Structure of the Brokerage Industry Mr. Andrew Sheng Chairman - - PowerPoint PPT Presentation
Hong Kong Institute of Bankers Structure of the Brokerage Industry Mr. Andrew Sheng Chairman Securities and Futures Commission 13 November 2002 The Brokerage Industry Worldwide trend consolidation Two-tier structure world class
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1.0 3.3 1.6 2.4
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 2000 2001 Wholesale brokers Retail brokers
Source: Estimates of McKinsey and JP Morgan
Profits for brokerage industries in UK, France, Germany and Italy (Euro bn)
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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
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 Sep
Number of NYSE Members
Source: HKEx
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
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 Sep
Number of NYSE Members
Source: HKEx
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participants turnover per exchange
participant
HKEx 495 241 0.5 NYSE 365 10,489 29 LSE 258 4,551 18 TSE 114 1,661 15 ASX 93 244 2.6 SGX 34 72 2.1
Remark: The number of exchange participants in Hong Kong here only includes those who report to the FRR, and does not include those who have ceased (or indicated to cease) business or those who have not commenced business. Sources: Websites of various exchanges and broker associations
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large international brokers (mainly Cat A + some Cat B brokers) and local small retail brokers (mainly Cat C brokers)
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
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Shareholders’ funds / total assets (period end, %) Cat A Cat B Cat C Total Aug 2002 31% 33% 63% 43% Jun 2002 28% 29% 59% 39% Mar 2002 28% 32% 60% 41% Dec 2001 35% 36% 63% 47%
Remark: The number of exchange participants here only includes those who report to 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
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15.5 6.9 7.8 12.3 8.0 7.0 5.7 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0 16.0 1996 1997 1998 1999 2000 2001 2002 (1-9)
Source: HKEx
Average Daily Turnover (HK$ bn)
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2.9 2.8 2.7 2.9 2.7 2.4 2.9 2.4 3.1 2.7 2.7 1.3 1.9 1.9 2.2 2.1 3.3 2.2 1.6 2.2 1.8 1.8 0.8 1.4 1.3 1.1 0.7 1.2 0.8 0.8 1.0 1.4 3.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2000 Q1 2000 Q2 2000 Q3 2000 Q4 2001 Q1 2001 Q2 2001 Q3 2001 Q4 2002 Q1 2002 Q2 2002 Q3 HSI constituent stocks Mainland enterprise stocks Other stocks
Remark: HSI constituent stocks do not include those which are also Mainland enterprise stocks. Source: SFC Research Paper No. 1, “Turnover Behaviour of the Hong Kong Stock Market”, SFC website
Average Daily Turnover at constant prices (HK$ bn)
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80 130 180 230 280 330 380 430 480 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 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 Category A Category B Category C
Source: SFC, FRR Returns
Net Commission Income (HK$ mn)
80 130 180 230 280 330 380 430 480 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 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 Category A Category B Category C
Source: SFC, FRR Returns
Net Commission Income (HK$ mn)
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Source: SFC, FRR Returns
Recurring Overheads (HK$ mn)
50 100 150 200 250 300 350 400 450 500 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 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 Category A Category B Category C
Source: SFC, FRR Returns
Recurring Overheads (HK$ mn)
50 100 150 200 250 300 350 400 450 500 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 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 Category A Category B Category C
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32% 39% 28% 42% 47% 53% 33% 32% 31% 32% 32% 30% 30% 30% 40% 27% 23% 17% 32% 36% 35%
10% 20% 30% 40% 50% 60% 1996 1997 1998 1999 2000 2001 Aug-02 Category A Category B Category C
Source: HKEx
Average Daily Turnover at constant prices (HK$ bn)
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Overseas individual trading 3% Principal trading 4%
Local individual trading 36%
Local institutional trading 19% Overseas institutional trading 38%
Remark: Figures in parentheses are 1999/2000 Source: HKEX, Cash Market Transaction Survey 2000/2001
Local individual trading: 49% in 1999/2000 fell to
(28%)
(49%)
(18%) (2%) (3%)
Market Share in Turnover by Investor Type (%)
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54% 56% 40% 27% 39% 30% 49% 3% 5% 10% 10% 69% 4% 1% 2% 1%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1992 1994 1997 2001 Brokers only Banks only Both brokers and banks Others
Remark: Others refer mainly to stock trading through family members or friends Source: HKEX, Retail Investor Survey 2001
15 25% 21% 49% 72% 58% 10% 2% 21% 40% 0% 2% 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Existing stock investors New stock investors Online traders Brokers only Banks only Both brokers and banks Others
Remark: Others refer mainly to stock trading through family members or friends Source: HKEX, Retail Investor Survey 2001
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Operational strategies – Risk-based regulatory framework
Legislative strategies – FRR changes (effective 1 Oct 2002)
stock collateral
Establishing a Working Group (comprising the industry, academics and professional bodies) to rationalize the capital and financial requirements
Imposing licensing conditions on risky brokers
Proposing to extend the broker fidelity insurance to all securities dealers and margin financiers under the SFO
Investor and broker education
District Council Offices and the Consumer Council
pooling
Maintaining Dialogue with the Industry
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Third party clearing to transfer clearing risks to specialist brokers with clearing capacity
Some stockbrokers may diversify to other areas such as futures broking and financial planning
IP accounts
shareholdings through IP accounts
Margin finance risk would be reduced through regulatory and capital requirements to
better
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The SFC continuously working with the HKMA in areas such as the Securities and Futures Ordinance (SFO) and the relevant subsidiary legislation
The Guidelines “Hong Kong Approach to Corporate Difficulties”, issued by the HKAB in Nov 1999, set out the basic principles to deal with corporate difficulties
This is applicable to the brokerage industry, and all banks are expected to comply with this approach to deal with brokers’ financial difficulties
Banks are advised to review the existing legal documentation between banks and brokers regarding re- pledging margin clients’ collateral to reflect the new regulatory framework under the SFO and relevant court judgements on broker failures such as CA Pacific
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Securities, asset management and banking industry convergence a matter of time
Smaller brokers are concerned about level playing field between banks and the brokerage sector
SFC and HKMA working closely to ensure that regulatory approach is even-handed
Great opportunities for banks and brokers to work together to improve the overall quality of service to the investor community
There is symbiotic relationship between banks and brokers – in all markets, retail brokers have worked closely with banks in improving retail service – many have moved to become boutique financial planners, working with financial supermarkets that provide the custody and payment services