During the year, we processed 101 applications for subordinated loans, and facilitated the operation of certain intermediaries by granting the following modifications relating to the Securities and Futures (Financial Resources) Rules:

• to a licensed corporation of an investment banking group to facilitate its adoption of the third-party clearing model;
• to a licensed corporation in relation to its investment in the Mainland under the Qualified Foreign Institutional Investor Scheme of the Mainland; and
• to three licensed corporations to facilitate market-making activities and/or certain back-to-back arrangement with the holding company.

In addition, to enable the public to more easily identify firms that are permitted to act as sponsors and compliance advisers, we started carrying the List of Sponsors on our website in September 2010.

New post-vetting regime

The post-vetting regime took effect on 25 June 2010 allowing certain routine takeovers-related announcements to be published without being submitted to the SFC for prior comment. It helped reduce the cost and burden of compliance for parties issuing announcements and promoted self-discipline among parties and professionals involved in deals. We also made miscellaneous house-keeping amendments to the Codes on Takeovers and Mergers and Share Repurchases.

Overall, market practitioners have followed our prescriptive guidance and complied with the requirements under the new regime. We will continue to monitor compliance with a view to including additional documents in the Post-Vet List, which names the routine announcements that do not require SFC vetting before publication.

Encouraging fewer hard copies of IPO prospectuses

Starting February 2011, companies seeking to list shares or debentures on SEHK are allowed to distribute paper application forms without accompanying printed prospectuses, as long as the prospectus is available on line. The similar option is also available to issuers of SFC-authorized CISs listed on SEHK. In response of a joint public consultation with SEHK, the market, the public, professionals and an environmental group widely supported the measure, which aimed to enhance market efficiency and environmental protection.

Other streamlining initiatives

We approved rule amendments proposed by HKEx in June 2010 to streamline the designation of market-making facility for securities products, thus simplifying the process to enhance liquidity for new products.

To remove unnecessary burden on applicants and issuers and to enhance the quality of property valuation information provided to investors, we joined SEHK to consult the public on proposals to streamline property valuation disclosure requirements in prospectuses and issuers’ circulars. The consultation ended in February 2011. We are analysing the comments received and target to publish the consultation conclusions in 2011.

Intermediary licensing

We devoted substantial efforts to cope with the significant rebound in new licence applications this year, following previous declines caused by the effects of the global financial crisis. Licence applications from local and overseas intermediaries registered strong growth, bringing the total number of SFC licensees to a record high of 38,579 as at 31 March 2011.

The hedge fund industry also expanded in the year. The number of licensed hedge fund managers/advisers increased 19% and reached an historical high of 326 as at March 2011, underscoring Hong Kong’s attraction as an international financial centre and a place that is conducive to conducting this business.

To ensure our regulatory approach is in line with international standards, we strengthened regulatory co-operation with overseas counterparts. In particular, we continued to participate in various task forces and committees of international standard setting organisations, including the International Organization of Securities Commissions (IOSCO), the Committee on Payment and Settlement Systems (CPSS), and others:

• the IOSCO Task Force on OTC Derivatives Regulation and the OTC Derivatives Regulators’ Forum, which aimed at developing consistent international standards related to OTC derivatives regulation, and allowing regulators to cooperate, exchange views and share information related to OTC derivatives central counterparties and trade repositories respectively;
• the CPSS-IOSCO Steering Committee on Principles for Financial Market Infrastructures, which targeted strengthening core financial infrastructures, including settlement facilities, payment systems and central counterparties through a review of related international standards;
• the IOSCO Task Force on Unregulated Financial Markets and Products, which examined ways to introduce greater transparency and oversight in unregulated financial markets and products, and improve investor confidence in, and the quality of, these markets, notably in terms of securitisation and credit default swap markets. The Task Force published its recommendations last year, and a report on the survey findings on the level of implementation of the recommendations relating to securitisation was published in March 2011;
• the IOSCO Task Force on Commodity Futures Market, which continued to work on the Group of Twenty’s directive relating to enhancing the transparency, regulation and supervision of the commodity derivatives markets, in particular oil derivatives;
• the IOSCO Standing Committee on Secondary Markets, which intensified efforts (including engaging the industry) to identify regulatory issues. Recent studies include those relating to technological developments in the market such as high frequency trading, direct electronic access and dark pools; and
• the IOSCO Standing Committee on Regulation of Market Intermediaries, chaired by the SFC’s Senior Director of Intermediaries Supervision, completed a review of international client asset protection and insolvency regimes, and is studying global capital standards for the securities sector and suitability requirements for intermediaries.

The SFC’s CEO represented Hong Kong at the Financial Stability Board (FSB) Standing Committee on Standards Implementation. He was invited to lead a review team, comprising experts from FSB member institutions, to conduct a peer review of Italy. The review report was published in February 2011, setting out findings from the assessment of the seven key financial sector standards in Italy, and highlighting issues that could be relevant to other jurisdictions for FSB’s consideration.

To maintain continued access by the local hedge fund industry to the European Union’s (EU) investor base, we worked with the Government to express our comments to the European Commission on the EU Directive on Alternative Investment Fund Managers.

We discussed the development of the Hong Kong and Taiwan securities markets and other regulatory matters in the second MOU meeting with the Taiwan Financial Supervisory Commission.

Through topical publications, we kept the industry informed periodically on latest regulatory developments and compliance concerns. The Enforcement Reporter highlights the more significant enforcement actions to draw the attention of market practitioners and investors. For takeovers-related matters, we continued to publish the Takeovers Bulletin and kept the Practice Notes under review to provide more guidance on the Executive’s practices. Separately, the Dual Filing Update helped to remind the market of key aspects in the preparation of listing applications.

Twice a year, we conducted financial review of the Hong Kong securities industry to provide key statistical information on securities dealers and securities margin financiers and give an overview of SEHK participants’ financial performance.

We published key findings of an Industry Participants Survey in June 2010. The survey was intended to give us a better understanding of the needs of the industry and related parties and to gain insights for corporate planning. The results were encouraging. Among a random sample of industry participants invited to rate their satisfaction with the SFC, 76% were either “satisfied” or “very satisfied” with our work and 73% expressed satisfaction with our efficiency and staff quality.

In July 2010, we released findings of our annual Fund Management Activities Survey, showing a 45.4% year-on-year growth in Hong Kong’s combined fund management business to $8,607 billion at the end of 2009. This confirms Hong Kong’s ability to provide platforms for investors worldwide to invest in the region and for Mainland-related firms to gain exposure to global investment practices.

Our Report of the Survey on Hedge Fund Activities of SFC-licensed Managers/Advisers was released in March 2011 to give an updated account of the hedge fund industry in Hong Kong. As of 30 September 2010, the total hedge fund assets under management in Hong Kong amounted to US$63.2 billion, seven times the level in 2004. The survey was conducted in conjunction with a data collection exercise coordinated by IOSCO to facilitate identification of possible systemic risks.