Hong Kong’s Financial Infrastructure Developments Presented at the Annual General Meeting of HKSIG Mr. Andrew Sheng Chairman Securities and Futures Commission 10 December, 2002 1
1. The SCEFI II Vision SCEFI II Vision: “To position Hong Kong as the “Preferred Location in Asian time zone” for both regional and international market participants.” SCEFI II Report was published in 9 December 2002 (available in SFC website: http://hksfc.org.hk) 2
2. Three Key Offerings Three key “offerings” are defined to achieve the SCEFI II vision and to resolve infrastructure issues. Robust & Efficient Market Infrastructure To achieve operational efficiency for market players, to provide flexibility to launch new services, to comply with international standards and support interoperable services with major exchanges and clearing houses. Cross-Border Connectivity and Interoperability To enable global players to “plug and play” into HK’s financial infrastructure, thus help HK expand its network of business services, and to improve quality and cost efficiency at all levels of operations in the transaction value chain both domestically and cross border. Superior Liquidity To capture liquidity from global markets by providing value-added services to optimize idle assets such as channels for SBL of international securities and cross collateralization service. These key offerings conform with the recommendations promulgated by international standard setting bodies such as CPSS/IOSCO, G30 and ISSA . 3
3. Key Building Blocks Key building blocks to achieve the three key “offerings”: Key Objectives Building Blocks Scripless Market Model Efficient & Robust Clearing Participant-ship Structure Market Infrastructure Cross-market Linkages DvP Settlement Infrastructure DvP Facility Connectivity & Extension of International Linkages Interoperability Institutional Services Development Securities Borrowing & Lending Superior Liquidity Cross-Collateralisation 4
4. Implementation of SCEFI II Recommendations SCEFI II Report suggests the establishment of three Implementation Working Groups (IWGs) reporting to a High Level Forum chaired by the Permanent Secretary of Financial Services with the participation of SFC, HKMA and HKEx, to implement recommendations: (1) Scripless Market (2) Clearing and Settlement Infrastructure Market Interoperability/Connectivity Market players will be consulted through involvement in focus groups under the three IWGs. 5
4.1 Scripless Market Consultation paper released in February and concluded in May 2002. The IWG chaired by SFC was formed. 4 focus groups were established to work on detailed proposals: (a) The Market Participants Focus Group, (b) The Listed Companies Focus Group, (c) The Legal and Regulatory Focus Group and (d) The Technical Working Group. The Technical Working Group made up of representatives from HKEx, the Federation of Share Registrars and SFC working on agreeing details of the proposed high level models. Models under consideration: • a Centralised Registration model – centralise registration services at CCASS; enhance transparency of registers and facilitate STP. • a Sub-register and Issuer Registers Model - integrate CCASS with share registrars; provide for competition and choices . Over 20 focus groups and meetings with industry participants have been held. Once details of the high level model have been agreed, a consultation conclusion paper will be produced and published. Work has started with overseas jurisdictions to ensure foreign incorporated companies can be scripless in Hong Kong. Currently obtaining information on Caymans, China and Bermuda. In parallel, working with the Government, HKEx and the industry on legislative changes to bid for the May/June 2003 Legco slot. 6
4.2 Clearing and Settlement Infrastructure Chaired by HKEx and had the first meeting on 26 November. HKEx conducted a business case study on SCEFI II Report. One of the key messages is to transform its Clearing and Settlement business from a transaction processing utility to a service provider. Focus Areas include: • Clearing Participant-ship Structure – tentative launch date 1Q 2003 at HKEx. • CCASS/CMU Linkage CCASS has one direction link to CMU. A bilateral linkage is in discussion.. To be discussed by the group in early January 2003. • DvP Facility HKMA/HKEx to discuss to move the payment confirmation to T+2 to achieve T+2 day end DvP. HKEx to propose an IP cash account model as an alternative to Retail DvP in Feb 2003. SFC chairs a Task Force on IP account to solicit views from local brokers . • Enhancement of CCASS’ link to RTGS System in Hong Kong The group to consider key implementation issues in March 2003 . 7
