Hong Kong Brokerage Industry Challenges and Reform Mr. Andrew - - PowerPoint PPT Presentation
Hong Kong Brokerage Industry Challenges and Reform Mr. Andrew Sheng Chairman Securities and Futures Commission 8 August 2003 Outline Two-tier industry structure Change of competitive landscape Challenges of the brokerage
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Two-tier industry structure Change of competitive landscape Challenges of the brokerage industry Our regulatory approach Structural reform Concluding remarks
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Remark: The number of exchange participants here only includes those who report the FRR, and does not include those who have ceased (or indicated to cease) business or those who have not commenced business. Source: SFC, FRR Returns and HKEx
Large international brokers (mainly Cat A + some Cat B brokers) and local small retail brokers (mainly Cat C brokers)
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participants turnover per exchange
participant
HKEx 481 194 0.4 NYSE 337 10,311 31 LSE 300* 4,001 18 TSE 109 1,564 14 ASX 80** 295 3.7 SGX 59*** 63 1.1
Remark: The number of exchange participants in Hong Kong here only includes those who report the FRR, and does not include those who have ceased (or indicated to cease) business or those who have not commenced business. * Estimated figure based on LSE annual report 2002/03 ** May-03 figure *** Jul-03 figure Sources: Websites of various exchanges, commissions and broker associations, World Federation of Exchanges
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32% 39% 28% 42% 47% 49% 49% 33% 32% 31% 32% 32% 30% 31% 34% 30% 40% 27% 23% 19% 17% 32% 36% 35%
10% 20% 30% 40% 50% 60% 1996 1997 1998 1999 2000 2001 2002 May-03 Category A Category B Category C
Source: HKEx
% Share in Market Turnover by Category of Participants
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Source: SFC, FRR Returns
Net Commission Income ($ mn)
50 100 150 200 250 300 350 400 450 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Category A Category B Category C
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300 350 400 450 500 550 600 650 700 1930 1940 1950 1960 1970 1980 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: NYSE
Number of SEHK Participants
500 550 600 650 700 750 800 850 900 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Jun 03
Number of NYSE Members
Source: HKEx
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1.2 1.3 2.8 4.9 4.6 3.3 5.7 15.5 6.9 7.8 12.3 8.0 6.5 7.0
2 4 6 8 10 12 14 16 18 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 (1-6)
Average Daily Turnover (HK$ bn) Source: HKEx
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Most of these brokers ceased business voluntarily Only 4 brokers ceased business because of
Integrity risk Pooling risk
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Properly segregate duties and functions Ensure adequate internal controls are in place
closely supervise and monitor staff
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Involves the common market practice of pooling and re- pledging client collateral, when margin financing allowed in contract between client and broker
As of the end of May 2003,
239 brokers and 8 securities margin financiers engaged
in securities margin financing
Total margin loans: $11.8 bn Securities collateral: $42.8 bn Average liquid capital ratio as % of total assets was
about 28%
The practice is entrenched by past practices and has been apparently convenient to investors and their brokers,
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When CA Pacific and its finance arm collapsed in January 1998,
Total investor loss exceeded $900 mn The Compensation Fund paid out $300 mn Over $600 mn remains uncompensated Total liquidation costs to date: about $120 mn
At the time of its collapse, the finance arm of CA Pacific had a capital base of only $16 mn, but it had borrowed $548 mn against client collateral.
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Risk-based regulatory approach Strengthening monitoring of brokers by risks Working with brokers to mitigate identified risk
strengthening capital base of brokers ring-fencing clients’ assets tightening internal controls Increasing investor education
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Since 1 April 2003, maximum compensation per investor
To ensure a safety net for investors, a market levy of
The ICF now has accumulated about $1 billion The Investor Compensation Company under the SFO
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In October 2002, we implemented 2 interim measures
an 80% “illiquid collateral” haircut on stocks and
firms that heavily re-pledge clients’ collateral are
The interim measures help but long term review is
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In April 2003, the Working Group made a list of
develop a user-friendly and cost-effective Investor
examine the tiering capital requirement for brokers
enhance transparency of fees and charges imposed
minimise compliance burden on small and medium-
enable brokers to diversify their product range
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Reform requires consultations and consensus by
Feedbacks from the industry suggest the following
User-friendly Investor Participant (IP) Account Rationalization of the capital framework Help brokers to diversify their business (e.g.,
Step up investor and broker education on market and
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A user-friendly IP Account will facilitate such changes by:
giving investors direct control over their stocks reducing systemic risk of the brokerage industry enabling brokers to compete with banks
If the new IP Account is widely accepted,
integrity risk can be largely mitigated the capital requirement for brokers not holding client
assets can be lowered
HKEx is close to finding a model and will discuss it with the Commission and consult the industry
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In May 2002, a Working Group was established to re- examine the capital and financial requirements of brokers given changing business environment
Major recommendations on the fundamental principles:-
Capital level of brokers should be commensurate with
their risks
Capital should be lower for brokers who do not hold
client assets and higher for those who do
It is international practice to require brokers to be well
capitalised to buffer against risks
Pooling risk should be properly addressed by
segregation of assets
There should be a reasonable transitional period for
the industry if any proposal is to be implemented, after wide consultation
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Hong Kong’s capital requirements ($5M and $10M) are
Capital requirements in other markets: Mainland: HK$47M – 470M Singapore: HK$22M Taiwan: HK$45M – 90M
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Demographics, consumer needs and technology have
There must be fundamental changes in infrastructure
Facilitating brokers to diversify their business to
Through providing financial planning services with
find another source of income mitigate their risks because they do not need to
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The financial planning industry in some markets is very well developed
17,000 financial planners for a population of 19 million in
Australia
30,000 financial planners for a population of 275 million
in the US
Financial market in Hong Kong is fairly segmented but customers demand one-stop solutions.
Financial planning industry has huge potential to grow It offers brokers an excellent opportunity to enter the
industry
HKSI has been already working on training needs
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Enable brokers to sell various financial
Market infrastructures and relevant training
Need to work closely with other regulators
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Quality of our investors = quality of our market Fundamental strategy: facilitate investors to make
Strengthen and step up investor and broker education
The banking and brokerage industries can do a lot to
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We are here for the investors
Two common-sense notions:
Companies publicly offering securities must tell the public the truth about their business, the securities they sell, and the risks involved in investing
People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting the interests of investors first
It is the fiduciary duty of brokers to serve investors’
As investors prosper, the intermediaries will prosper
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The Commission seeks regulatory partnership with
Change is necessary because market determines
The Commission will facilitate a smooth transition
The HKEx will help us with products and