The Second Steering Committee on the Enhancement of the Financial - - PowerPoint PPT Presentation

1

The Second Steering Committee on the Enhancement of the Financial Infrastructure (SCEFI II) Andrew Sheng, SFC Chairman

04 July 2002

2

• 1. Introduction
• 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. 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.

3

• 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
• f financial services in a straight through manner

4

• 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)

5

• 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

6

Key Objectives Building Blocks

• 3. Key Building Blocks

Superior Liquidity

Securities Borrowing & Lending Cross-Collateralisation

The three key building blocks constitute the core of our recommendations to realising the SCEFI II vision. Efficient & Robust Market Infrastructure

Clearing Participant-ship Structure Scripless Market Model Cross-market Linkages DvP Settlement Infrastructure Extension of International Linkages Institutional Servicing Development

Connectivity & Interoperability

DvP Facility

7

4.1 Scripless Market Model

Share Registration Structure

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

• wnership by maintaining Holding Accounts at Sub-registrar.

 Sponsorship Agreement: Investors can enter into Sponsorship Agreements with brokers to authorise settlement in their accounts.

Registrar 1

Sub-registrar

Sub- Registrar Holding Accounts

Holding Account (Clearing Participants) Holding Account (Brokers) Sponsored Account (Investors) Holding Account (Investors)

Registrar 2 Sub- Registrar Holding Accounts Registrar 3 Sub- Registrar Holding Accounts

Sponsorship Agreement

8

4.2 Institutional Servicing - TFM

Trade Concentrator Model

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.

Institutional Investors Brokers / Dealers Custodians

Local TFM

Local Trade Concentrator Local TFM Trade Notification Alloc. Instruct Routing

Glob al TFM

Domestic Trades Cross-Border Trades Auto-SI Generation Block Trade Allocation Allocated Trade Confirm. Auto-SI Generation

9

DvP Facility Model

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.

4.3 DvP Facility

CCASS CCASS Broker Broker AMS/3 AMS/3 DvP Facility DvP Facility Investor Investor Bank Bank

Securities Transfer Instruction Securities Locking & Confirmation Fund Locking & Confirmation Fund Transfer Common Authentication Transaction Routing Trade requests Order execution Matched

• rders

Fund locking request & confirmation Securities locking request & confirmation Confirmation

Investor A/C Investor A/C Broker A/C Broker A/C Investor A/C Investor A/C Broker A/C Broker A/C

Auto transfer Auto transfer Payment Vs Trades

10

MPFA OCI

AMS/3 CCASS/3 HKATS & Clearing

HKEx

Insurance Companies Insurance Agents Financial Planners Mortgage Brokers Law Firms Boutique Financial Companies

Fund Managers

Overseas Systems RTGS Banks

RTGS Network

5 5 FinNet FinNet - Vision

• Vision

FinNet

HKMA

SFC

FinNet

Regulatory Bodies

FinNet

SCEFI Initiatives STP PvP DvP TvP

Service Providers

ASPs e-IPO Pre-matching Omgeo Etc. Securities Brokers

11

FinNet

FinNet

HKMA

SFC

FinNet

CCASS/3

HKEx

Banks (46)

5.1 5.1 FinNet FinNet - Implementation Status

• Implementation Status

Regulatory Bodies

Service Providers

e-IPO Securities Brokers (462) Pledgees (6)

SFC Registrants (1533)

12

5.2 FinNet - Readiness

• 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.

FinNet is technically and operationally ready to support more users:

13

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.

14

• 6. SCEFI II - Benefits & Opportunities for

the Financial Sector

Besides expected increase in local and cross-border business, SCEFI II Recommendations offer opportunities to outsource, consolidate, harmonize operational and technical standards, and eliminate paper- based processes to achieve STP. Some examples: Building Blocks Benefits and Opportunities Clearing Participant- ship Structure

Provides option for brokers to outsource clearing function to Clearing participants Number of Clearing participants expected to reduce, enhances clearing efficiency Opportunity for consolidating operations for merged entities; STP enhancement all-round

Scripless Market Infrastructure

Six registrars announced merger plans in anticipation of Scripless implementation – considerable savings in implementation cost

15

Building Blocks Benefits and Opportunities

• 6. SCEFI II - Benefits & Opportunities

DvP Settlement Infrastructure

CCASS access to RTGS for securities money settlement enhances settlement finality and reduces credit risk. Multiple intraday settlement runs and use of RTGS for settlement boost settlement efficiency Improvement in cash flow/collateral management

Cross Market Linkages

Integration of CCASS/DCASS/CMU for collateral transfer reduces liquidity cost to banking sector

16

• 6. SCEFI II - Benefits & Opportunities

Building Blocks Benefits and Opportunities DvP Facility

Greatly enhances broker back office workflow through automation of money settlement between brokers and retail investors New revenue source for banks, and opportunity for participating banks to contribute to HK’s retail payment infrastructure. Provides cost effective facilities to attract institutional investors to trade in the local market

Extension of International Linkages & Institutional Servicing Utility

Enables local and regional brokers to offer wider range of services to institutional clients – levelling playing field against international brokers Provides STP for e-IPO; reduces use of cheques as mean of payments between brokers and retail clients

17

Thank You !