The Second Steering Committee on the Enhancement of the Financial Infrastructure (SCEFI II) Andrew Sheng, SFC Chairman 04 July 2002 1
1. Introduction We studied key business initiatives of major exchanges and CSDs in G10 countries, and four distinctive trends in the development of market infrastructure were identified. 1. Pooling of Liquidity Pooling of liquidity to beget liquidity has become the key success factor to achieve sustainable growth in the global financial market. 2. Infrastructure Integration As participants become more sophisticated, seamless integration of market infrastructure is critical to achieve higher operational efficiency and to support new business services. 3. Cross-border Inter-operability Exchanges and clearing houses are becoming infrastructure “anchor points” in different time zones to support global trading for global players. 4. Value-added Services Traditional trading and settlement services have become commodities service. Exchanges and CSDs are exploring new revenue streams in the provision of value-added services. 2
2. The Vision SCEFI II Vision is to position Hong Kong as the “Preferred Location in Asian time zone” for both regional and international market participants. To implement this vision, three key objectives have been identified: 2.1 Efficient and Robust Market Infrastructure The integrated market infrastructure should provide the following: A scripless model to enable straight-through-processing services Facilitate asset utilisation and management to significantly lower liquidity cost Enable new business services (e.g. Delivery vs Payment, Payment vs Trades) to market participants and investors Allow and support shared-services and operational collaboration to improve service levels and operation effectiveness Full compliance with international standards (e.g. G30, IOSCO) to offer inter-operable services with other major exchanges & clearing houses Fully deploy FinNet as the Common Network platform for the delivery of financial services in a straight through manner 3
2. The Vision 2.2 Connectivity and Interoperability The integrated infrastructure should help Hong Kong expand its market reach and networking of business services by: Enabling global participants to “plug and play” into Hong Kong infrastructure in an efficient and cost-effective manner Facilitating market participants to achieve consistent and high quality service level for both local and cross-border services Improving cost efficiency for the full “transaction processing chain” (e.g. pre-trade, trading, post-trade, pre-settlement, security and money settlement, post settlement) 4
2. The Vision 2.3 Superior Liquidity The infrastructure should help position Hong Kong as the “Asia Liquidity Centre” by: Enabling Hong Kong to provide asset servicing solutions to global participants by becoming a common marketplace for SB&L (Securities Borrowing and Lending) of international securities Providing cross collateralisation service for global participants to transfer excess collaterals across different markets and time zones Enhancing the mobility of capital in Hong Kong and lower liquidity costs for both participants and the overall market 5
3. Key Building Blocks The three key building blocks constitute the core of our recommendations to realising the SCEFI II vision. 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 Servicing Development Securities Borrowing & Lending Superior Liquidity Cross-Collateralisation 6
4.1 Scripless Market Model Share Registration Structure Registrar 1 Registrar 2 Registrar 3 Holding Holding Holding Accounts Accounts Accounts Sub- Sub- Sub- Registrar Registrar Registrar Sub-registrar Holding Holding Holding Account Account Sponsored Account Account (Investors) (Brokers) (Clearing (Investors) Participants) Sponsorship Agreement Share Registration Structure Sub-registrar Structure: Clearing participant, broker and investor could maintain their legal title to their shareholdings by registering their shares either with Issuer Registers or Sub-registrar. Holdings Transfer: Investors will be able to exercise full control of their holdings and retain legal ownership by maintaining Holding Accounts at Sub-registrar. Sponsorship Agreement: Investors can enter into Sponsorship Agreements with brokers to authorise settlement in their accounts. 7
4.2 Institutional Servicing - TFM Trade Concentrator Model Local TFM Glob al Institutional Cross-Border Domestic TFM Trades Investors Trades Local Trade Local TFM Concentrator Block Trade Trade Brokers / Allocation Notification Dealers Allocated Alloc. Trade Instruct Confirm. Routing Auto-SI Auto-SI Custodians Generation Generation Key Features of Trade Concentrator Model TFM will streamline post-trade/ pre-settlement processing for both equities and fixed income markets. Existing manual settlement notification and settlement instruction input processing between institutional participants, brokers and custodians would be eliminated. Local Trade Concentrator provides connectivity linking up domestic institutional investors with and overseas participants via Global TFM for cross-border trade settlement. 8
4.3 DvP Facility DvP Facility Model Order Matched Trade requests CCASS CCASS execution orders Investor Broker AMS/3 Investor Broker AMS/3 Securities Transfer Investor Investor A/C Instruction A/C Auto transfer Confirmation Broker Securities Locking & Broker A/C A/C Confirmation DvP Facility Securities DvP Facility locking request & confirmation Common Authentication Bank Bank Investor Investor Fund Locking & Confirmation Transaction Routing A/C A/C Auto transfer Fund locking Broker Payment Vs Trades Broker request & Fund Transfer A/C A/C confirmation Key Features of DvP Facility DvP Facility provides a common connection as well as authentication mechanism for streamlining order and transaction payment flow among market participants. Brokers would be able to lock funds in investors’ bank account in order placement through automation of transaction routing between brokers and banks. Payment vs. Trades stamping capability would provide a validation mechanism to ensure investor payments are made for the net consideration of their trades. 9
5 FinNet FinNet - Vision - Vision 5 Service Providers Fund RTGS ASPs Managers Overseas Systems e-IPO Insurance Banks Companies Pre-matching Omgeo Boutique TvP SCEFI RTGS Network Financial Etc. Initiatives Companies FinNet Insurance Agents DvP FinNet FinNet HKEx PvP STP Mortgage Brokers Law AMS/3 Firms CCASS/3 SFC MPFA Financial Planners Securities HKMA HKATS OCI Brokers & Clearing Regulatory Bodies 10
5.1 FinNet FinNet - Implementation Status - Implementation Status 5.1 Service Providers Pledgees (6) e-IPO Banks (46) FinNet Securities Brokers (462) FinNet FinNet HKEx SFC Registrants (1533) CCASS/3 SFC HKMA Regulatory Bodies 11
5.2 FinNet - Readiness FinNet is technically and operationally ready to support more users: 1. Availability Network design ensures that no single point of failure will cause system outage. Service level requirement 99.98%; YTD service availability 100% achieved. 2. Network Security Physical and logical security in place against unauthorised FinNet access. 3. Robustness and Scalability FinNet robustness has been tested during CCASS/3 Market Rehearsals; CCASS/3 users fully migrated onto FinNet since May 2002. It has spare capacity to support additional services, and network is scalable on demand to support new services. 4. Operational Arrangements Since February 2002, Wharf New T&T has been appointed to operate the network under SFC supervision. 12
5.3 FinNet - Marketing & Promotion 1. Within SFC Brokers’ submission of e-FRR and despatch of SFC circulars are on FinNet. More systems under way (e.g. support e-forms and e-licensing in early 2003 when the Securities and Futures Ordinance comes into force). 2. Amongst other Financial Regulators To extend FinNet to support submission of HKMA statistical returns (STET), and to inter-connect MPFA, OCI, MPF Service Providers and Insurance companies. 3. SCEFI Initiatives To connect Registrars, Brokers, and Banks under SCEFI II’s Scripless Market Infrastructure, Institutional Servicing Utility, and DvP Facility implementation. 4. ASPs, Accounting and Law Firms To promote FinNet as the platform for ASPs, Accounting and Law firms to communicate with banks and financial institutions to improve STP. 13
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