4.2 Clearing and Settlement Infrastructure Clearing Participant-ship Structure • HKEx issued a consultation paper in July and consultation conclusion is being prepared. • New clearing participant-ship: GCP, DCP to replace BP • Extend participant-ship to non-BP (Authorised institutions can apply as GCP via a subsidiary with Register Dealer status) • Admission Fee, minimum paid-up capital requirements and additional risk management measures will be determined and announced in the consultation conclusion. • Tentative launch date: 1Q 2003. 8
4.3 Market Interoperability/Connectivity IWG chaired by SFC. Focus Areas include: • Asset Serving Utility (Local SBL and Collateral Management) HKEx to propose an appropriate centralised SBL model for consultation in 1Q to 2Q 2003 CCMS to be launched in phases • Institutional Serving Utility (pre-matching) SFC met with Omgeo and Reuters (Omgeo was interested in pursuing ways FinNet could be used by them and their clients) GSTPA dissolving HKEx exploring linkage or JV with TFM/CTM • International CSD Linkages Ideally industry-driven Focus groups to be formed which houses custodians, sub-custodians and institutions to agree preferred direction and feasibility. SFC conducting on-site visits to these institutions to understand their workflow, needs and deficiencies in the existing systems. 9
5. Other infrastructural developments Development of Critical Systems and Network: Upgrade of AMS/3 network A new generation of clearing and settlement system - CCASS/3 Integration of its derivatives trading and clearing systems – DCASS FinNet coverage 10
5.1 Upgrade of AMS/3 AMS/3, launched on 23 October 2000 enabling: • Direct Internet Trading • New Trading Methods - market making, single price auction, multiple market functionalities and extended trading hours Recently upgraded network to allow participants to subscribe additional throttles (over 30 throttles subscribed). Rollout in late December. Next, to review trading features such as enhanced order types (e.g.market orders), trading spreads, board lot size, closing auction etc. HKEx will start comprehensive review of AMS/3 and interface systems to identify areas of improvement in system infrastructure, processing and operational procedures. Long term plan - study feasibility and develop plan to migrate AMS/3 and other HKEx critical systems on FinNet. 11
5.2 CCASS/3 A new generation of cash clearing system sharing the same network with FinNet . Open, standard-based messages that align with international standards such as SWIFT messaging, ISO 15022, ISIN and BIC. Can support multiple markets with different processing schedule, settlement cycle and traffic structure, operating hours up to 20 hours and flexible settlement period from T+1 to T+5. Rollout in 3 stages: • Stage 1 - launched in May 2002 utilizing industry standard interface (web browser) and network protocol (TCP/IP). Over 460 clearing participants access CCASS/3 and FinNet through a single communication line. • Stage 2 - launched on 9 December 2002. New features include cash market side of CCMS and Security Management Functions. First phase of CRMS launched with strengthened risk management functions on cash market. • Stage 3, currently in testing stage, will support Participant Gateway. Clearing participants can connect back office systems to CCASS/3 directly to achieve further automation and STP. 12
5.3 DCASS Integrating Derivatives trading and clearing Trading of all derivatives (stock options and other HKEx futures and options) migrated to HKATS supplied by OM in August 2001 Working towards an integrated trading and clearing systems, involving an upgrade of HKATS to a new version which is operable with the new derivatives clearing system (DCASS) supplied by OM. DCASS is in the development and testing stage (target to be launched by Q4 2003). Two other systems to be launched with DCASS : • CRMS - Risk management systems for futures and stock options will be integrated with DCASS. • CCMS - Collateral management and payment processing in cash and derivatives markets will be migrated to CCMS. The use of collateral in both markets will be synchronized, a critical step towards implementation of cross-collateralisation. HKEx is studying the feasibility and model for cross margining. 13
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