XN000022-1992-01-24 — Page 5

FRIDAY, JANUARY 24, 1992

SECURITIES (CLEARING HOUSES) BILL PUBLISHED

THE SECURITIES (CLEARING HOUSES} BILL TO PROVIDE THE LEGISLATIVE FRAMEWORK FOR THE OPERATION OF A CENTRAL SECURITIES CLEARING HOUSE HAD BEEN ENDORSED BY THE EXECUTIVE COUNCIL FOR INTRODUCTION INTO THE LEGISLATIVE COUNCIL ON

FEBRUARY 19, THE SECRETARY FOR MONETARY AFFAIRS, MR DAVID NENDICK BAID TODAY (FRIDAY).

SPEAKING AT A PRESS CONFERENCE TO EXPLAIN THE BILL, MR NENDICK SAID THE ESTABLISHMENT OF A CENTRAL SECURITIES CLEARING AND SETTLEMENT SYSTEM WOULD IMPROVE OPERATIONAL EFFICIENCY, REDUCE MARKET RISK, LOWER TRANSACTION COSTS AND ENHANCE HONG KONG'S STATUS AS A LEADING FINANCIAL CENTRE.

INTRODUCING THE CENTRAL CLEARING SYSTEM, MR NENDICK SAID ONE OF THE MAJOR FEATURES OF THE SYSTEM WAS THE IMMOBILISATION OF SCRIP IN A CENTRAL DEPOSITORY WHICH WOULD REDUCE THE MOVEMENT OF SCRIP AND THE RISK ASSOCIATED WITH SUCH TRANSFER.

"THE SYSTEM WOULD ALSO PROVIDE A BOOK ENTRY SERVICE AND GUARANTEE SETTLEMENT BY THE PROCESS OF NOVATION IN WHICH EACH TRADE BETWEEN A BUYING AND SELLING BROKER WOULD BE REPLACED BY TWO CONTRACTS, ONE BETWEEN THE SELLING BROKER PARTICIPAN'T AND HONG KONG SECURITIES CLEARING COMPANY (HKSCC) AS BUYER AND THE OTHER BETWEEN THE BUYING BROKER PARTICIPANT AND HKSCC AS SELLER.

MR NENDICK STRESSED THAT THE LEGISLATION AIMED TO PROTECT THE NETTING AND SETTLEMENT OPERATIONS OF CENTRAL CLEARING AND SETTLEMENT SYSTEM (CCASS) FROM THE EFFECT OF THE STATUTORY INSOLVENCY RULES WHICH COULD UPSET THE WHOLE CLEARING SYSTEM.

"THE BILL IS NOT TO INSULATE THE CLEARING SYSTEM FROM ITS PRIMARY RISK SUCH AS DEFAULT BY ITS PARTICIPANTS, HE POINTED OUT.

THE HKSCC WILL BE REQUIRED TO PROTECT ITSELF AGAINST SUCH RISKS THROUGH ITS OVERALL RISK MANAGEMENT SYSTEM WHICH INCLUDE PARTICIPANT ADMISSION CRITERIA, SURVEILLANCE, RISK MONITORING, CAPITAL ADEQUACY STANDARDS, SETTLEMENT CAPS AND MARK-TO-MARKET PAYMENTS.

EVERY BROKER WILL BE REQUIRED ΤΟ CONTRIBUTE TO A

70 FUND AN AMOUNT CALCULATED ON THE BASIS OF HIS TRADING VOLUME.

GUARANTEE

THIS FUND, TOGETHER WITH INSURANCE COVER, WILL A MOUNT ΤΟ AT LEAST $200 MILLION AND WILL BE AVAILABLE TO THE HKSCC то GUARANTEE SETTLEMENT SHOULD A PARTICIPANT DEFAULT.

EXPLAINING HOW THE STATUTORY INSOLVENCY LAW COULD AFFECT THE CLEARING SYSTEM, MR NENDICK SAID AS THE HKSCC, BEING A COUNTERPARTY TO BOTH THE BUYING AND SELLING BROKER WOULD OPERATE ON A CONTINUOUS NETTING BASIS, ANY INTERFERENCE WITH THE SETTLEMENT PROCESS BY A THIRD PARTY UNDER THE LAW OF INSOLVENCY WOULD CAUSE D ́SRUPTION TO THE SYSTEM AND WOULD BRING THE NETTING PROCESS TO A HALT AND WOULD EVEN CAUSE CHAIN REACTION OF FINANCIAL DEFAULTS.

"THIS COULD